CHAPTER - 1.

1.1 INTRODUCTION
These three letters stand for foreign direct investment. The simplest explanation
of FDIA 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.
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.

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.
1

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.

Foreign Direct Investment when a firm invests directly in production or other

facilities, over which it has effective control, in a foreign country.

1.2 - OBJECTIVES OF THE STUDY

To study the role, significance of plastic money

To know the implications of plastic money

1.3 - METHODS OF RESEARCH

The data is collected only from secondary data source. Such as Newspapers, Magazines,
Books, Journals, E-data, etc.

1.4 - SIGNIFICANCE OF THE STUDY

FDI has grown in importance in the global economy with FDI stocks now constituting
over 20 percent of global GDP. Foreign direct investment (FDI) is a measure of foreign
ownership of productive assets, such as factories, mines and land. Increasing foreign
investment can be used as one measure of growing economic globalization. The largest
flows of foreign investment occur between the industrialized countries (North America,
Western Europe and Japan). But flows to non-industrialized countries are increasing
sharply.

Avoiding foreign government pressure for local production.

Circumventing trade barriers, hidden and otherwise.
Making the move from domestic export sales to a locally-based national sales

office.
Capability to increase total production capacity.
Opportunities for co-production, joint ventures with local partners, joint
marketing arrangements, licensing, etc.

1.5 - CHAPTER SCHEME

THIS STUDY CONSISTS OF FOLLOWING CHAPTER : -

CHAPTER 1

:-

INTRODUCTION

CHAPTER 2

:-

FDI IN INDIA

CHAPTER 3

:-

IMPORTANCE OF FDI

CHAPTER 4

:-

METHODS OF FDI

CHAPTER 5

:-

INVESTMENT RISKS IN INDIA

CHAPTER 6

:-

FDI POLICY IN INDIA

CHAPTER 7

:-

SPECIAL FACILITIES AND RULES FOR NRIS AND

OCBS

CHAPTER 8

:-

FDI EQUITY INFLOW BY COUNTRIES

CHAPTER 9

:-

FOREIGN INSTITUTIONAL INVESTMENT

CHAPTER 10

:-

OBJECTIVE OF THE STUDY

CHAPTER 11

:-

RESEARCH METHODOLOGY

CHAPTER 12

:-

BIBILOGRAPHY

CHAPTER - 2.0

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
work force still earn 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 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 green revolution and economic reforms.

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.

2.1 TYPES OF FDI

FDIS CAN BE BROADLY CLASSIFIED INTO TWO TYPES:

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 FDI :- 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.
- Liability of foreignness the costs of doing business abroad resulting in a competitive

10

CHAPTER 3.0

IMPORTANCE OF FDI

The simple answer is that making a direct foreign investment allows companies
to accomplish several tasks:

- Avoiding foreign government pressure for local production.

- Circumventing trade barriers, hidden and otherwise.
- Making the move from domestic export sales to a locally-based national sales office.
- Capability to increase total production capacity.
- Opportunities for co-production, joint ventures with local partners, joint marketing
Arrangements, licensing, etc;

A more complete response might address the issue of global business partnering
in very general terms. While it is nice that many business writers like the expression,
think globally, act locally, this often used clich does not really mean very much to
the average business executive in a small and medium sized company. The phrase does
have significant connotations for multinational corporations. But for executives in
SMEs, it is still just another buzzword.

11

The simple explanation for this is the difference in perspective between executives of
multinational corporations and small and medium sized companies. Multinational
corporations are almost always concerned with world wide manufacturing capacity and
proximity to major markets. Small and medium sized companies tend to be more
concerned with selling their products in overseas markets. The advent of the Internet
has ushered focusing on access to markets, access to expertise and most of all in a new
and very different mindset that tends to focus more on access issues. SMEs in
particular are now access to technology.

12

CHAPTER 4.0

4.1 - 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

13

R&D support
Derogation from regulations (usually for very large projects)
The manner in which a firm chooses to enter a foreign market through FDI.

4.2 - ENTRY MODE

International franchising
Branches
Contractual alliances
Equity joint ventures
Wholly foreign-owned subsidiaries.

CHAPTER 5.0
14

INVESTMENT RISKS IN INDIA

5.1 - SOVEREIGN RISK

India is an effervescent parliamentary democracy since its political freedom from
British rule more than50 years ago. The country does not face any real threat of a
serious revolutionary movement which might 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 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. None the less investing in these parts is lucrative
due to the rich mineral reserves here and high level of literacy.
Kashmir on the northern tip is a militancy affected area and hence investment in the
state of Kashmir are restricted by law.

5.2 - POLITICAL RISK

15

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 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.

5.3 - 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.

5.4 RISK DUE TO TERRORISM

16

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 concerned of RBI of receipt of inward
remittances within 30 days of such receipt and will have to file the 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 6.O

17

FDI POLICY IN INDIA

6.1 FOREIGN DIRECT INVESTMENT POLICY

FDI policy is reviewed on an ongoing basis and measures for its further
liberalization are taken. Change in sector policy/sector 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 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:

18

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 up to 100% equity participation with the capping
amount as Rs. 1500 corers.
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.

6.2 - 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 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.

6.3 - PROCEDURE UNDER AUTOMATIC ROUTE

19

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 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.
INVESTING COMPANIES IN INFRASTRUCTURE & SERVICE SECTOR.
ATOMIC ENERGY & RELATED PROJECTS.
DEFENSE AND STRATEGIC INDUSTRIES.
AGRICULTURE (INCLUDING PLANTATION)
PRINT MEDIA
BROADCASTING
POSTAL SERVICES

6.4 - 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
20

Economic Affairs (DEA),Ministry of Finance. Application for NRI and 100% EOU
cases should be presented to SIA in Department of Industrial Policy & Promotion.

6.5 - 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.

6.6 - 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.
21

6.7 - 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.

6.8

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 capon FDI.

6.9 - FDI IN SMALL SCALE SECTOR 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 invest main ten
plant and machinery in the unit does not exceed Rs 10 million, the unit loses its smallscale status and shall require an industrial license to manufacture items reserved for
small-scale sector. See also FDI in Small Scale Sector in India Further Liberalized.
22

6.10 - FOREIGN DIRECT INVESTMENT INDIAN SCENARIO

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.

CHAPTER - 7.0

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:23

High Priority Industry Groups

Export Trading Companies
Hotels and Tourism-related Projects
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.

24

Investment in Government Securities, Units of UTI, National Plan/Saving

Certificates.

CHAPTER - 8.0

8.1 - FDI EQUITY INFLOW BY COUNTRIES

FDI INFLOWS BY COUNTRIES ARE AS FOLLOWS :-

A) MAURITIUS
25

Mauritius invested Rs.19,18,633 million in India Up to the January 2010, equal

to 44.01 percent of total FDI inflows. Many companies based outside of India utilize
Mauritian holding companies to take advantage of the India- Mauritius Double Taxation
Avoidance Agreement (DTAA). The DTAA allows foreign firms to bypass Indian
capital gains taxes, and may allow some India-based firms to avoid paying certain taxes
through a process known as round tripping.
The extent of round tripping by Indian companies through Mauritius is unknown.
However, the Indian government is concerned enough about this problem to have asked
the government of Mauritius to set up a joint monitoring mechanism to study these
investment flows. The potential loss of tax revenue is of particular concern to the Indian
government. These are the sectors which attracting more FDI from Mauritius Electrical
equipment Gypsum and cement products Telecommunications Services sector that
includes both non- financial and financial Fuels.

B) SINGAPORE

Singapore continues to be the single largest investor in India amongst the

Singapore with FDI inflows into Rs. 3,80,142crore up to January 2010
Sector-wise distribution of FDI inflows received from Singapore the highest inflows
have been in the services sector (financial and non financial), which accounts for about

26

30% of FDI inflows from Singapore. Petroleum and natural gas occupies the second
place followed by computer software and hardware, mining and construction.

C) UNITED STATE OF AMERICA

The United States is the third largest source of FDI in India (7.64 % of the total),
valued at 732335 Cr. in cumulative inflows up to January 2010. According to the Indian
government, the top sectors attracting FDI from the United States to India are fuel,
telecommunications, electrical equipment, food processing, and services. According to
the available M&A data, the two top sectors attracting FDI inflows from the United
States are computer systems design and programming and manufacturing.

D) UNITED KINDOM

The United Kingdom is the fourth largest source of FDI in India (5.53 % of the
total), valued at 2,40,974crore in cumulative inflows up to January 2010 - Over 17 UK
companies under the aegis of the Nuclear Industry Association of UK have tied up with
Ficci to identify joint venture and FDI possibilities in the civil nuclear energy sector.

27

UK companies and policy makers the focus sectors for joint ventures, partnerships, and
trade are nonconventional energy, IT, precision engineering, medical equipment,
infrastructure equipment, and creative industries.

E) NETHERLANDS

FDI from Netherlands to India has increased at a very fast pace over the last few
years. Netherlands ranks fifth among all the countries that make investments in India.
The total flow of FDI from Netherlands to India came to Rs. 1, 78,047 Cr. between
1991 and 2002. The total percentage of FDI from Netherlands to India stood at 4.08%
out of the total foreign direct investment in the country up to August 2009.

28

29

8.2 - FOREIGN INVESTMENT PROMOTION BOARD

The FIPB (Foreign Investment Promotion Board) is a government body that
offers a single window clearance for proposals on foreign direct investment in the
country that are not allowed access through the automatic route. Consisting of Senior
Secretaries drawn from different ministries with Secretary, Economic Affairs in the
chair, this high powered body discusses and examines proposals for foreign investment
in the country for restricted sectors ( as laid out in the Press notes and extant foreign
investment policy) on a regular basis. Currently proposals for investment beyond 600
Cr. require them concurrence of the CCEA (Cabinet Committee on Economic Affairs).
The threshold limit is likely to be raised to 1200 Cr. soon. The Board thus plays an
important role in the administration and implementation of the Governments FDI
policy. In circumstances where there is ambiguity or a conflict of interpretation, the
FIPB has stepped in to provide solutions. Through its fast track working it has
established its reputation as a body that does not unreasonably delay and is objective in
its decision making. It therefore has a strong record of actively encouraging the flow of
FDI into the country. The FIPB is assisted in this task by a FIPB Secretariat. The launch
of e- filing facility is an important initiative of the Secretariat to further the cause of
enhanced accessibility and transparency.

30

8.3 - FOLLOWING VARIOUS INDUSTRIES ATTRACTING FDI FROM

NETHERLANDS TO INDIA ARE
-

Food processing industries

Telecommunications that includes services of cellular mobile, basic telephone,

and radio paging

Horticulture
Electrical equipment that includes computer software and electronics
Service sector that includes non- financial and financial services.

The sectors receiving the largest shares of total FDI inflows up to arch 2010 were the
service sector and computer software and hardware sector, each accounting for 22.14
and 9.48 percent respectively. These were followed by the telecommunications, real
estate, construction and automobile sectors. The top sectors attracting FDI into India via
M&A activity were manufacturing; information; and professional, scientific, and
technical services. These sectors correspond closely with the sectors identified by the
Indian government as attracting the largest shares of FDI inflows overall.

The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers)
registered maximum growth of 227 per cent during April 2008 March 2009 as
compared to 11.71 per cent during the last fiscal. The sector attracted USD 749 million
FDI in FY 09 as compared to USD 229 million in FY 08. During the year 2009
government had raised the FDI limit in telecom sector from 49 per cent to 74 per, which
has contributed to the robust growth of FDI. The telecom sector registered a growth of
103 per cent during fiscal 2008-09 as compared to previous fiscal. The sector attracted
31

USD 2558 million FDI in FY 09 as compared to the USD 1261 million in FY 08,
acquired 9.37 per cent share in total FDI inflow. India automobile sector has been able
to record 70 per cent growth in foreign investment. The FDI inflow in automobile sector
has increased from USD 675 million to 1,152 million in FY 09 over FY 08. The other
sectors which registered growth in highest FDI inflow during April March 2009 were
housing & real estate (28.55 per cent), computer software & hardware (18.94 per cent),
construction activities including road & highways (16.35 per cent) and power (1.86 per
cent).

CHAPTER - 9.0

32

FOREIGN INSTITUTIONAL INVESTMENT

9.1 - INTRODUCTION TO FII

Since 1990-91, the Government of India embarked on liberalization and
economic reforms with a view of bringing about rapid and substantial economic growth
and move towards globalization of the economy. Asa part of the reforms process, the
Government under its New Industrial Policy revamped its foreign investment policy
recognizing the growing importance of foreign direct investment as an instrument of
technology transfer, augmentation of foreign exchange reserves and globalization of the
Indian economy.
Simultaneously, the Government, for the first time, permitted portfolio
investments from abroad by foreign institutional investors in the Indian capital market.
The entry of FIIs seems to be a follow up of there commendation of the Narsimhan
Committee Report on Financial System. While recommending their
entry, the Committee, however did not elaborate on the objectives of the suggested
policy. The committee only suggested that the capital market should be gradually
opened up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all
the securities traded on the primary and secondary markets, including shares,
debentures and warrants issued by companies which were listed or were to be listed on
the Stock Exchanges in India. While presenting the
33

Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh had announced a
proposal to allow reputed foreign investors, such as Pension Funds etc., to invest in
Indian capital market.

9.2 - 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 :-

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.

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-

34

accounts, viz. partnership firms, private company, public company, pension fund,
investment trust, and individuals.

FIIS REGISTERED WITH SEBI FALL UNDER THE FOLLOWING

CATEGORIES

Regular FIIs- those who are required to invest not less than 70 % of their
investment in equity-related instruments and 30 % in non-equity instruments.

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'
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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.

9.3 - 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:

Business of chit fund

Nidhi Company

Agricultural or plantation activities

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).
Trading in Transferable Development Rights (TDRs).

9.4 - TRENDS OF FOREIGN INSTITUTIONAL INVESTMENTS

IN INDIA

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Portfolio investments in India include investments in American Depository

Receipts

(ADRs)/

Global

Depository

Receipts

(GDRs),

Foreign

Institutional

Investments and investments in offshore funds. Before1992, 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 2009, there were 1609 FIIs registered with SEBI.

9.5 FDI V/s FII

Both FDI and FII is related to investment in a foreign country. FDI or Foreign
Direct Investment is an investment that a parent company makes in a foreign country.
On the contrary, FII or Foreign Institutional Investor is an investment made by an
investor in the markets of a foreign nation. In FII, the companies only need to get
registered in the stock exchange to make investments. But FDI is quite different from it

37

as they invest in a foreign nation. The Foreign Institutional Investor is also known as
hot money as the investors have the liberty to sell it and take it back. But in Foreign
Direct Investment, this is not possible. In simple words, FII can enter the stock market
easily and also withdraw from it easily. But FDI can not enter and exit that easily. This
difference is what makes nations to choose FDIs more than then FIIs.

FDI is more preferred to the FII as they are considered to be the most beneficial
kind of foreign investment for the whole Economy. specific enterprise. It aims to
increase the enterprises capacity or productivity or change its management control. In
an FDI, the capital inflow is translated into additional production. The FII investment
flows only into the secondary market. It helps in increasing capital availability in
general rather than enhancing the capital of a specific enterprise. The Foreign Direct
Investment is considered to be more stable than Foreign Institutional Investor. FDI not
only brings in capital but also helps in good governance practices and better
management skills and even technology transfer.

Though the Foreign Institutional Investor helps in promoting good governance

and improving accounting, it does not come out with any other benefits of the FDI.
While the FDI flows into the primary market, the FII flows into secondary market.

While FIIs are short-term investments, the FDIs are long term.

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FDI is an investment that a parent company makes in a foreign country. On the

contrary, FII is an investment made by an investor in the markets of a foreign
nation.

FII can enter the stock market easily and also withdraw from it easily. But FDI
cannot enter and exit easily.

Foreign Direct Investment targets a specific enterprise. The FII increasing capital
availability in general.

The Foreign Direct Investment is considered to be more stable than Foreign

Institutional Investor.

CHAPTER - 10.0

OBJECTIVE OF THE STUDY

OBJECTIVE OF THE STUDY

39

To know the flow of investment in India

To know how can India Grow by investment.
To examine the trends and patterns in the FDI across different sectors and from

different countries
in India.
To know in which sector we can get more foreign currency in terms of

investment in India
To know which country s safe to invest.
To know how much to invest in a developed country or in a developing.
To know Which sector is good for investment.
To know which country in investing in which country
To know the reason for investment in India
Influence of FII on movement of Indian stock exchange
To understand the FII & FDI policy in India.

CHAPTER - 11.0

RESEARCH METHODOLOGY
In order to accomplish this project successfully we will take following steps.

DATA COLLECTION
Internet, Books , newspapers, journals and books, other reports and projects, literatures

FDI

40

The study is limited to a sample of investing countries e.g. Mauritius, Singapore, USA
etc.

and

sectors

e.g.

service

sector,

computer

hardware

and

software,

telecommunications etc. which had attracted larger inflow of FDI from different
countries.

FII
CORRELATION :- We have used the Correlation tool to determine whether two
ranges of data move together that is, how the Sensex, Bank, IT, Power and Capital
Goods are related to the FII which may be positive relation, negative relation or no
relation.
We will use this model for understanding the relationship between FII and stock indices
returns. FII is taken as independent variable. Stock indices are taken as dependent
variable

HYPOTHESIS TEST
If the hypothesis holds good then we can infer that FIIs have significant impact
on the Indian capital market. This will help the investors to decide on their investments
in stocks and shares. If the hypothesis is rejected, or in other words if the null
hypothesis is accepted, then FIIs will have no significant impact on the Indian bourses.

41

CHAPTER 12.0

CONCLUSION

It can be observed from the above analysis that at the sector level of the Indian
Economy, FDI has helped to raised the output, productivity and export in some sector.
However, in this variables ( output, Labour productivity and export ) is establish by the
FDI inflow in the sector. This may be due to the Low flow of the FDI into India both at
the micro level as well as at sectoral level. It implies that the spirit in which economy
has been liberalized and exposed to world economy at the let eighties and early nineties
42

Has not been achieved after so many years. This call for a Judicious Policy Decision
towards FDI at the sectoral level. Therefore, in eve of Indias plan for further opening
up of the economy, it is advisable to open up the export oriented sectors and a higher
the growth of the economy could be achieved through the growth of this sector. Foreign
Direct Investment ( FDI ) as a strategic component of investment is needed by India for
its sustained economy growth and development through creation of jobs, Expansion Of
Exiting Manufacturing Industries, short and long term project in the filed of Health care
Education, Research and Development etc. Government should Design the FDI Policy
Such a way where FDI Inflow can be utilized as means of enhancing Domestic
Production, Saving and Export

through the equitable Distribution among Sated by

Providing Much freedom to states, so that they can attract FDI inflow at there own
level. FDI can Help to raised the output, Productivity and Export at the sectoral level of
the Indian Economy.

CHAPTER - 13.0

BIBILOGRAPHY

A) Reference Books:AUTHOR'S NAME

:-

Dana Vachan

TITLE OF BOOK

:-

Foreign Investments

PUBLICATION :-

3rd Edition, 2010

43

B) JOURNALS
E-DATA

http://www.answers.com/topic/foreign-direct-investment#History
http://www.unctad.org/sections/dite_iiab/docs/diteiiab20041_en.pdf
http://www.economywatch.com/foreign-direct-investment/
http://www.legalserviceindia.com/articles/fdi_india.htm
www.coca-colacompany

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