Foreign investment refers to investments made by the residents of a country in the

financial assets and production processes of another country. The effect of foreign
investment, however, varies from country to country. It can affect the factor
productivity of the recipient country and can also affect the balance of payments.
Foreign investment provides a channel through which countries can gain access to
foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign
institutional investment (FII). Foreign direct investment involves in direct production
activities and is also of a medium- to long-term nature. But foreign institutional
investment is a short-term investment, mostly in the financial markets. FII, given its
short-term nature, can have bidirectional causation with the returns of other domestic
financial markets such as money markets, stock markets, and foreign exchange
markets. Hence, understanding the determinants of FII is very important for any
emerging economy as FII exerts a larger impact on the domestic financial markets in
the short run and a real impact in the long run. India, being a capital scarce country,
has taken many measures to attract foreign investment since the beginning of reforms
in 1991.
India is the second largest country in the world, with a population of over 1 billion
people. As a developing country, Indias economy is characterized by wage rates that
are significantly lower than those in most developed countries. These two traits
combine to make India a natural destination for foreign direct investment (FDI) and
foreign institutional investment (FII). Until recently, however, India has attracted only a
small share of global foreign direct investment (FDI) and foreign institutional
investment (FII), primarily due to government restrictions on foreign involvement in the
economy. But beginning in 1991 and accelerating rapidly since 2000, India has
liberalized its investment regulations and actively encouraged new foreign investment, a
sharp reversal from decades of discouraging economic integration with the global
economy.
The world is increasingly becoming interdependent. In fact, the world has become a
borderless world. With the globalization of the various markets, international financial
flows have so far been in excess for the goods and services among the trading countries
of the world. Of the different types of financial inflows, the foreign direct investment
(FDI) and foreign institutional investment (FII)) has played an important role in the
process of development of many economies. Further many developing countries
consider foreign direct investment (FDI) and foreign institutional investment (FII) as an
important element in their development strategy among the various forms of foreign
assistance.
The Foreign direct investment (FDI) and foreign institutional investment (FII) flows are
usually preferred over the other form of external finance, because they are not debt
creating, nonvolatile in nature and their returns depend upon the projects financed by
the investor. The Foreign direct investment (FDI) and foreign institutional investment
(FII) would also facilitate international trade and transfer of knowledge, skills and
technology.
The Foreign direct investment (FDI) and foreign institutional investment (FII) is the
process by which the resident of one country(the source country) acquire the ownership

of assets for the purpose of controlling the production, distribution and other productive
activities of a firm in another country(the host country).
According to the international monetary fund (IMF), foreign direct investment (FDI) and
foreign institutional investment (FII) is defined as an investment that is made to
acquire a lasting interest in an enterprise operating in an economy other than that of
investor.
The government of India (GOI) has also recognized the key role of the foreign direct
investment (FDI) and foreign institutional investment (FII) in its process of economic
development, not only as an addition to its own domestic capital but also as an
important source of technology and other global trade practices. In order to attract the
required amount of foreign direct investment (FDI) and foreign institutional investment
(FII), it has bought about a number of changes in its economic policies and has put in
its practice a liberal and more transparent foreign direct investment (FDI) and foreign
institutional investment (FII) policy with a view to attract more foreign direct
investment (FDI) and foreign institutional investment (FII) inflows into its economy.
These changes have heralded the liberalization era of the foreign direct investment
(FDI) and foreign institutional investment (FII) policy regime into India and have
brought about a structural breakthrough in the volume of foreign direct investment
(FDI) and foreign institutional investment (FII) inflows in the economy. In this context,
this report is going to analyze the trends and patterns of foreign direct investment
(FDI) and foreign institutional investment (FII) flows into India during the post
liberalization period that is 1991 to 2007 year.
Objective of the project
Objective 1 pertaining to FDI: examines the trends and patterns in the foreign direct
investment (FDI) across different sectors and from different countries in India during
1991-2007 period means during post liberalization period. Objective 2 pertaining to FII:
influence of FII on movement of Indian stock exchange during the post liberalization
period that is 1991 to 2007.
Research Methodology
The lifeblood of business and commerce in the modern world is information. The ability
to gather, analyze, evaluate, present and utilize information is therefore is a vital skill
for the manager of today.
In order to accomplish this project successfully I will take following steps.
1) Data Collection:
The analysis will be done with the help Secondary data (from internet site and
journals).
The data is collected mainly from websites, annual reports, World Bank reports,
research reports, already conducted survey analysis, database available etc.
2) Analysis:
Appropriate Statistical tools like correlation and regression will be used to analyze the
data like to analyze the growth and patterns of the FDI and FII flows in India during the
post liberalization period, the liner trend model will be used. Further the percentage

analysis will be used to measure the share of each investing countries and the share of
each sectors in the overall flow of FDI and FII into India.
MAIN TEXT (FDI)
In this section I am going to discuss or describe the main business of the report i.e.
analysis of secondary data. It includes data in an organized form, discussion on its
significance and analyzing the results. For this I had divided this section in further two
subsections i.e. the first subsection fulfill the requirement of first objective which is
pertaining to FDI. The objective for FDI is to examine the trends and patterns in the
foreign direct investment (FDI) across different sectors and from different countries in
India during 1991-2007 period means during post liberalization period. And the second
subsection fulfills the analysis of second objective which is pertaining to FII. The
objective for FII is to examine the influence of FII on movement of Indian stock
exchange during the post liberalization period that is 1991 to 2007.
Subsection I: objective 1: Examine the trends and patterns in the foreign direct
investment (FDI) across different sectors and from different countries in India during
1991-2007 period means during post liberalization period.
About foreign direct investment
Is the process whereby residents of one country (the source country) acquire ownership
of assets for the purpose of controlling the production, distribution, and other activities
of a firm in another country (the host country). The international monetary funds
balance of payment manual defines FDI as an investment that is made to acquire a
lasting interest in an enterprise operating in an economy other than that of the investor.
The investors purpose being to have an effective voice in the management of the
enterprise. The united nations 1999 world investment report defines FDI as an
investment involving a long term relationship and reflecting a lasting interest and
control of a resident entity in one economy (foreign direct investor or parent enterprise)
in an enterprise resident in an economy other than that of the foreign direct investor
( FDI enterprise, affiliate enterprise or foreign affiliate).
Foreign direct investment: Indian scenario
Foreign Direct Investment (FDI) is permitted as under the following forms of
investments
Through financial collaborations.
Through joint ventures and technical collaborations.
Through capital markets via Euro issues.
Through private placements or preferential allotments.
Forbidden Territories
FDI is not permitted in the following industrial sectors:
Arms and ammunition.
Atomic Energy.
Railway Transport.
Coal and lignite.

 Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
Retail Trading (except single brand product retailing).
Lottery Business
Gambling and Betting
Business of chit fund
Nidhi Company
Trading in Transferable Development Rights (TDRs).
Activity/sector not opened to private sector investment.
Foreign Investment through GDRs (Euro Issues)
Indian companies are allowed to raise equity capital in the international market through
the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and
are designated in dollars and are not subject to any ceilings on investment. An
applicant company seeking Government's approval in this regard should have consistent
track record for good performance (financial or otherwise) for a minimum period of 3
years. This condition would be relaxed for infrastructure projects such as power
generation, telecommunication, petroleum exploration and refining, ports, airports and
roads.
1. Clearance from FIPB
There is no restriction on the number of Euro-issue to be floated by a company or a
group of companies in the financial year. A company engaged in the manufacture of
items covered under Annex-III of the New Industrial Policy whose direct foreign
investment after a proposed Euro issue is likely to exceed 51% or which is
implementing a project not contained in Annex-III, would need to obtain prior FIPB
clearance before seeking final approval from Ministry of Finance.
2. Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital
expenditure including domestic purchase/installation of plant, equipment and building
and investment in software development, prepayment or scheduled repayment of
earlier external borrowings, and equity investment in JV/WOSs in India.
3. Restrictions
However, investment in stock markets and real estate will not be permitted. Companies
may retain the proceeds abroad or may remit funds into India in anticipation of the use
of funds for approved end uses. Any investment from a foreign firm into India requires
the prior approval of the Government of 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 highpriority industries or for trading
companies primarily engaged in exporting are given almost automatic approval by the

RBI.
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.
Market design in India for foreign institutional investors
Foreign Institutional Investors means an institution established or incorporated outside
India which proposes to make investment in India in securities. A Working Group for
Streamlining of the Procedures relating to FIIs, constituted in April, 2003, inter alia,
recommended streamlining of SEBI registration procedure, and suggested that dual
approval process of SEBI and RBI be changed to a single approval process of SEBI. This
recommendation was implemented in December 2003. Currently, entities eligible to
invest under the FII route are as follows:
i) As FII: Overseas pension funds, mutual funds, investment trust, asset management
company, nominee company, bank, institutional portfolio manager, university funds,
endowments, foundations, charitable trusts, charitable societies, a trustee or power of
attorney holder incorporated or established outside India proposing to make proprietary
investments or with no single investor holding more than 10 per cent of the shares or
units of the fund).
(ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf
the FII invests. The following entities are eligible to be registered as sub-accounts, viz.
partnership firms, private company, public company, pension fund, investment trust,
and individuals.
FIIs registered with SEBI fall under the following categories:
a) Regular FIIs- those who are required to invest not less than 70 % of their investment
in quity-related instruments and 30 % in non-equity instruments.
b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.
The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset
management companies, nominee companies and incorporated/institutional portfolio
managers or their power of attorney holders (providing discretionary and nondiscretionary portfolio management services) to be registered as FIIs. While the
guidelines did not have a specific provision regarding clients, in the application form the
details of clients on whose behalf investments were being made were sought.
While granting registration to the FII, permission was also granted for making
investments in the names of such clients. Asset management companies/portfolio
managers are basically in the business of managing funds and investing them on behalf
of their funds/clients. Hence, the intention of the guidelines was to allow these
categories of investors to invest funds in India on behalf of their 'clients'. These 'clients'
later came to be known as sub-accounts. The broad strategy consisted of having a wide

variety of clients, including individuals, intermediated through institutional investors,

who would be registered as FIIs in India. FIIs are eligible to purchase shares and
convertible debentures issued by Indian companies under the Portfolio Investment
Scheme.
Registration Process of FIIs
A FII is required to obtain a certificate by SEBI for dealing in securities. SEBI grants the
certificate SEBI by taking into account the following criteria:
i) The applicant's track record, professional competence, financial soundness,
experience, general reputation of fairness and integrity.
ii) Whether the applicant is regulated by an appropriate foreign regulatory authority.
iii) Whether the applicant has been granted permission under the provisions of the
Foreign Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for
making investments in India as a Foreign Institutional Investor.
iv) Whether the applicant is
a) an institution established or incorporated outside India as a pension fund, mutual
fund, investment trust, insurance company or reinsurance company.
b) an International or Multilateral Organization or an agency thereof or a Foreign
Governmental Agency or a Foreign Central Bank. c) an asset management company,
investment manager or advisor, nominee company, bank or institutional portfolio
manager, established or incorporated outside India and proposing to make investments
in India on behalf of broad based funds and its proprietary funds in if any or
d) university fund, endowments, foundations or charitable trusts or charitable societies.
v) Whether the grant of certificate to the applicant is in the interest of the development
of the securities market.
vi) Whether the applicant is a fit and proper person.
The SEBIs initial registration is valid for a period of three years from the date of its
grant
of renewal. Investment Conditions and Restrictions for FIIs: Foreign Institutional
Investor may invest only in the following:(a) Securities in the primary and secondary markets including shares, debentures and
warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in
India.
(b) units of schemes floated by domestic mutual funds including Unit Trust of India,
whether listed or not listed on a recognised stock exchange.
Dated Government securities.
(d) Derivatives traded on a recognised stock exchange.
(e) Commercial paper.
(f) Security receipts.
The total investments in equity and equity related instruments (including fully
convertible debentures, convertible portion of partially convertible debentures and
tradable warrants) made by a Foreign Institutional Investor in India, whether on his
own account or on account of his sub- accounts, should not be less than seventy per
cent of the aggregate of all the investments of the Foreign Institutional Investor in

India, made on his own account and on account of his sub-accounts. However, this is
not applicable to any investment of the foreign institutional investor either on its own
account or on behalf of its sub-accounts in debt securities which are unlisted or listed or
to be listed on any stock exchange if the prior approval of the SEBI has been obtained
for such investments. Further, SEBI while granting approval for the investments may
impose conditions as are necessary with respect to the maximum amount which can be
invested in the debt securities by the foreign institutional investor on its own account or
through its sub-accounts. A foreign corporate or individual is not eligible to invest
through the hundred percent debt route. Even investments made by FIIs in security
receipts issued by securitization companies or asset reconstruction companies under
the Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 are not eligible for the investment limits mentioned above. No
foreign institutional should invest in security receipts on behalf of its sub-account.
Prohibitions on Investments:
FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company.
They are also not allowed to invest in any company which is engaged or proposes to
engage in the following activities:
1) Business of chit fund
2) Nidhi Company
3) Agricultural or plantation activities
4) Real estate business or construction of farm houses (real estate business does not
include development of townships, construction of residential/commercial premises,
roads or bridges.
5) Trading in Transferable Development Rights (TDRs).
Trends of Foreign Institutional Investments in India.
Portfolio investments in India include investments in American Depository Receipts
(ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and
investments in offshore funds. Before 1992, only Non-Resident Indians (NRIs) and
Overseas Corporate Bodies were allowed to undertake portfolio investments in India.
Thereafter, the Indian stock markets were opened up for direct participation by FIIs.
They were allowed to invest in all the securities traded on the primary and the
secondary market including the equity and other securities/instruments of companies
listed/to be listed on stock exchanges in India. It can be observed from the table below
that India is one of the preferred investment destinations for FIIs over the years. As of
March 2007, there were 996 FIIs registered with SEBI.
CONCLUSION:
For objective 1:
The process of economic reforms which was initiated in July 1991 to liberalize and
globalize the economy had gradually opened up many sectors of its economy for the
foreign investors. 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 during the period from 1991-2007 came from Mauritius 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 electrical and
equipment had received the larger proportion followed by service sector and
telecommunication sector.
For objective 2:
According to findings and results, I concluded that FII did have high significant impact
on the Indian capital market. Therefore, the alternate hypothesis is accepted. S&P CNX
NIFTY, BANK NIFTY, CNX NIFTY JUNIOR, S&P CNX 500 showed positive correlation but
CNX 100, CNX IT showed negative correlation with FII. Also the degree of relation was
high in all the case. It shows high degree of linear relation between FII and stock index.
This shows that there is relationship between them. 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. I also analyzed that FII had significant
impact on the stock index for the period starting from January 1991 to March 2007. The
sample data available for other indices like BANK NIFTY, CNX 100, S&P CNX 500 was
low with just 51, 87 and 94 respectively observations that have also hampered the
results.