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SIGNIFICANCE
With the initiation of new economic policy in 1991 and subsequent reforms process, India has witnessed a change in the flow and direction of foreign direct investment (FDI) into the country. This is mainly due to the removal of restrictive and regulated practices. Foreign direct investment in India increased from US $ 129 millions in 1991-92 to US $ 40,885 million in March, 2005, an increase of about 316.9 times. Thus, the study of FDI & FII signifies how the Indian economy is growing
SOURCE 2: eastasiaforum.org
India is macro-economically well placed to attract FDI inflows, merely showing an intention to introduce user-friendly regulations without addressing the core regulatory, institutional and policy issues affecting FDI may not be enough to attract the huge amounts of FDI the country needs. Economic surveys in last few years confirm time and again the need for concrete reforms to improve the Indian investment and business climate.
CONCEPTUALISATION
Concept of foreign direct investment as well as the foreign institutional investment has been explained. FDI types, entry modes and procedure to invest in different sector management, and an overview of FII are also explained. This project is based on the Study of Foreign Direct investment in India The project also includes the on study of FDI in India through sector wise, country wise and year wise Analysis & Interpretation and findings.
rallied to make sure that this attack on their expansion plans was not successful. One key to understanding FDI is to get a mental picture of the global scale of corporations able to make such investment. A carefully planned FDI can provide a huge new market for the company, perhaps introducing products and services to an area where they have never been available. Not only that, but such an investment may also be more profitable if construction costs and labor costs are less in the host country. 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. FDI growth has been a key factor in the international nature of business that many are familiar with in the 21st century. This growth has been facilitated by changes in regulations both in the originating country and in the country where the new installation is to be built. Corporations from some of the countries that lead the worlds economy have found fertile soil for FDI in nations where commercial development was limited, if it existed at all. The dollars invested in such developing-country projects increased 40 times over in less than 30 years. The financial strength of the investing corporations has sometimes meant failure for smaller competitors in the target country. One of the reasons is that foreign direct investment in buildings and equipment still accounts for a vast majority of FDI activity. Corporations from the originating country gain a significant financial
foothold in the host country. Even with this factor, host countries may welcome FDI because of the positive impact it has on the smaller economy.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. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic product (GDP). 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. Foreign direct investment (FDI) refers to long term participation by country A into country B. 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 that of the investor (direct investment enterprise).The lasting interest implies the existence of a longterm 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. Portfolio theory the behavior of individuals or firms administering large amounts of financial assets. Product Life-Cycle Theory Ray Vernon asserted that product moves to lower income countries as products move through their product life cycle. The FDI impact is similar: FDI flows to developed countries for innovation, and from developed countries as products evolve from being innovative to being mass-produced. The Eclectic Paradigm
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Distinguishes between:
Structural market failure external condition that gives rise to monopoly advantages as a result of entry barriers Transactional market failure failure of intermediate product markets to transact goods and services at a lower cost than internationalization
The Dynamic Capability Perspective A firms ability to diffuse, deploy, utilize and rebuild firm-specific resources for a competitive advantage. Ownership specific resources or knowledge are necessary but not sufficient for international investment or production success. It is necessary to effectively use and build dynamic capabilities for quantity and/or quality based deployment that is transferable to the multinational environment. Firms develop centers of excellence to concentrate core competencies to the host environment. Monopolistic Advantage Theory An MNE has and/or creates monopolistic advantages that enable it to operate subsidiaries abroad more profitably than local competitors. Monopolistic Advantage comes from:
Superior knowledge production technologies, managerial skills, industrial organization, knowledge of product. Economies of scale through horizontal or vertical FDI
Internationalization Theory
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When external markets for supplies, production, or distribution fails to provide efficiency, companies can invest FDI to create their own supply, production, or distribution streams. Advantages Avoid search and negotiating costs Avoid costs of moral hazard (hidden detrimental action by external partners) Avoid cost of violated contracts and litigation Capture economies of interdependent activities Avoid government intervention Control supplies Control market outlets Better apply cross-subsidization, predatory pricing and transfer pricing
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History
In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. 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. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic product (GDP). The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to nonindustrialized countries are increasing sharply.
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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.
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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 disadvantage.
through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise
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 derogation from regulations (usually for very large projects)
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Entry Mode
The manner in which a firm chooses to enter a foreign market through FDI. International franchising Branches Contractual alliances Equity joint ventures Wholly foreign-owned subsidiaries Investment approaches: Greenfield investment (building a new facility) Cross-border mergers Cross-border acquisitions Sharing existing facilities
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has ushered in a new and very different mindset that tends to focus more on access issues.
Resources seeking looking for resources at a lower real cost. Market seeking secure market share and sales growth in target foreign market.
Efficiency seeking seeks to establish efficient structure through useful factors, cultures, policies, or markets.
Strategic asset seeking seeks to acquire assets in foreign firms that promote corporate long term objectives.
Location advantages - defined as the benefits arising from a host countrys comparative advantages.- Better access to resources Lower real cost from operating in a host country Labor cost differentials Transportation costs, tariff and non-tariff barriers Governmental policies
Structural discrepancies are the differences in industry structure attributes between home and host countries. where:
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Competition is less intense Products are in different stages of their life cycle
Ownership Advantages come from the application of proprietary tangible and intangible assets in the host country. Reputation, brand image, distribution channels Technological expertise, organizational skills, experience
Core competence skills within the firm that competitors cannot easily imitate or match.
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RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. It may be understood as a science of studying how research is done systematically. In fact, research is an art of scientific investigation. The procedure adopted for conducting the research requires a lot of attention as it has direct bearing on accuracy, reliability and adequacy of results obtained. Research methodology is a way to systematically study and solve the research problems.
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RESEARCH
Research refers to a search for knowledge. OR A careful investigation or inquiry specially through search for new facts in any branch of knowledge. -The Advanced Learners Dictionary of Current English. Systematized effort to gain new knowledge. -Redman and Mory.
RESEARCH PROBLEM
The first step while conducting research is careful definition of Research Problem as a very good saying is there, A well defined problem is half solved The present project has been undertaken to do is the Analysis and Interpretation FDI AND FII IN INDIA
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RESEARCH DESIGN
FDI: 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, Bankex, IT, Power and Capital Goods are related to the FII which may be positive relation, negative relation or no relation.
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Exploratory:
In it, the problem is formulated for precise investigation and working hypothesis is developed.
Diagnostic:
In this, those frequencies are determined with which something occurs or its association with something else.
Experimental:
In it, casual relationships between variables are tested. It is also known as Hypothesis Testing Research Design.
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Descriptive:
In this, those studies are taken which are concerned with describing the characteristics of particular individual or a group. The present project is Descriptive in nature. The purpose of descriptive research design is in descriptive state. The main characteristic is that the research has no control over the variables; he can only report what has happened or what is happening.
TYPES OF DATA COLLECTION PRIMARY DATA SECONDARY DATA PRIMARY DATA:The primary data are those, which are collected afresh and for the first time, and thus happen to be original in character.
SECONDARY DATA:The secondary data, on the other hand, are those which have already been collected by someone else and which have already been passed through the statistical process. Books, magazines.
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Reports, websites .
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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 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.
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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.
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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.
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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
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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
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Investment under automatic route; and Investment through prior approval of Government
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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 Investing Companies in Infrastructure & Service Sector Atomic Energy & Related Projects
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Defense and Strategic Industries Agriculture (Including Plantation) Print Media Broadcasting Postal Services
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. 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
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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
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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.
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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, entertainment, amusement, sports, and health units for tourists and Convention/Seminar units and organizations. For foreign technology agreements, automatic approval is granted if i. 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. ii. 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.
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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: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. Merchant banking 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 Micro Credit Rural Credit
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b. Minimum Capitalization Norms for fund based NBFCs: i) For FDI up to 51% - US$ 0.5 million to be brought upfront ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront iii) 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
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complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above.
f.
compliance with guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard.
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iii. iv.
No equity cap is applicable to manufacturing activities. FDI up to 100% is allowed for the following activities in the telecom sector :
a. b. c. d.
ISPs not providing gateways (both for satellite and submarine cables); Infrastructure Providers providing dark fiber (IP Category 1); Electronic Mail; and Voice Mail The above would be subject to the following conditions:
e.
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.
f.
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.
house/super trading house/star trading house. However, under the FIPB route:-
i. 100% FDI is permitted in case of trading companies for the following activities:
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.
ii. 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
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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.
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) ecommerce and not in retail trading.
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SECTOR
INFLOWS
In Rs Million Services Sector Computer Software & hardware Construction Activities Automobile Housing & Real estate Power Chemicals (Other than Fertilizers) Ports Metallurgical industries Electrical Equipments Cement & Gypsum Products 787420.81 391109.74
In US$ Million 18118.40 8876.43 6215.55 5029.01 3310.23 5118.85 3129.66 1964.06 1551.88 2612.85 1324.92 1621.03 2244.17 1480.94 1112.92 1217.50 760.32 748.57
48 648.86
22.39 11.12 7.83 6.07 4.17 6.20 3.90 2.47 1.80 3.11 1.63 2.01 2.68 1.77 1.38 1.49 0.98 0.96 0.80
Telecommunications 275441.38 213595.12 146799.41 217936.02 137089.37 87008.07 63290.50 109563.20 57379.63 70781.19
Petroleum & Natural 94417.17 Gas Trading Consultancy Services Hotel and Tourism Food Processing Industries Electronics 62416.85 48647.43 52500.05 34362.49 33914.75
Forbidden Territories
Arms and ammunition Atomic Energy Coal and lignite Rail Transport Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold,
I.
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. As a 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 the recommendation 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 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.
II.
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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.
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a) 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. 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, and nominee companies and incorporated/institutional portfolio managers or their power of attorney holders (providing discretionary non-discretionary 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. iii. Prohibitions on Investments:
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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). iv. 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 NonResident 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.
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SEBI Registered FIIs in India Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 End of March 0 3 156 353 439 496 450 506 527 490 502 540 685 882 996 1279 1609 1805
Entry/Route Automatic
2. 3. 4.
ISPs with gateways, radio- 74% paging Electronic Mail & Voice 5. Mail Trading companies: primarily export activities bulk imports, cash and carry 6. 7. 8. 9. 10 11. 12. wholesale trading Power(other than 100% atomic 51% 100%
reactor power plants) 100% Drugs & Pharmaceuticals 100% Roads, Highways, Ports and 100% Harbors Pollution Control and 100% 100% 100% 100%
Management Call Centers BPO For NRI's and OCB's: A. 34 High Priority Industry Groups
B. Export
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D. Hospitals, Centers
E. Shipping
Fishing F. Power G. Housing and Real Estate Development H. Highways, Bridges and Ports I. Sick Industrial Units J. Industries Reserved for Small Scale Sector K. Oil exploration
13.
100% 100%
Existing projects Assets reconstruction 49% company Cigars and cigarettes Courier services Investing companies telecom sector) INTERPRETATION
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This trend show level how much FDI is allowed in various sector and different route to invest in india.
(Amount US$ in Millions) FDI % Growth Over Previous Year ---(+) 52 (-) 18 (-) 14 (+) 40 (+) 48 (+) 146 (+) 51 (+) 02 ----
INTERPRETATION The above graph shows the increasing trend of FDI in india till 2008-2009 and slope downwards in 2009-2010.
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INTERPRETATION
Mauritius
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 IndiaMauritius 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
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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.
Singapore
Singapore continues to be the single largest investor in India amongst the Singapore with FDI inflows into Rs. 3,80,142 crores 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 30% of FDI inflows from Singapore. Petroleum and natural gas occupies the second place followed by computer software and hardware, mining and construction.
U.S.A.
The United States is the third largest source of FDI in India (7.64 % of the total), valued at 732335 crore 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.
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U.K.
The United Kingdom is the fourth largest source of FDI in India (5.53 % of the total), valued at 2,40,974 crores 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. UK companies and policy makers the focus sectors for joint ventures, partnerships, and trade are non-conventional energy, IT, precision engineering, medical equipment, infrastructure equipment, and creative industries.
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 crores 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. 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
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(Financial & Non Financial) Computer Software & 4,13,419.03 Hardware Telecommunication Housing & Real Estate Construction Activities Automobile Industry Power Metallurgical Industries Petroleum & Natural Gas Chemical 3,68,899.62 3,25,021.36 2,65,492.96 1,90,172.22 1,79,849.92 1,25,785.57 1,11,957.00 1,01,680.18
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INTERPRETATION SERVICE SECTOR AND COMPUTER AND HARDWARE The sectors receiving the largest shares of total FDI inflows up to march 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.
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CHEMICAL INDUSTRY 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. TELECOM SECTOR 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 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. AUTOMOBILE 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).
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(b)(Rs.crore)
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INTERPRETATION There may be many other factors on which a stock index may depend i.e. Government policies, budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar exchange rate etc. But for my study I have selected only one independent variable i.e. FII and dependent variable is indices of nifty.
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FINDINGS
India has liberalized foreign investment regulations in key sectors, opening up commodity exchanges, credit information services and aircraft maintenance operations. The foreign investment limit in
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Public Sector Units (PSU) refineries has been raised from 26% to 49%.
An additional sweetener is that the mandatory disinvestment clause within five years has been done away with. FDI in Civil aviation up to 74% will now be allowed through the automatic route for nonscheduled and cargo airlines, as also for ground handling activities. 100% FDI in aircraft maintenance and repair operations has also been allowed. But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been given a miss again. India has decided to allow 26% FDI and 23% FII investments in commodity exchanges, subject to the proviso that no single entity will hold more than 5% of the stake.
Sectors like credit information companies, industrial parks and construction and development projects have also been opened up to more foreign investment. Also keeping India's civilian nuclear ambitions in mind, India has also allowed 100% FDI in mining of titanium, a mineral which is abundant in India.
Sources say the government wants to send out a signal that it is not done with reforms yet. At the same time, critics say contentious issues like FDI and multi-brand retail are out of the policy radar because of political compulsions.
LIMITATIONS
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Although every effort has been into collect the relevant information through the sources available, still some relevant information could not be gathered. i) ii) iii) The time duration could not provide ample opportunity to study of FDI in India. Most of the study is based on secondary information. There is not much information regarding FII in india
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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. According to findings and results, we have concluded that FII did have significant impact on Sensex but there is less co-relation with Bankex 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.
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BIBLIOGRAPHY
BOOKS Foreign direct investment FDI from developing countries: a vector for trade -Byung-Hwa Lee
- By Neil K. Patterson
and development. FDI in retail sector, India. -By Arpita Mukherjee, Nitisha Patel WEBSITE
www.rbi.org www.fin.in.nic www.sebi.org http://www.indiahousing.com/fdi-foreign-direct-investment.html http://finance.indiamart.com/investment_in_india/fdi.html http://www.economywatch.com/foreign-direct-investment/ http://www.legalserviceindia.com/articles/fdi_india.htm
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