DISSERTATION ON

ANALYTICAL STUDY OF FOREIGN DIRECT INVESTMENT

IN INDIA

A Report Submitted to Delhi Business School, New Delhi

as a part fulfillment of
MBA+PGP Graduate Program (Industry Integrated) in Entrepreneurship and Business.

Submitted to: Submitted by:

Miss. Setuma Rawal, Vivek Kumar
Director, Academics Roll No. DBS/08-10/S-293
Delhi Business School Batch: 2008-10
New Delhi Semester 4
Punjab Technical University, Jalandhar

Internal guide:

Mr. lokhnath Mishra

Delhi Business School,

dbs
Delhi Business School, New Delhi
B-II/58, M.C.I.E., Mathura Road, New Delhi
Website: www.dbs.edu.in

1
 ACKNOWLEDGEMENTS

I feel the pleasure to have an opportunity to express my deep and sincere feelings of gratitude
towards all the personalities who have helped me to convert my dreams into the reality.

Express my sincerest gratitude to Mr. Vijay Kumar, who spared his precious time and
helped to solve the problem that I faced in the processing and analysis of this project.

Sincere thanks to our Director Academics, Setuma Rawal, for making this experience of
summer training in an esteemed organization like Standard Chartered Bank possible. The learning
from this experience has been immense and would be cherished throughout life.

Thankful to my Project Mentor Mr. Lokhnath Mishra for her guidance and support at every step while
completing this project and providing me the accurate and detailed information to complete this report as
part of my curriculum. Without her continuous help and enthusiasm the project would not have been
materialized in the present form.

I pay my sincere regards to my parents and friends who always encouraged and helped me in the
preparation of this project.

VIVEK KUMAR

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 DECLARATION

I, Vivek Kumar, hereby declare that the dissertation entitled COMPRATIVE

STUDY- RETURN OF MUTUAL FUND AND INSURANCE ULIPS IN INDIAN

CONTEXT submitted for the Post-Graduate Programe in Management is my

original work and the dissertation has not formed the basis for the award of

any degree, diploma, associate ship, fellowship or similar other titles. It has

not been submitted to any other university or Institution of higher learning for

award of any degree or diploma.

Place: NEW DELHI Signature of Student

Date: 20-07-09 Name: VIVEK KUMAR

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 Enrolment No: DBS/08 -10/S-293

PREFACE

MBA is the stepping-stone to management career. In order to achieve practical,

positive and concrete result, the classroom learning has to be effectively supplemented

in relation to the situation existing outside the classroom for developing healthy

managerial and administrative skills in a potential manager. It is necessary that the

theoretical knowledge must be supplemented with exposure to the real environment.

This Project provided me with an opportunity to do an in depth study of the

recent trends in market and investors . Starting from consulting books, management

journals, surfing internet for latest details, carrying out a research study and survey,

at the end of this research dissertation I have gained a considerable understanding of

the topic of my study- “COMPARATIVE STUDY- RETURN OF MUTUAL FUNDS

AND INSURANCE ULIPS IN INDIAN CONTEXT”

A sincere effort has been made in the report to present my viewpoints on the

project report and enough literature has been derived from various sources, which

have been acknowledged in the Bibliography.

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 TABLE OF CONTENTS

Introduction

Meaning

Definition

History

Objective of the study

Research methodology

Conclusion

Recommendations & suggestions

Limitations of research

Bibliography

Annexure

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 Introduction and overview

What is Foreign Direct Investment?

Meaning:

These three letters stand for foreign direct investment. The simplest explanation of
FDI would be a direct investment by a corporation in a commercial venture in
another country. A key to separating this action from involvement in other ventures in
a foreign country is that the business enterprise operates completely outside the
economy of the corporation’s home country. The investing corporation must control
10 percent or more of the voting power of the new venture.

According to history the United States was the leader in the FDI activity dating back
as far as the end of World War II. Businesses from other nations have taken up the
flag of FDI, including many who were not in a financial position to do so just a few
years ago.

The practice has grown significantly in the last couple of decades, to the point that
FDI has generated quite a bit of opposition from groups such as labor unions. These
organizations have expressed concern that investing at such a level in another
country eliminates jobs. Legislation was introduced in the early 1970s that would
have put an end to the tax incentives of FDI. But members of the Nixon
administration, Congress and business interests 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.

6
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
world’s 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

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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 long-term
relationship between the direct investor and the enterprise and a significant degree
of influence on the management of the enterprise. Direct investment involves both
the initial transaction between the two entities and all subsequent capital
transactions between them and among affiliated enterprises, both incorporated and
unincorporated.

• Foreign Direct Investment – when a firm invests directly in production or

other facilities, over which it has effective control, in a foreign country.
• Manufacturing FDI requires the establishment of production facilities.
• Service FDI requires building service facilities or an investment foothold via
capital contributions or building office facilities.
•
•
• Foreign subsidiaries – overseas units or entities.
• Host country – the country in which a foreign subsidiary operates.
• Flow of FDI – the amount of FDI undertaken over a given time.
• Stock of FDI – total accumulated value of foreign-owned assets.
• Outflows/Inflows of FDI – the flow of FDI out of or into a country.
• Foreign Portfolio Investment – the investment by individuals, firms, or public
bodies in foreign financial instruments.
• Stocks, bonds, other forms of debt.
• Differs from FDI, which is the investment in physical assets.

Portfolio theory – the behavior of individuals or firms administering large amounts

of financial assets.

Product Life-Cycle Theory

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 • 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

• 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 firm’s 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

Definition
FDI stands for Foreign Direct Investment, a component of a country's national
financial accounts. Foreign direct investment is investment of foreign assets into
domestic structures, equipment, and organizations. It does not include foreign
investment into the stock markets. Foreign direct investment is thought to be more
useful to a country than investments in the equity of its companies because equity
investments are potentially "hot money" which can leave at the first sign of trouble,
whereas FDI is durable and generally useful whether things go well or badly.
FDI or Foreign Direct Investment is any form of investment that earns interest in
enterprises which function outside of the domestic territory of the investor. 
FDIs require a business relationship between a parent company and its foreign
subsidiary. Foreign direct business relationships give rise to multinational
corporations. For an investment to be regarded as an FDI, the parent firm needs to
have at least 10% of the ordinary shares of its foreign affiliates. The investing firm
may also qualify for an FDI if it owns voting power in a business enterprise operating
in a foreign country.

History

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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 non-industrialized countries are increasing sharply.

Foreign Direct investor

A foreign direct investor is an individual, an incorporated or unincorporated public or
private enterprise, a government, a group of related individuals, or a group of related
incorporated and/or unincorporated enterprises which has a direct investment
enterprise – that is, a subsidiary, associate or branch – operating in a country other
than the country or countries of residence of the foreign direct
investor or investors.

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Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types:

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1 Outward FDIs
2 Inward FDIs
This classification is based on the types of restrictions imposed, and the various
prerequisites required for these investments. 
Outward FDI: An outward-bound FDI is backed by the government against all
types of associated risks. This form of FDI is subject to tax incentives as well as
disincentives of various forms. Risk coverage provided to the domestic
industries and subsidies granted to the local firms stand in the way of outward FDIs,
which are also known as 'direct investments abroad.' 
Inward FDIs: Different economic factors encourage inward FDIs. These include
interest loans, tax breaks, grants, subsidies, and the removal of restrictions and
limitations. Factors detrimental to the growth of FDIs include necessities of
differential performance and limitations related with ownership patterns. 

Other categorizations of FDI 

Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes
place when a multinational corporation owns some shares of a foreign enterprise, which
supplies input for it or uses the output produced by the MNC. 
Horizontal foreign direct investments happen when a multinational company carries
out a similar business operation in different nations.
• Horizontal FDI – the MNE enters a foreign country to produce the same
products product at home.
• Conglomerate FDI – the MNE produces products not manufactured at home.
• Vertical FDI – the MNE produces intermediate goods either forward or
backward in the supply stream.
• Liability of foreignness – the costs of doing business abroad resulting in a
competitive disadvantage.

Methods of Foreign Direct Investments

The foreign direct investor may acquire 10% or more of the voting power of an
enterprise in an economy through any of the following methods:

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  by incorporating a wholly owned subsidiary or company
 by acquiring shares in an associated enterprise
 through a merger or an acquisition of an unrelated enterprise
 participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:

low corporate tax and income tax rates

 tax holidays
 other types of tax concessions
 preferential tariffs
 special economic zones
 investment financial subsidies
 soft loan or loan guarantees
 free land or land subsidies
 relocation & expatriation subsidies
 job training & employment subsidies
 infrastructure subsidies
 R&D support
 derogation from regulations (usually for very large projects)

Entry Mode

• The manner in which a firm chooses to enter a foreign market through FDI.

– International franchising

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 – 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

Why is FDI important for any consideration of going global?

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

1 .Avoiding foreign government pressure for local production.

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

15
office.
4. Capability to increase total production capacity.
5.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 cliché 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 SME’s, it is still just another buzzword.  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 worldwide 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 in
a new and very different mindset that tends to focus more on access issues.   SME’s
in particular are now focusing on access to markets, access to expertise and most of
all access to technology.

The Strategic Logic behind FDI

• 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.

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 • Strategic asset seeking – seeks to acquire assets in foreign firms that
promote corporate long term objectives.

Enhancing Efficiency from Location Advantages

• Location advantages - defined as the benefits arising from a host country’s

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

Improving Performance from Structural Discrepancies

• Structural discrepancies are the differences in industry structure attributes

between home and host countries. Examples include areas where:

– Competition is less intense

– Products are in different stages of their life cycle

– Market demand is unsaturated

– There are differences in market sophistication

Increasing Return from Ownership Advantages

• 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.

Ensuring Growth from Organizational Learning

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 • MNEs exposed to multiple stimuli, developing:

– Diversity capabilities

– Broader learning opportunities

• Exposed to:

– New markets

– New practices

– New ideas

– New cultures

– New competition

The Impact of FDI on the Host Country Employment

– Firms attempt to capitalize on abundant and inexpensive labor.

– Host countries seek to have firms develop labor skills and

sophistication.

– Host countries often feel like “least desirable” jobs are transplanted
from home countries.

– Home countries often face the loss of employment as jobs move.

FDI Impact on Domestic Enterprises

– Foreign invested companies are likely more productive than local

competitors.

– The result is uneven competition in the short run, and competency

building efforts in the longer term.

– It is likely that FDI developed enterprises will gradually develop local

supporting industries, supplier relationships in the host country.

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The Impact of FDI on the Host Country Employment
– Firms attempt to capitalize on abundant and inexpensive labor.

– Host countries seek to have firms develop labor skills and

sophistication.

– Host countries often feel like “least desirable” jobs are transplanted
from home countries.

– Home countries often face the loss of employment as jobs move.

FDI Impact on Domestic Enterprises

– Foreign invested companies are likely more productive than local

competitors.

– The result is uneven competition in the short run, and competency

building efforts in the longer term.

– It is likely that FDI developed enterprises will gradually develop local

supporting industries, supplier relationships in the host country.

Foreign Direct Investment in India

The economy of India is the third largest in the world as measured by purchasing
power parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion. When
measured in USD exchange-rate terms, it is the tenth largest in the world, with a
GDP of US $800.8 billion (2006). is the second fastest growing major economy in the
world, with a GDP growth rate of 8.9% at the end of the first quarter of 2006-2007.
However, India's huge population results in a per capita income of $3,300 at PPP
and $714 at nominal.

The economy is diverse and encompasses agriculture, handicrafts, textile,

manufacturing, and a multitude of services. Although two-thirds of the Indian
workforce still earn their livelihood directly or indirectly through agriculture, services

19
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 the green revolution and economic reforms. FDI up to
100% is allowed under the automatic route in all activities/sectors except the
following which will require approval of the Government: Activities/items that require
an Industrial License; Proposals in which the foreign collaborator has a
previous/existing venture/tie up in India

FDI in India includes FDI inflows as well as FDI outflow from India. Also FDI foreign
direct investment and FII foreign institutional investors are a separate case study
while preparing a report on FDI and economic growth in India. FDI and FII in India
have registered growth in terms of both FDI flows in India and outflow from India.
The FDI statistics and data are evident of the emergence of India as both a potential
investment market and investing country.  FDI has helped the Indian economy grow,
and the government continues to encourage more investments of this sort - but with
$5.3 billion in FDI . India gets less than 10% of the FDI of China.  Foreign direct
investment (FDI) in India has played an important role in the development of the
Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a
certain degree of financial stability, growth and development. This money has
allowed India to focus on the areas that may have needed economic attention, and

20
address the various problems that continue to challenge the country.  India has
continually sought to attract FDI from the world’s major investors.

In 1998 and 1999, the Indian national government announced a number of reforms
designed to encourage FDI and present a favorable scenario for investors. FDI
investments are permitted through financial collaborations, through private equity or
preferential allotments, by way of capital markets through Euro issues, and in joint
ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining
industries. A number of projects have been announced in areas such as electricity
generation, distribution and transmission, as well as the development of roads and
highways, with opportunities for foreign investors. The Indian national government
also provided permission to FDIs to provide up to 100% of the financing required for
the construction of bridges and tunnels, but with a limit on foreign equity of INR
1,500 crores, approximately $352.5m. Currently, FDI is allowed in financial services,
including the growing credit card business.

These services include the non-banking financial services sector. Foreign investors
can buy up to 40% of the equity in private banks, although there is condition that
stipulates that these banks must be multilateral financial organizations. Up to 45% of
the shares of companies in the global mobile personal communication by satellite
services (GMPCSS) sector can also be purchased. By 2004, India received $5.3
billion in FDI, big growth compared to previous years, but less than 10% of the $60.6
billion that flowed into China. Why does India, with a stable democracy and a
smoother approval process, lag so far behind China in FDI amounts?  Although the
Chinese

Approval process is complex; it includes both national and regional approval in the
same process. Federal democracy is perversely an impediment for India. Local
authorities are not part of the approvals process and have their own rights, and this
often leads to projects getting bogged 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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Sovereign Risk
India is an effervescent
parliamentary
democracy since its political
freedom from British rule
more than 50 years ago. The
country does not face any
real threat of a serious
revolutionary
movement which might lead
to a collapse of state
machinery. Sovereign risk in
India is hence nil for both
"foreign Investment Risks in India direct investment"
and "foreign portfolio
investment." Many Industrial and Business houses have restrained themselves from
investing in the North-Eastern part of the country due to unstable conditions.
Nonetheless investing in these parts is lucrative due to the rich mineral reserves
here and high level of literacy. Kashmir on the northern tip is a militancy affected
area and hence investment in the state of Kashmir are restricted by law

Political Risk
India has enjoyed successive years of elected representative government at the
Union as well as federal level. India suffered political instability for a few years in the
sense there was no single party which won clear majority and hence it led to the
formation of coalition governments. However, political stability has firmly returned
since the general elections in 1999, with strong and healthy coalition governments
emerging. Nonetheless, political instability did not change India's bright economic
course though it delayed certain decisions relating to the economy. Economic
liberalization which mostly interested foreign investors has been accepted as

22
essential by all political parties including the Communist Party of India Though there
are bleak chances of political instability in the future, even if such a situation arises
the economic policy of India would hardly be affected.. Being a strong democratic
nation the chances of an army coup or foreign dictatorship are minimal. Hence,
political risk in India is practically absent.

Commercial Risk
Commercial risk exists in any business ventures of a country. Not each and every
product or service is profitably accepted in the market. Hence it is advisable to study
the demand / supply condition for a particular product or service before making any
major investment. In India one can avail the facilities of a large number of market
research firms in exchange for a professional t involves some kind of gamble and
hence involves commercial risk

Risk Due To Terrorism

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

23
FDI Policy in India

Foreign Direct Investment Policy

FDI policy is reviewed on an ongoing basis and measures for its further liberalization
are taken. Change in sectoral policy/sectoral equity cap is notified from time to time
through Press Notes by the Secretariat for Industrial Assistance (SIA) in the
Department of Industrial Policy announcement by SIA are subsequently notified by
RBI under FEMA. All Press Notes are available at the website of Department of
Industrial Policy & Promotion. FDI Policy permits FDI up to 100 % from foreign/NRI
investor without prior approval in most of the sectors including the services sector
under automatic route. FDI in sectors/activities under automatic route does not
require any prior approval either by the Government or the RBI. The investors are
required to notify the Regional office concerned of RBI of receipt of inward
remittances within 30 days of such receipt and will have to file the required
documents with that office within 30 days after issue of shares to foreign investors.

The Foreign direct investment scheme and strategy depends on the respective FDI
norms and policies in India. The FDI policy of India has imposed certain foreign

24
direct investment regulations as per the FDI theory of the Government of India .
These include FDI limits in India for example:

o Foreign direct investment in India in infrastructure development projects

excluding arms and ammunitions, atomic energy sector, railways system ,
extraction of coal and lignite and mining industry is allowed upto 100% equity
participation with the capping amount as Rs. 1500 crores.
o 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.
o FDI limit of maximum 49% in telecom industry especially in the GSM services

Government Approvals for Foreign Companies Doing Business in India

Government Approvals for Foreign Companies Doing Business in India or

Investment Routes for Investing in India, Entry Strategies for Foreign Investors
India's foreign trade policy has been formulated with a view to invite and
encourage FDI in India.  The Reserve Bank of India has prescribed the
administrative and 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.

25
Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not

require any prior approval either by the Government or RBI. The investors are only

required to notify the Regional office concerned of RBI within 30 days of receipt of

inward remittances and file the required documents with that office within 30 days of

issue of shares to foreign investors.

List of activities or items for which automatic route for foreign investment is not
available, include the following:

 Banking

 NBFC's Activities in Financial Services Sector

 Civil Aviation

 Petroleum Including Exploration/Refinery/Marketing

 Housing & Real Estate Development Sector for Investment from Persons
other
than NRIs/OCBs.

 Venture Capital Fund and Venture Capital Company

 Investing Companies in Infrastructure & Service Sector

 Atomic Energy & Related Projects

 Defense and Strategic Industries

 Agriculture (Including Plantation)

 Print Media

26
  Broadcasting

 Postal Services

Procedure under Government approval

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

Investment by way of Share Acquisition

A foreign investing company is entitled to acquire the shares of an Indian company

without obtaining any prior permission of the FIPB subject to prescribed parameters/
guidelines. If the acquisition of shares directly or indirectly results in the acquisition of
a company listed on the stock exchange, it would require the approval of the Security
Exchange Board of India.

New investment by an existing collaborator in India

A foreign investor with an existing venture or collaboration (technical and financial)

with an Indian partner in particular field proposes to invest in another area, such type
of additional investment is subject to a prior approval from the FIPB, wherein both
the parties are required to participate to demonstrate that the new venture does not
prejudice the old one.

27
General Permission of RBI under FEMA

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

FDI In Small Scale Sector (SSI) Units

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

28
Foreign Direct Investment in India

The economy of India is the third largest in the world as measured by purchasing
power parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion. When
measured in USD exchange-rate terms, it is the tenth largest in the world, with a
GDP of US $800.8 billion (2006). is the second fastest growing major economy in the
world, with a GDP growth rate of 8.9% at the end of the first quarter of 2006-2007.
However, India's huge population results in a per capita income of $3,300 at PPP
and $714 at nominal.

The economy is diverse and encompasses agriculture, handicrafts, textile,

manufacturing, and a multitude of services. Although two-thirds of the Indian
workforce still 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 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

29
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 world’s 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

30
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.

31
 Investment Risks in India

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

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

32
Risk Due To Terrorism
In the recent past, India has witnessed several terrorist attacks on its soil which
could have a negative impact on investor confidence. Not only business environment
and return on investment, but also the overall security conditions in a nation have an
effect on FDI's. Though some of the financial experts think otherwise. They believe
the negative impact of terrorist attacks would be a short term phenomenon. In the
long run, it is the micro and macro economic conditions of the Indian economy that
would decide the flow of foreign investment and in this regard India would continue
to be a favorable investment destination.

33
FDI Policy in India

Foreign Direct Investment Policy

FDI policy is reviewed on an ongoing basis and measures for its further liberalization
are taken. Change in sectoral policy/sectoral equity cap is notified from time to time
through Press Notes by the Secretariat for Industrial Assistance (SIA) in the
Department of Industrial Policy announcement by SIA are subsequently notified by
RBI under FEMA. All Press Notes are available at the website of Department of
Industrial Policy & Promotion. FDI Policy permits FDI up to 100 % from foreign/NRI
investor without prior approval in most of the sectors including the services sector
under automatic route. FDI in sectors/activities under automatic route does not
require any prior approval either by the Government or the RBI. The investors are
required to notify the Regional office concerned of RBI of receipt of inward
remittances within 30 days of such receipt and will have to file the required
documents with that office within 30 days after issue of shares to foreign investors.

The Foreign direct investment scheme and strategy depends on the respective FDI
norms and policies in India. The FDI policy of India has imposed certain foreign
direct investment regulations as per the FDI theory of the Government of India .
These include FDI limits in India for example:

o Foreign direct investment in India in infrastructure development projects

excluding arms and ammunitions, atomic energy sector, railways system ,
extraction of coal and lignite and mining industry is allowed upto 100% equity
participation with the capping amount as Rs. 1500 crores.
o 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.
o FDI limit of maximum 49% in telecom industry especially in the GSM services

34
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.

Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not

require any prior approval either by the Government or RBI. The investors are only

required to notify the Regional office concerned of RBI within 30 days of receipt of

inward remittances and file the required documents with that office within 30 days of

issue of shares to foreign investors.

List of activities or items for which automatic route for foreign investment is not
available, include the following:

 Banking

 NBFC's Activities in Financial Services Sector

 Civil Aviation

 Petroleum Including Exploration/Refinery/Marketing

35
  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

Procedure under Government approval

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

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.

36
New investment by an existing collaborator in India

A foreign investor with an existing venture or collaboration (technical and financial)

with an Indian partner in particular field proposes to invest in another area, such type
of additional investment is subject to a prior approval from the FIPB, wherein both
the parties are required to participate to demonstrate that the new venture does not
prejudice the old one.

General Permission of RBI under FEMA

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

FDI In Small Scale Sector (SSI) Units

A small-scale unit cannot have more than 24 per cent equity in its paid up capital
from any industrial undertaking, either foreign or domestic.
If the equity from another company (including foreign equity) exceeds 24 per cent,
even if the investment in plant and machinery in the unit does not exceed Rs 10
million, the unit loses its small-scale status and shall require an industrial license to
manufacture items reserved for small-scale sector. See also FDI in Small Scale
Sector in India Further Liberalized country. The international monetary fund’s
balance of payment manual defines FDI as an investment that is made to acquire a
lasting interest in an enterprise operating in an economy other than that of the

37
investor. The investors’ purpose being to have an effective voice in the management
of the enterprise’. The united nations 1999 world investment report defines FDI as
‘an investment involving a long term relationship and reflecting a lasting interest and
control of a resident entity in one economy (foreign direct investor or parent
enterprise) in an enterprise resident in an economy other than that of the foreign
direct investor ( FDI enterprise, affiliate enterprise or foreign affiliate).

Foreign direct investment: Indian scenario

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.

38
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.

39
 Private Sector Banking:

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to guidelines
issued from RBI from time to time.

a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be

as per levels indicated below:

i. Merchant banking
ii. Underwriting
iii. Portfolio Management Services
iv. Investment Advisory Services
v. Financial Consultancy
vi. Stock Broking
vii. Asset Management
viii. Venture Capital
ix. Custodial Services
x. Factoring
xi. Credit Reference Agencies
xii. Credit rating Agencies
xiii. Leasing & Finance

40
 xiv. Housing Finance
xv. Foreign Exchange Brokering
xvi. Credit card business
xvii. Money changing Business
xviii. Micro Credit
xix. Rural Credit

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 complying with the applicable minimum
capital inflow i.e. (b)(i) and (b)(ii) above.

41
   f.   FDI in the NBFC sector is put on automatic route subject to compliance with
guidelines of the Reserve Bank of India.  RBI would issue appropriate guidelines in
this regard.

Insurance Sector: FDI in Insurance sector in India

FDI up to 26% in the Insurance sector is allowed on the automatic route subject to
obtaining license from Insurance Regulatory & Development Authority (IRDA)

Telecommunication:

FDI in Telecommunication sector

i. In basic, cellular, value added services and global mobile personal

communications by satellite, FDI is limited to 49% subject to  licensing and
security requirements and adherence by the companies  (who are investing
and the companies in which investment is being made) to the license
conditions for foreign equity cap and lock- in period for transfer and addition of
equity and other license provisions.
ii. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted
up to 74% with FDI, beyond 49% requiring Government approval. These
services would be subject to licensing and security requirements.
iii. No equity cap is applicable to manufacturing activities.
iv. FDI up to 100% is allowed for the following activities in the telecom sector :
a. ISPs not providing gateways (both for satellite and submarine cables);
b. Infrastructure Providers providing dark fiber (IP Category 1);
c. Electronic Mail; and
d. Voice Mail

The above would be subject to the following conditions:

42
 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.

Trading:

FDI in Trading Companies in India

Trading is permitted under automatic route with FDI up to 51% provided it is primarily
export activities, and the undertaking is an export house/trading house/super trading
house/star trading house. However, under the FIPB route:-

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)

43
 b. Domestic trading of products of JVs is permitted at the wholesale level for
such trading companies who wish to market manufactured products on behalf
of their joint ventures in which they have equity participation in India.
c. Trading of hi-tech items/items requiring specialized after sales service
d. Trading of items for social sector
e. Trading of hi-tech, medical and diagnostic items.
f. Trading of items sourced from the small scale sector under which, based on
technology provided and laid down quality specifications, a company can
market that item under its brand name.
g. Domestic sourcing of products for exports.
h. Test marketing of such items for which a company has approval for
manufacture provided such test marketing facility will be for a period of two
years, and investment in setting up manufacturing facilities commences
simultaneously with test marketing

FDI up to 100% permitted for e-commerce activities subject to the condition that
such companies would divest 26% of their equity in favor of the Indian public in five
years, if these companies are listed in other parts of the world. Such companies
would engage only in business to business (B2B) e-commerce and not in retail
trading.

Power:

FDI In Power Sector in India

Up to 100% FDI allowed in respect of projects relating to electricity generation,

transmission and distribution, other than atomic reactor power plants. There is no
limit on the project cost and quantum of foreign direct investment.

Drugs & Pharmaceuticals

FDI up to 100% is permitted on the automatic route for manufacture of drugs and
pharmaceutical, provided the activity does not attract compulsory licensing or involve
use of recombinant DNA technology, and specific cell / tissue targeted formulations.

44
FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk
drugs produced by recombinant DNA technology, and specific cell / tissue targeted
formulations will require prior Government approval.

Roads, Highways, Ports and Harbors

FDI up to 100% under automatic route is permitted in projects for construction and
maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels,
ports and harbors. 

Pollution Control and Management

FDI up to 100% in both manufacture of pollution control equipment and consultancy

for integration of pollution control systems is permitted on the automatic route.

Call Centers in India / Call Centre’s in India

FDI up to 100% is allowed subject to certain conditions. 

   Business Process Outsourcing BPO in India

FDI up to 100% is allowed subject to certain conditions. 

Special Facilities and Rules for NRI's and OCB's

NRI's and OCB's  are allowed the following special facilities:

1. Direct investment in industry, trade, infrastructure etc.

2. Up to 100% equity with full repatriation facility for capital and dividends in the
following sectors  
i. 34 High Priority Industry Groups
ii. Export Trading Companies
iii. Hotels and Tourism-related Projects
iv. Hospitals, Diagnostic Centers

45
 v. Shipping
vi. Deep Sea Fishing
vii. Oil Exploration
viii. Power
ix. Housing and Real Estate Development
x. Highways, Bridges and Ports
xi. Sick Industrial Units
xii. Industries Requiring Compulsory Licensing
3. 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.
4. On non-repatriation basis: Up to 100% Equity in any Proprietary or
Partnership engaged in Industrial, Commercial or Trading Activity.
5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of
the equity Capital or Convertible Debentures of the Company by each NRI.
Investment in Government Securities, Units of UTI, National Plan/Saving
Certificates.
6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company,
through a General Body Resolution, up to 24% of the Paid Up Value of the
Company.
7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from
Shares or Debentures of an Indian

India Further Opens Up Key Sectors for Foreign Investment

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 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 non-scheduled and cargo airlines, as also for ground
handling activities. 100% FDI in aircraft maintenance and repair operations has also
been allowed.

46
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.

Sector-wise FDI Inflows ( From April 2000 to January 2010)

AMOUNT OF FDI
SECTOR INFLOWS PERCENT OF TOTAL FDI
INFLOWS (In terms of Rs)
  In US$
In Rs Million
Million  
Services Sector 787420.81 18118.40 22.39
Computer Software &
391109.74 8876.43 11.12
hardware
Telecommunications 275441.38 6215.55 7.83
Construction
213595.12 5029.01 6.07
Activities
Automobile 146799.41 3310.23 4.17
Housing & Real
217936.02 5118.85 6.20
estate
Power 137089.37 3129.66 3.90
Chemicals (Other
87008.07 1964.06 2.47
than Fertilizers)

47
Ports 63290.50 1551.88 1.80
Metallurgical
109563.20 2612.85 3.11
industries
Electrical Equipments 57379.63 1324.92 1.63
Cement & Gypsum
70781.19 1621.03 2.01
Products
Petroleum & Natural
94417.17 2244.17 2.68
Gas
Trading 62416.85 1480.94 1.77
Consultancy Services 48647.43 1112.92 1.38
Hotel and Tourism 52500.05 1217.50 1.49
Food Processing
34362.49 760.32 0.98
Industries
Electronics 33914.75 748.57 0.96
Misc. Mechanical &
Engineering 28310.13 648.86 0.80
industries
Information &
Broadcasting (Incl. 52115.90 1194.20 1.48
Print media)
Mining 21204.94 522.86 0.60
Textiles (Incl. Dyed,
26736.94 611.03 0.76
Printed)
Sea Transport 17653.81 402.59 0.50
Hospital & Diagnostic
27241.42 644.73 0.77
Centers
Fermentation
27743.46 658.04 0.79
Industries
Machine Tools 10955.32 247.88 0.31
Air Transport ( Incl.
10552.19 240.71 0.30
air freight)
Ceramics 17462.43 409.92 0.50
Rubber Goods 11392.76 247.60 0.32
Agriculture Services 7937.13 188.39 0.23
Industrial Machinery 13748.27 316.97 0.39
Paper & Pulp 18612.76 429.06 0.53

48
Diamond & Gold
11014.62 248.15 0.31
Ornaments
Agricultural
6649.12 148.37 0.19
Machinery
Earth Moving
5749.34 134.22 0.16
Machinery
Commercial, Office &
Household 5798.71 132.74 0.16
Equipments
Glass 5683.60 126.51 0.16
Printing of Books
(Incl. Litho printing 6066.23 135.80 0.17
industry)
Soaps, Cosmetics
and Toilet 4984.88 114.54 0.14
Preparations
Medical & Surgical
8087.87 177.42 0.23
Appliances
Education 14374.11 309.09 0.41
Fertilizers 4282.17 96.59 0.12
Photographic raw
2580.20 63.90 0.07
Film & Paper
Railway related
3281.85 75.11 0.09
components
Vegetable oils and
3769.18 83.69 0.11
Vanaspati
Sugar 1836.64 41.58 0.05
Tea & Coffee 3774.81 84.28 0.11
Leather, Leather
1621.56 36.74 0.05
goods & Piackers
Non-conventional
3640.58 86.84 0.10
energy
Industrial instruments 1368.36 29.47 0.04
Scientific instruments 511.44 11.64 0.01
Glue and Gelatine 385.80 8.44 0.01
Boilers & steam
238.67 5.40 0.01
generating plants
Dye-Stuffs 406.48 9.52 0.01

49
Retail Trading (Single
1074.67 25.18 0.03
brand)
Coal Production 614.10 15.42 0.02
Coir 50.17 1.12 0.00
Timber products 139.59 3.10 0.00
Prime Mover (Other
than electrical 178.30 3.72 0.01
generators
Defence Industries 6.87 0.15 0.00
Mathematical,
Surveying & drawing 50.35 1.27 0.00
instruments
Misc. industries 180561.54 4162.55 5.19

Sub Total 3517310.79 81010.63 100.00

Stock Swapped
145466.35 3391.07 -
(from 2002 to 2008)
Advance of Inflows
89622.22 1962.82 -
(from 2000 to 2004)
RBI's NRI Schemes 5330.60 121.33 -
Grand Total 3757729.96 86395.85 -

Sector wise FDI inflows

 
SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government
of India

Forbidden Territories:

 Arms and ammunition

 Atomic Energy
 Coal and lignite

50
  Rail Transport
 Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold,
diamonds, copper, zinc.

Foreign Investment through GDRs (Euro Issues) –

Indian companies are allowed to raise equity capital in the international market
through the issue of Global Depository Receipt (GDRs). GDR investments are
treated as FDI and are designated in dollars and are not subject to any ceilings on
investment. An applicant company seeking Government's approval in this regard
should have consistent track record for good performance (financial or otherwise) for
a minimum period of 3 years. This condition would be relaxed for infrastructure
projects such as power generation, telecommunication, petroleum exploration and
refining, ports, airports and roads.

1. Clearance from FIPB –

There is no restriction on the number of Euro-issue to be floated by a company or a
group of companies in the financial year. A company engaged in the manufacture of
items covered under Annex-III of the New Industrial Policy whose direct foreign
investment after a proposed Euro issue is likely to exceed 51% or which is
implementing a project not contained in Annex-III, would need to obtain prior FIPB
clearance before seeking final approval from Ministry of Finance.

51
2. Use of GDRs –
The proceeds of the GDRs can be used for financing capital goods imports, capital
expenditure including domestic purchase/installation of plant, equipment and building
and investment in software development, prepayment or scheduled repayment of
earlier external borrowings, and equity investment in JV/WOSs in India.

Foreign direct investments in India are approved through two routes –

1. Automatic approval by RBI –

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

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

FIPB stands for Foreign Investment Promotion Board which approves all other cases
where the parameters of automatic approval are not met. Normal processing time is
4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and
rejections are few. It is not necessary for foreign investors to have a local partner,
52
 even when the foreign investor wishes to hold less than the entire equity of the
company. The portion of the equity not proposed to be held by the foreign investor
can be offered to the public.

iii. Analysis of sector specific policy for FDI

Sr. No. Sector/Activity FDI cap/Equity Entry/Route

1. Hotel & Tourism 100% Automatic
2. NBFC 49% Automatic
3. Insurance 26% Automatic
4. Telecommunication: Automatic
cellular, value added services 49%
ISPs with gateways, radio- Above 49% need Govt.
paging 74% licence
Electronic Mail & Voice Mail 100%
5. Trading companies:
primarily export activities 51% Automatic
bulk imports, cash and carry
wholesale trading 100% Automatic
6. Power(other than atomic
reactor power plants) 100% Automatic
7. Drugs & Pharmaceuticals  100% Automatic
8. Roads, Highways, Ports and 100% Automatic
Harbors

53
9. Pollution Control and 100% Automatic
Management
10 Call Centers 100% Automatic
11. BPO 100% Automatic
12. For NRI's and OCB's: 

i. 34 High Priority
100% Automatic
Industry Groups
ii. Export Trading
Companies
iii. Hotels and
Tourism-related
Projects
iv. Hospitals,
Diagnostic Centers
v. Shipping
vi. Deep Sea
Fishing
vii. Oil Exploration
viii. Power
ix. Housing and
Real Estate
Development
x. Highways,
Bridges and Ports
xi. Sick Industrial
Units
xii. Industries
Requiring Compulsory
Licensing
xiii. Industries
Reserved for Small
Scale Sector

13. Airports:

54
 Greenfield projects 100% Automatic
Existing projects 100% Beyond 74% FIPB
14 Assets reconstruction 49% FIPB
company
15. Cigars and cigarettes 100% FIPB
16. Courier services 100% FIPB

17. Investing companies in 49% FIPB

infrastructure (other than
telecom sector)

iv. Analysis of FDI inflow in India

From April 2000 to August 2 (Amount US$ in Millions)

S.No Financial Year Total FDI % Growth Over Previous Year
Inflows

55
1. 2000-01 4,029 ----
2. 2001-02 6,130 (+) 52
3. 2002-03 5,035 (-) 18
4. 2003-04 4,322 (-) 14
5. 2004-05 6,051 (+) 40
6. 2005-06 8,961 (+) 48
7. 2006-07 22,826 (+) 146
8. 2007-08 34,362 (+) 51
9. 2008-09 35,168 (+) 02
10. 2009-10 16,232 ----

56
 TOTAL FDI INFLOWS IN INDIA
40,000

35,000 35,168
34,362

30,000

25,000
22,826
20,000 TOTAL FDI INFLOWS

16,232
15,000

10,000
8,961
6,130 6,051
5,000 5,035 4,322
4,029

0
3

8
1

0
-0

-0

-0

-0

-0

-0

-0

-0

-0

-1
00

01

02

03

04

05

06

07

08

09
20

20

20

20

20

20
20

20

20

20

v. Analysis of share of top ten investing countries FDI equity in flows

57
 From April 2000 to January 2010
(Amount in Millions)
Sr. No Country Amount of FDI Inflows % As To
Total FDI
Inflow
1. Mauritius 19,18,633.61 44.01
2. Singapore 3,80,142.56 8.72
3. U.S.A. 3,32,935.60 7.64
4. U.K. 2,40,974.98 5.53
5. Netherlands 1,78,047.76 4.08
6. Japan 1,50,129.05 3.44
7. Cyprus 1,32,448.04 3.04
8. Germany 1,12,242.06 2.57
9. France 61,686.39 1.42
10. U.A.E. 50,915.59 1.17

58
59
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 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.
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

60
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.

61
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

vi. Analysis of sectors attracting highest FDI equity inflows

From April 2000 to March 2010
(Amount in Millions)
Sr. No Country Amount of FDI % As To
Inflows Total FDI
Inflow
1. Service Sector 9,65,210.77 22.14
(Financial & Non Financial)
2. Computer Software & Hardware 4,13,419.03 9.48
3. Telecommunication 3,68,899.62 8.46
4. Housing & Real Estate 3,25,021.36 7.46
5. Construction Activities 2,65,492.96 6.09
6. Automobile Industry 1,90,172.22 4.36
7. Power 1,79,849.92 4.13
8. Metallurgical Industries 1,25,785.57 2.89
9. Petroleum & Natural Gas 1,11,957.00 2.57
10. Chemical 1,01,680.18 2.33

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

62
 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 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).

Foreign Investment Promotion Board

63
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 crores require the concurrence of the CCEA (Cabinet
Committee on Economic Affairs). The threshold limit is likely to be raised to 1200
crore soon.The Board thus plays an important role in the administration and
implementation of the Government’s 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 .

64
Low Income Countries in Global FDI Race
The situation of foreign direct investment has been relatively good in the recent times
with an increase of 38%. Normally, the foreign direct investment is made mostly into
the extractive industries. However, now the foreign direct investors are also looking
to pump money into the manufacturing industry that has garnered 47% of the total
foreign direct investment made in 1992. However, the situation has not been the
same in the countries with a middle income range.

The middle income countries have not received a steady inflow of foreign direct
income coming their way. The situation is comparatively better in
the low income countries. They have had an uninterrupted and continually increasing
flow of foreign direct investment. It has been observed that the various debt crises,
as well as, other forms of economic crises have had less effect on these countries. 

These countries had lesser amounts of commercial bank obligations, which again
had been caused by the absence of proper financial markets, as well as the fact that
their economies were not open to foreign direct investment. During the later phases
of the decade of 70s the Asian countries started encouraging foreign
direct investments in their economies. China has received the most of the foreign
direct investment that was pumped into the countries 

with low income. It accounted for as much as 86% of the total foreign direct
investment made in the lower income countries in with low income. It accounted for
as much as 86% of the total foreign direct investment made in the lower income
countries in 1995. 

The economic liberalization in China started in 1979. This led to an increase in the
foreign direct investment in China. In the years between 1982 and 1991 the average
foreign direct investment in China was US$ 2.5 billion. This average increased by
seven times to become US$ 37.5 billion during 1995. A significant amount of the
foreign direct investment in China was provided in the industrial sector.

It was as much as 68%. Around 20% of the foreign direct investment of China was
made in the real estate sector. During the same period Nigeria had been the second
best in terms of receiving foreign direct investment. In the recent times India has

65
Risen to be the third major foreign direct investment destination in the recent years.
Foreign direct investment started in India in 1991 with the initiation of the economic
liberation.

There were more initiatives that enabled India to garner foreign direct investments
worth US$ 2.9 billion from 1991 to 1995. This was a significant increase from the
previous twenty years when the total foreign direct investment in India was US$1
billion. Most of the foreign direct investment made in India has been in the
infrastructural areas like telecommunications and power. In the manufacturing
industry the emphasis has been on petroleum refining, vehicles and petrochemicals
Vietnam is a low income country, which is supposed to have the same potential as
China to generate foreign direct investment.

The foreign direct investment laws were introduced in Vietnam in 1987-88. This led
to an increase in the foreign direct investment made in the country. The amount
stood at US$ 25 million in 1993 compared to US$ 8 million in 1993. This amount
increased by 3 times after the USA removed its economic sanctions in 1994. The
gas and petroleum industries were the biggest beneficiaries of the foreign direct
investment. Bangladesh started receiving increasing foreign direct investment after
1991, when the economic reforms took place in the country.

After 1991 it was possible for foreign companies to set up companies in Bangladesh
without taking permission beforehand. The foreign direct investment rose from US$
11 million in 1994 to US$ 125 million in 1995. As per the available statistics the
manufacturing industry, comprising of clothing and textiles took up 20% of the total
approved foreign direct investment. Food processing, chemicals and electric
machinery were also important in this regard. The increase in the foreign direct
investment in Ghana was remarkable as well. The figures increased from US$11.7
million, on an average, from 1986 to 1992 to US$ 201 million, on an average, from
1993 to 1995. This improvement was brought about by the privatization of the
Ashanti Goldfields.

66
FOREIGN INSTITUTIONAL INVESTMENT

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. 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.

67
Currently, entities eligible to invest under the FII route are as follows:

i) As FII: Overseas pension funds, mutual funds, investment trust, asset

management company, nominee company, bank, institutional portfolio
manager, university funds, endowments, foundations, charitable trusts,
charitable societies, a trustee or power of attorney holder incorporated or
established outside India proposing to make proprietary investments or
with no single investor holding more than 10 per cent of the shares or units
of the fund.
ii) As Sub-accounts: The sub account is generally the underlying fund on
whose behalf the FII invests. The following entities are eligible to be
registered as sub-accounts, viz. partnership firms, private company, public
company, pension fund, investment trust, and individuals.

FIIs registered with SEBI fall under the following categories:

a) Regular FIIs- those who are required to invest not less than 70 % of their
investment in 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, nominee companies and incorporated/institutional portfolio
managers or their power of attorney holders (providing discretionary and 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
68
'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:

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 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.

69
 SEBI Registered FIIs in India
Year End of March
1992-93 0
1993-94 3
1994-95 156
1995-96 353
1996-97 439
1997-98 496
1998-99 450
1999-00 506
2000-01 527
2001-02 490
2002-03 502
2003-04 540
2004-05 685
2005-06 882
2006-07 996
2007-08 1279
2008-09 1609

2009-10 1805

v. FII trend in India

Year Gross Gross Sales Net % increase
Purchases (b) Investment in FII inflow
(a) (Rs. crore) (Rs.crore) (a-b)
(Rs. crore)
1992-93 17 4 13 -

70
1993-94 5593 466 5127 39338.46
1994-95 7631 2835 4796 -6.45
1995-96 9694 2752 6942 44.75
1996-97 15554 6979 8575 23.52
1997-98 18695 12737 5958 -30.52
1998-99 16115 17699 1584 126.59
1999-00 56856 46734 10122 739.02
2000-01 74051 64116 9935 -1.85
2001-02 49920 41165 8755 -11.88
2002-03 47061 44373 2688 69.30
2003-04 144858 99094 45764 1602.53
2004-05 16953 171072 45881 0.26
2005-06 346978 305512 41466 -9.62
2006-07 520508 489667 30841 -25.62
2007-08 896686 844504 52182 69.20
2008-09 548876 594608 -45732 187.64
2009-10 - - - -

2010 data was not available

71
 FII INFLOW
1000000
Gross
Purchase
800000 s (a)
(Rs.crore
600000 )
Gross
400000 Sales (b)
(Rs.crore
)
200000 Net
Investme
0 nt (a-b)
(Rs.crore
)
-200000
93 94 5 6 7 98 99 00 1 2 0 3 0 4 5 6 07 0 8 0 9
9 2 - 9 3 - 4 -9 5 -9 6 -9 9 7 - 9 8 - 9 9 - 0 -0 1 -0 0 2 - 0 3 - 4 -0 5 -0 0 6 - 0 7 - 0 8 -
9 9 9 0 0 0 0
19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20

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.

vi. Co – relation with Indices

72
 Indices Co-relation with FII
Sensex 0.80
Bankex 0.18
Power 0.33
IT 0.13
Capital Goods 0.44

From the above table we can say that FII has a positive impact on all the indices
which means that if FIIs come in India then it is goods for the Indian economy. FIIs
have more co-relation with Sensex so we can say that they are mostly invest in big
and reputed companies which are included in Sensex.

Power and Capital Goods sector have more co-relation with FII investment which
shows more interest of FIIs in those sectors.

Difference Between FDI and FII

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

73
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 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 cannot enter and exit
that easily. This difference is what makes nations to choose FDI’s 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 FDI’s are long term.

1. 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.

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

74
3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital
availability in general.
4. The Foreign Direct Investment is considered to be more stable than Foreign
Institutional Investor

Objective of the study:

75
 CONCLUSION

A large number of changes that were introduced in the country’s 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.

76
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.

Recommendations & suggestions

1. FDI is good for growth of economy.

2. It generates employment for the country.
3. It increases standard living of the people.
4. Investment in a particular region leads to regional development.
5. The gap of regional disparity can be minimized.
6. New MNC comes with new Technology.

77
Limitations of research

78
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http://finance.indiamart.com/investment_in_india/fdi.html

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/
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http://www.legalserviceindia.com/articles/fdi_india.htm

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