CHAPTER 1: FOREIGN DIRECT INVESTMENT

Meaning
These three letters stand for foreign direct investment. The simplest explanation of
FDI would be a direct investment by a corporation in a commercial venture in
another country. A key to separating this action from involvement in other ventures
in a foreign country is that the business enterprise operates completely outside the
economy of the corporations home country. The investing corporation must
control 10 percent or more of the voting power of the new venture.
According to history the United States was the leader in the FDI activity dating
back as far as the end of World War II. Businesses from other nations have taken
up the flag of FDI, including many who were not in a financial position to do so
just a few years ago.
The definition of FDI originally meant that the investing corporation gained a
significant number of shares (10 percent or more) of the new venture. In recent
years, however, companies have been able to make a foreign direct investment that
is actually long-term management control as opposed to direct investment in
buildings and equipment.
It

usually

involves

participation

in management, joint-

venture, transfer of technology and expertise. There are two

types of FDI: inward foreign direct investment and outward
foreign direct investment, resulting in a net FDI inflow (positive or
negative) .Foreign direct investment reflects the objective of
obtaining a lasting interest by a resident entity in one economy
(direct investor) in an entity resident in an economy other than
1

that of the investor

(direct investment enterprise).The lasting

interest implies the existence of a long-term relationship between

the direct investor and the enterprise and a significant degree of
influence on the management of the enterprise. Direct investment
involves both the initial transaction between the two entities and
all subsequent capital transactions between them and among
affiliated enterprises, both incorporated and unincorporated.
Foreign Direct Investment when a firm invests directly in production or
other facilities, over which it has effective control, in a foreign country.
Manufacturing FDI requires the establishment of production facilities.
Service FDI requires building service facilities or an investment foothold via
capital contributions or building office facilities.
Foreign subsidiaries overseas units or entities.
Host country the country in which a foreign subsidiary operates.
Flow of FDI the amount of FDI undertaken over a given time.
Stock of FDI total accumulated value of foreign-owned assets.
Outflows/Inflows of FDI the flow of FDI out of or into a country.
Foreign Portfolio Investment the investment by individuals, firms, or public
bodies in foreign financial instruments.
Stocks, bonds, other forms of debt.
Differs from FDI, which is the investment in physical assets.

Definition
Foreign direct investment is that investment, which is made to serve the business
interests of the investor in a company, which is in a different nation distinct from
the investor's country of origin. A parent business enterprise and its foreign affiliate
are the two sides of the FDI relationship. Together they comprise an MNC.
The parent enterprise through its foreign direct investment effort seeks to exercise
substantial control over the foreign affiliate company. 'Control' as defined by the
UN, is ownership of greater than or equal to 10% of ordinary shares or access to
voting rights in an incorporated firm. For an unincorporated firm one needs to
consider an equivalent criterion. Ownership share amounting to less than that
stated above is termed as portfolio investment and is not categorized as FDI.
FDI stands for Foreign Direct Investment, a component of a country's national
financial accounts. Foreign direct investment is investment of foreign assets into
domestic structures, equipment, and organizations. It does not include foreign
investment into the stock markets. Foreign direct investment is thought to be more
useful to a country than investments in the equity of its companies because equity
investments are potentially "hot money" which can leave at the first sign of trouble,
whereas FDI is durable and generally useful whether things go well or badly.
FDI or Foreign Direct Investment is any form of investment that earns interest in
enterprises which function outside of the domestic territory of the investor.
FDIs require a business relationship between a parent company and its foreign
subsidiary. Foreign direct business relationships give rise to multinational
corporations. For an investment to be regarded as an FDI, the parent firm needs to
have at least 10% of the ordinary shares of its foreign affiliates. The investing firm
may also qualify for an FDI if it owns voting power in a business enterprise
operating in a foreign country.
3

Types of FDI

Types of Foreign Direct Investment

FDIs can be broadly classified into two types:
Outward FDIs
Inward FDIs
This classification is based on the types of restrictions imposed, and the various
prerequisites required for these investments.
Outward FDI: An outward-bound FDI is backed by the government against all
types of associated risks. This form of FDI is subject to tax incentives as well as
disincentives of various forms. Risk coverage provided to the domestic
industries and subsidies granted to the local firms stand in the way of outward
FDIs, which are also known as 'direct investments abroad.'
Inward FDIs: Different economic factors encourage inward FDIs. These include
interest loans, tax breaks, grants, subsidies, and the removal of restrictions and
limitations. Factors detrimental to the growth of FDIs include necessities of
differential performance and limitations related with ownership patterns.
Other categorizations of FDI
Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes
place when a multinational corporation owns some shares of a foreign enterprise,
which supplies input for it or uses the output produced by the MNC.
Horizontal foreign direct investments happen when a multinational company carries
out a similar business operation in different nations.
Horizontal FDI the MNE enters a foreign country to produce the same
products product at home.
Conglomerate FDI the MNE produces products not manufactured at home.
Vertical FDI the MNE produces intermediate goods either forward or
backward in the supply stream.
5

 Liability of foreignness the costs of doing business abroad resulting in a

competitive disadvantage.

Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more of the voting power of an
enterprise in an economy through any of the following methods:
by incorporating a wholly owned subsidiary or company

 by acquiring shares in an associated enterprise

through a merger or an acquisition of an unrelated enterprise
participating in an equity joint venture with another investor or enterprise
Foreign direct investment incentives may take the following forms:
Low corporate tax and income tax rates
tax holidays
other types of tax concessions
preferential tariffs
special economic zones
investment financial subsidies
soft loan or loan guarantees
free land or land subsidies
relocation & expatriation subsidies
job training & employment subsidies
infrastructure subsidies
R&D support
7

 derogation from regulations (usually for very large projects)

Chapter 2: FOREIGN DIRECT INVESTMENT IN INDIA

The economy of India is the third largest in the world as measured by purchasing
power parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion.
When measured in USD exchange-rate terms, it is the tenth largest in the world,
with a GDP of US $800.8 billion (2006). is the second fastest growing major
economy in the world, with a GDP growth rate of 8.9% at the end of the first
quarter of 2006-2007. However, India's huge population results in a per capita
income of $3,300 at PPP and $714 at nominal.
The economy is diverse and encompasses agriculture, handicrafts, textile,
manufacturing, and a multitude of services. Although two-thirds of the Indian
workforce still earns their livelihood directly or indirectly through agriculture,
services are a growing sector and are playing an increasingly important role of
India's economy. The advent of the digital age, and the large number of young and
educated populace fluent in English, is gradually transforming India as an
important 'back office' destination for global companies for the outsourcing of their
customer services and technical support.
India is a major exporter of highly-skilled workers in software and financial
services, and software engineering. India followed a socialist-inspired approach for
most of its independent history, with strict government control over private sector
participation, foreign trade, and foreign direct investment. However, since the early
1990s, India has gradually opened up its markets through economic reforms by
8

reducing government controls on foreign trade and investment. The privatization of

publicly owned industries and the opening up of certain sectors to private and
foreign interests has proceeded slowly amid political debate. India faces a
burgeoning population and the challenge of reducing economic and social
inequality. Poverty remains a serious problem, although it has declined
significantly since independence, mainly due to the green revolution and economic
reforms. FDI up to 100% is allowed under the automatic route in all
activities/sectors except the following which will require approval of the
Government: Activities/items that require an Industrial License; Proposals in which
the foreign collaborator has a previous/existing venture/tie up in India
FDI in India includes FDI inflows as well as FDI outflow from India. Also FDI
foreign direct investment and FII foreign institutional investors are a separate case
study while preparing a report on FDI and economic growth in India. FDI and FII
in India have registered growth in terms of both FDI flows in India and outflow
from India. The FDI statistics and data are evident of the emergence of India as
both a potential investment market and investing country. FDI has helped the
Indian economy grow, and the government continues to encourage more
investments of this sort - but with $5.3 billion in FDI. India gets less than 10% of
the FDI of China. Foreign direct investment (FDI) in India has played an important
role in the development of the Indian economy. FDI in India has - in a lot of ways enabled India to achieve a certain degree of financial stability, growth and
development. This money has allowed India to focus on the areas that may have
needed economic attention, and address the various problems that continue to
challenge the country. India has continually sought to attract FDI from the worlds
major investors.

In 1998 and 1999, the Indian national government announced a number of reforms
designed to encourage FDI and present a favorable scenario for investors. FDI
investments are permitted through financial collaborations, through private equity
or preferential allotments, by way of capital markets through Euro issues, and in
joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or
mining industries. A number of projects have been announced in areas such as
electricity generation, distribution and transmission, as well as the development of
roads and highways, with opportunities for foreign investors. The Indian national
government also provided permission to FDIs to provide up to 100% of the
financing required for the construction of bridges and tunnels, but with a limit on
foreign equity of INR 1,500 crores, approximately $352.5m. Currently, FDI is
allowed in financial services, including the growing credit card business.
These services include the non-banking financial services sector. Foreign investors
can buy up to 40% of the equity in private banks, although there is condition that
stipulates that these banks must be multilateral financial organizations. Up to 45%
of the shares of companies in the global mobile personal communication by
satellite services (GMPCSS) sector can also be purchased. By 2004, India received
$5.3 billion in FDI, big growth compared to previous years, but less than 10% of
the $60.6 billion that flowed into China. Why does India, with a stable democracy
and a smoother approval process, lag so far behind China in FDI amounts?
Although the Chinese approval process is complex, it includes both national and
regional approval in the same process. Federal democracy is perversely an
impediment for India. Local authorities are not part of the approvals process and
have their own rights, and this often leads to projects getting bogged down in red
tape and bureaucracy. India actually receives less than half the FDI that the federal
government approves.
10

FDI Policy in India

Foreign Direct Investment Policy
FDI policy is reviewed on an ongoing basis and measures for its further
liberalization are taken. Change in sectoral policy/sectoral equity cap is notified
from time to time through Press Notes by the Secretariat for Industrial Assistance
(SIA) in the Department of Industrial Policy announcement by SIA are
subsequently notified by RBI under FEMA. All Press Notes are available at the
website of Department of Industrial Policy & Promotion. FDI Policy permits FDI
up to 100 % from foreign/NRI investor without prior approval in most of the
sectors

including

the

services

sector

under

automatic

route.

FDI

in

sectors/activities under automatic route does not require any prior approval either
by the Government or the RBI. The investors are required to notify the Regional
office concerned of RBI of receipt of inward remittances within 30 days of such
receipt and will have to file the required documents with that office within 30 days
after issue of shares to foreign investors.
The Foreign direct investment scheme and strategy depends on the respective FDI
norms and policies in India. The FDI policy of India has imposed certain foreign
direct investment regulations as per the FDI theory of the Government of India.
These include FDI limits in India for example:
11

 Foreign direct investment in India in infrastructure development projects

excluding arms and ammunitions, atomic energy sector, railways
system , extraction of coal and lignite and mining industry is allowed
upto 100% equity participation with the capping amount as Rs. 1500
crores.
FDI figures in equity contribution in the finance sector cannot exceed
more than 40% in banking services including credit card operations and
in insurance sector only in joint ventures with local insurance companies.
FDI limit of maximum 49% in telecom industry especially in the GSM
services

Government Approvals for Foreign Companies Doing Business in

India
Government Approvals for Foreign Companies Doing Business in
India or Investment Routes for Investing in India, Entry Strategies
for Foreign Investors

India's foreign trade policy has been

formulated with a view to invite and encourage FDI in India. The

Reserve Bank of India has prescribed the administrative and
12

compliance aspects of FDI. A foreign company planning to set up

business operations in India has the following options:
Investment under automatic route; and
Investment through prior approval of Government.
Procedure under automatic route
FDI in sectors/activities to the extent permitted under automatic route does not
require any prior approval either by the Government or RBI. The investors are only
required to notify the Regional office concerned of RBI within 30 days of receipt
of inward remittances and file the required documents with that office within 30
days of issue of shares to foreign investors.
List of activities or items for which automatic route for foreign investment is not
available, include the following:
Banking
NBFC's Activities in Financial Services Sector
Civil Aviation
Petroleum Including Exploration/Refinery/Marketing
Housing & Real Estate Development Sector for Investment from Persons
other
than NRIs/OCBs.
Venture Capital Fund and Venture Capital Company
13

 Investing Companies in Infrastructure & Service Sector

Atomic Energy & Related Projects
Defense and Strategic Industries
Agriculture (Including Plantation)
Print Media
Broadcasting
Postal Services

Procedure under Government approval

FDI in activities not covered under the automatic route, requires prior Government
approval and are considered by the Foreign Investment Promotion Board (FIPB).
Approvals of composite proposals involving foreign investment/foreign technical
collaboration are also granted on the recommendations of the FIPB. Application
for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export
Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of
Economic Affairs (DEA), Ministry of Finance. Application for NRI and 100%
EOU cases should be presented to SIA in Department of Industrial Policy &
Promotion.

14

Investment by way of Share Acquisition

A foreign investing company is entitled to acquire the shares of an Indian company
without obtaining any prior permission of the FIPB subject to prescribed
parameters/ guidelines. If the acquisition of shares directly or indirectly results in
the acquisition of a company listed on the stock exchange, it would require the
approval of the Security Exchange Board of India.
New investment by an existing collaborator in India
A foreign investor with an existing venture or collaboration (technical and
financial) with an Indian partner in particular field proposes to invest in another
area, such type of additional investment is subject to a prior approval from the
FIPB, wherein both the parties are required to participate to demonstrate that the
new venture does not prejudice the old one.

General Permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do not
require any further clearance from RBI for receiving inward remittance and issue
of shares to the foreign investors. The companies are required to notify the
concerned Regional office of the RBI of receipt of inward remittances within 30
days of such receipt and within 30 days of issue of shares to the foreign investors
or NRIs. Participation by International Financial Institutions Equity participation
by international financial institutions such as ADB, IFC, CDC, DEG, etc., in
domestic companies is permitted through automatic route, subject to SEBI/RBI
regulations and sector specific cap on FDI.

15

FDI in Small Scale Sector (SSI) Units

A small-scale unit cannot have more than 24 per cent equity in its paid up capital
from any industrial undertaking, either foreign or domestic. If the equity from
another company (including foreign equity) exceeds 24 per cent, even if the
investment in plant and machinery in the unit does not exceed Rs 10 million, the
unit loses its small-scale status and shall require an industrial license to
manufacture items reserved for small-scale sector.

CHAPTER 3: SECTOR SPECIFIC FOREIGN DIRECT INVESTMENT IN

INDIA

Hotel & Tourism: FDI in Hotel & Tourism sector in India

100% FDI is permissible in the sector on the automatic route, the term hotels
include restaurants, beach resorts, and other tourist complexes providing
accommodation and/or catering and food facilities to tourists. Tourism related
industry include travel agencies, tour operating agencies and tourist transport
operating agencies, units providing facilities for cultural, adventure and wild life
experience to tourists, surface, air and water transport facilities to tourists, leisure,

16

entertainment,

amusement,

sports,

and

health

units

for

tourists

and

Convention/Seminar units and organizations.

For foreign technology agreements, automatic approval is granted if
Up to 3% of the capital cost of the project is proposed to be paid for technical
and consultancy services including fees for architects, design, supervision, etc.
Up to 3% of net turnover is payable for franchising and marketing/publicity
support fee, and up to 10% of gross operating profit is payable for management
fee, including incentive fee.

Private Sector Banking:

Non-Banking Financial Companies (NBFC)
49% FDI is allowed from all sources on the automatic route subject to guidelines
issued from RBI from time to time.
a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall
be as per levels indicated below:
Merchant banking
17

 Underwriting
Portfolio Management Services
Investment Advisory Services
Financial Consultancy
Stock Broking
Asset Management
Venture Capital
Custodial Services
Factoring
Credit Reference Agencies
Credit rating Agencies
Leasing & Finance
Housing Finance
Foreign Exchange Brokering
Credit card business
Money changing Business
18

 Micro Credit
Rural Credit

b. Minimum Capitalization Norms for fund based NBFCs:

For FDI up to 51% - US$ 0.5 million to be brought upfront
For FDI above 51% and up to 75% - US $ 5 million to be brought upfront
For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5
million to be brought up front and the balance in 24 months
c. Minimum capitalization norms for non-fund based activities:
Minimum capitalization norm of US $ 0.5 million is applicable in respect of all
permitted non-fund based NBFCs with foreign investment.
d. Foreign investors can set up 100% operating subsidiaries without the condition
to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing
in US$ 50 million as at b) (iii) above (without any restriction on number of
operating subsidiaries without bringing in additional capital)
e. Joint Venture operating NBFC's that have 75% or less than 75% foreign
investment will also be allowed to set up subsidiaries for undertaking other NBFC
activities, subject to the subsidiaries also complying with the applicable minimum
capital inflow i.e. (b)(i) and (b)(ii) above.

19

f. FDI in the NBFC sector is put on automatic route subject to compliance with
guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines
in this regard.
Insurance Sector: FDI in Insurance sector in India
FDI up to 26% in the Insurance sector is allowed on the automatic route subject to
obtaining license from Insurance Regulatory & Development Authority (IRDA)

Telecommunication:
FDI in Telecommunication sector
In basic, cellular, value added services and global mobile personal
communications by satellite, FDI is limited to 49% subject to licensing and
security requirements and adherence by the companies (who are investing and
the companies in which investment is being made) to the license conditions for
foreign equity cap and lock- in period for transfer and addition of equity and
other license provisions.
ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted
up to 74% with FDI, beyond 49% requiring Government approval. These
services would be subject to licensing and security requirements.
No equity cap is applicable to manufacturing activities.
FDI up to 100% is allowed for the following activities in the telecom sector :
i.

ISPs not providing gateways (both for satellite and submarine cables);
20

ii.

Infrastructure Providers providing dark fiber (IP Category 1);

iii.

Electronic Mail; and

iv.

Voice Mail

The above would be subject to the following conditions:

FDI up to 100% is allowed subject to the condition that such companies would
divest 26% of their equity in favor of Indian public in 5 years, if these
companies are listed in other parts of the world.
The above services would be subject to licensing and security requirements,
wherever required.
Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.
Trading:
FDI in Trading Companies in India
Trading is permitted under automatic route with FDI up to 51% provided it is
primarily export activities, and the undertaking is an export house/trading
house/super trading house/star trading house. However, under the FIPB route: 100% FDI is permitted in case of trading companies for the following activities:

21

 exports;
bulk imports with ex-port/ex-bonded warehouse sales;
cash and carry wholesale trading;
Other import of goods or services provided at least 75% is for procurement
and sale of goods and services among the companies of the same group and
not for third party use or onward transfer/distribution/sales.

The following kinds of trading are also permitted, subject to provisions of EXIM
Policy:
a. Companies for providing after sales services (that is not trading per se)
b. Domestic trading of products of JVs is permitted at the wholesale level for
such trading companies who wish to market manufactured products on
behalf of their joint ventures in which they have equity participation in
India.
c. Trading of hi-tech items/items requiring specialized after sales service
d. Trading of items for social sector
e. Trading of hi-tech, medical and diagnostic items.
f. Trading of items sourced from the small scale sector under which, based on
technology provided and laid down quality specifications, a company can
market that item under its brand name.
22

g. Domestic sourcing of products for exports.

h. Test marketing of such items for which a company has approval for
manufacture provided such test marketing facility will be for a period of two
years, and investment in setting up manufacturing facilities commences
simultaneously with test marketing
FDI up to 100% permitted for e-commerce activities subject to the condition that
such companies would divest 26% of their equity in favor of the Indian public in
five years, if these companies are listed in other parts of the world. Such
companies would engage only in business to business (B2B) e-commerce and not
in retail trading.
Power:
FDI in Power Sector in India
Up to 100% FDI allowed in respect of projects relating to electricity generation,
transmission and distribution, other than atomic reactor power plants. There is no
limit on the project cost and quantum of foreign direct investment.
Drugs & Pharmaceuticals
FDI up to 100% is permitted on the automatic route for manufacture of drugs and
pharmaceutical, provided the activity does not attract compulsory licensing or
involve use of recombinant DNA technology, and specific cell / tissue targeted
formulations.
FDI proposals for the manufacture of licensable drugs and pharmaceuticals and
bulk drugs produced by recombinant DNA technology, and specific cell / tissue
targeted formulations will require prior Government approval.
23

Roads, Highways, Ports and Harbors

FDI up to 100% under automatic route is permitted in projects for construction and
maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels,
ports and harbors.
Pollution Control and Management
FDI up to 100% in both manufacture of pollution control equipment and
consultancy for integration of pollution control systems is permitted on the
automatic route.
Call Centers in India / Call Centres in India
FDI up to 100% is allowed subject to certain conditions.
Business Process Outsourcing BPO in India
FDI up to 100% is allowed subject to certain conditions.
Special Facilities and Rules for NRI's and OCB's
NRI's and OCB's are allowed the following special facilities:
Direct investment in industry, trade, infrastructure etc.
Up to 100% equity with full repatriation facility for capital and dividends in the
following sectors
34 High Priority Industry Groups
Export Trading Companies
Hotels and Tourism-related Projects
24

 Hospitals, Diagnostic Centers

Shipping
Deep Sea Fishing
Oil Exploration
Power
Housing and Real Estate Development
Highways, Bridges and Ports
Sick Industrial Units
Industries Requiring Compulsory Licensing
Up to 40% Equity with full repatriation: New Issues of Existing Companies
raising Capital through Public Issue up to 40% of the new Capital Issue.
On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership
engaged in Industrial, Commercial or Trading Activity.
Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the
equity Capital or Convertible Debentures of the Company by each NRI.
Investment in Government Securities, Units of UTI, National Plan/Saving
Certificates.

25

 On Non-Repatriation Basis: Acquisition of shares of an Indian Company,

through a General Body Resolution, up to 24% of the Paid Up Value of the
Company.
Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from
Shares or Debentures of an Indian

Forbidden Territories for FDI in India

Arms and ammunition
Atomic Energy

26

 Coal and lignite

Rail Transport
Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold,
diamonds, copper, zinc.

Approval for FDI in INDIA

Foreign direct investments in India are approved through two routes
1. Automatic approval by RBI
The Reserve Bank of India accords automatic approval within a period of two
weeks (subject to compliance of norms) to all proposals and permits foreign equity
up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of
industries and the sectoral caps applicable. The lists are comprehensive and cover
most industries of interest to foreign companies. Investments in high priority
industries or for trading companies primarily engaged in exporting are given
almost automatic approval by the RBI.

27

2. The FIPB Route Processing of non-automatic approval cases

FIPB stands for Foreign Investment Promotion Board which approves all other
cases where the parameters of automatic approval are not met. Normal processing
time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of
proposals, and rejections are few. It is not necessary for foreign investors to have a
local partner, even when the foreign investor wishes to hold less than the entire
equity of the company. The portion of the equity not proposed to be held by the
foreign investor can be offered to the public.

CHAPTER 4: Investment Risks in India

Sovereign Risk
India is an effervescent parliamentary democracy since its political freedom from
British rule more than 50 years ago. The country does not face any real threat of a
serious revolutionary movement which might lead to a collapse of state machinery.
Sovereign risk in India is hence nil for both "foreign direct investment" and
"foreign portfolio investment." Many Industrial and Business houses have
restrained themselves from investing in the North-Eastern part of the country due
to unstable conditions. Nonetheless investing in these parts is lucrative due to the
rich mineral reserves here and high level of literacy. Kashmir on the northern tip is

28

a militancy affected area and hence investment in the state of Kashmir are
restricted by law
Political Risk
India has enjoyed successive years of elected representative government at the
Union as well as federal level. India suffered political instability for a few years in
the sense there was no single party which won clear majority and hence it led to
the formation of coalition governments. However, political stability has firmly
returned since the general elections in 1999, with strong and healthy coalition
governments emerging. Nonetheless, political instability did not change India's
bright economic course though it delayed certain decisions relating to the
economy. Economic liberalization which mostly interested foreign investors has
been accepted as essential by all political parties including the Communist Party of
India Though there are bleak chances of political instability in the future, even if
such a situation arises the economic policy of India would hardly be affected..
Being a strong democratic nation the chances of an army coup or foreign
dictatorship are minimal. Hence, political risk in India is practically absent.
Commercial Risk
Commercial risk exists in any business ventures of a country. Not each and every
product or service is profitably accepted in the market. Hence it is advisable to
study the demand / supply condition for a particular product or service before
making any major investment. In India one can avail the facilities of a large
number of market research firms in exchange for a professional fee to study the
state of demand / supply for any product. As it is, entering the consumer market
involves some kind of gamble and hence involves commercial risk
Risk Due To Terrorism
29

In the recent past, India has witnessed several terrorist attacks on its soil which
could have a negative impact on investor confidence. Not only business
environment and return on investment, but also the overall security conditions in a
nation have an effect on FDI's. Though some of the financial experts think
otherwise. They believe the negative impact of terrorist attacks would be a short
term phenomenon. In the long run, it is the micro and macro economic conditions
of the Indian economy that would decide the flow of foreign investment and in this
regard India would continue to be a favorable investment destination

CHAPTER 5: CONCLUSION
A large number of changes that were introduced in the countrys regulatory
economic policies heralded the liberalization era of the FDI policy regime in India
and brought about a structural breakthrough in the volume of the FDI inflows into
the economy maintained a fluctuating and unsteady trend during the study period.
It might be of interest to note that more than 50% of the total FDI inflows received
by India came from Mauritius, Singapore and the USA.
The main reason for higher levels of investment from Mauritius was that the fact
that India entered into a double taxation avoidance agreement (DTAA) with
Mauritius were protected from taxation in India. Among the different sectors, the
service sector had received the larger proportion followed by computer software
and hardware sector and telecommunication sector.
30

According to findings and results, we have concluded that FII did have significant
impact on Sensex but there is less co-relation with Banks and IT. One of the
reasons for high degree of any linear relation can also be due to the sample data.
The data was taken on monthly basis. The data on daily basis can give more
positive results (may be). Also FII is not the only factor affecting the stock indices.
There are other major factors that influence the bourses in the stock market.

31