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―Analytical Study Of Foreign Direct Investment in India‖
Project Report Submitted towards Partial fulfillment of requirements for obtaining the degree of Master of Business Administration Session 2009-10
SUBMITTED BY Deepak kumar Gautam 0826370012 V.S.B
SUBMITTED TO: Miss GarimaChaudhary Faculty Guide
VIDYA SCHOOL OF BUSINESS MEERUT
This is to certify that Deepak Kumar Gautam student of M.B.A IV SEM V.S.B. Meerut has under gone a research project on ―Analytical Study Of Foreign Direct Investment in India ‖And submitted a report based on the same as a mandatory requirement for obtaining the degree of Master of Business Administration from Uttar Pradesh Technical University, Lucknow.
Date: Director of V.S.B. Dr . J.R Bhatti Meerut
This is to certify that Deepak Kumar Gautam student of M.B.A IVsem, V.S.B. Meerut has under gone a research project on ―Analytical Study Of Foreign Direct Investment in India ‖And submitted a report based on the same as a mandatory requirement for obtaining the degree of Master of Business Administration from Uttar Pradesh Technical University, Lucknow
Miss Garima Chaudhray Faculty guide Meerut Date:
A special note of thanks also goes out to the people from various fields for giving me their precious time and helping me with this project. I also extend my appreciation towards my family who encouraged me and were by my side whenever I needed them. this project would not be what it is.ACKNOWLEDGEMENT I extend my sincere thanks to all those who helped me in the completion of this project. and guiding me in every way help and continuous guidance possible. Deepak Kumar Gautam 5 . Without their undying help and guidance. This project would not have been successful without her throughout. I specially extend my heartfelt thanks to my Faculty guide Miss Garima Chaudhray for helping me at every step.
INDEX 6 .
Introduction Meaning Definition History Objective of the study Research methodology Conclusion Recommendations & suggestions Limitations of research Bibliography Annexure 7 .INDEX TOPIC PAGE NO.
Introduction 8 .
In recent years. Not only that. One key to understanding FDI is to get a mental picture of the global scale of corporations able to make such investment. The simplest explanation of FDI would be a direct investment by a corporation in a commercial venture in another country. 9 . 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. The investing corporation must control 10 percent or more of the voting power of the new venture. but such an investment may also be more profitable if construction costs and labor costs are less in the host country. Businesses from other nations have taken up the flag of FDI. A carefully planned FDI can provide a huge new market for the company. 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. Legislation was introduced in the early 1970s that would have put an end to the tax incentives of FDI. The definition of FDI originally meant that the investing corporation gained a significant number of shares (10 percent or more) 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. including many who were not in a financial position to do so just a few years ago. These organizations have expressed concern that investing at such a level in another country eliminates jobs. But members of the Nixon administration. 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. perhaps introducing products and services to an area where they have never been available. Congress and business interests rallied to make sure that this attack on their expansion plans was not successful.Introduction and overview What is Foreign Direct Investment ? Meaning: These three letters stand for foreign direct investment. however.
Manufacturing FDI requires the establishment of production facilities. • • • Foreign Direct Investment – when a firm invests directly in production or other facilities. It usually involves participation in management. if it existed at all. Even with this factor. 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. The dollars invested in such developing-country projects increased 40 times over in less than 30 years. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets. joint-venture. Service FDI requires building service facilities or an investment foothold via capital contributions or building office facilities. There are two types of FDI: inward foreign direct investment and outward foreign direct investment. in a foreign country. 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. Foreign direct investment (FDI) refers to long term participation by country A into country B. Western Europe and Japan).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. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic product (GDP). mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. over which it has effective control.FDI growth has been a key factor in the ―international‖ nature of business that many are familiar with in the 21st century. both incorporated and unincorporated. One of the reasons is that foreign direct investment in buildings and equipment still accounts for a vast majority of FDI activity. The financial strength of the investing corporations has sometimes meant failure for smaller competitors in the target country.But flows to non-industrialized countries are increasing sharply.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‘‘). 10 . host countries may welcome FDI because of the positive impact it has on the smaller economy. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises. transfer of technology and expertise. Corporations from the originating country gain a significant financial foothold in the host country. resulting in a net FDI inflow (positive or negative) . such as factories. The largest flows of foreign investment occur between the industrialized countries (North America.
amounts of financial Product Life-Cycle Theory • • Ray Vernon asserted that product moves to lower income countries as products move through their product life cycle. bonds. and from developed countries as products evolve from being innovative to being mass-produced. which is the investment in physical assets. Stock of FDI – total accumulated value of foreign-owned assets. Host country – the country in which a foreign subsidiary operates. Foreign Portfolio Investment – the investment by individuals. or public bodies in foreign financial instruments. Portfolio theory – the behavior of individuals or firms administering large assets. other forms of debt. The FDI impact is similar: FDI flows to developed countries for innovation. 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 11 . Stocks. Differs from FDI. firms. Outflows/Inflows of FDI – the flow of FDI out of or into a country.• • • • • • • • Foreign subsidiaries – overseas units or entities. Flow of FDI – the amount of FDI undertaken over a given time.
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.The Dynamic Capability Perspective • • • • A firm‘s ability to diffuse. It is necessary to effectively use and build dynamic capabilities for quantity and/or quality based deployment that is transferable to the multinational environment. production. deploy. or distribution streams. companies can invest FDI to create their own supply. industrial organization. Ownership specific resources or knowledge are necessary but not sufficient for international investment or production success. production. Economies of scale – through horizontal or vertical FDI Internationalization Theory When external markets for supplies. predatory pricing and transfer pricing 12 . or distribution fails to provide efficiency. Monopolistic Advantage Theory • • An MNE has and/or creates monopolistic advantages that enable it to operate subsidiaries abroad more profitably than local competitors. managerial skills. Firms develop centers of excellence to concentrate core competencies to the host environment. utilize and rebuild firm-specific resources for a competitive advantage. Monopolistic Advantage comes from: – – • • Superior knowledge – production technologies. knowledge of product.
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. Foreign direct investment is investment of foreign assets into domestic structures. For an unincorporated firm one needs to consider an equivalent criterion. Together they comprise an MNC. 13 . The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country. FDI stands for Foreign Direct Investment. 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. A parent business enterprise and its foreign affiliate are the two sides of the FDI relationship. is ownership of greater than or equal to 10% of ordinary shares or access to voting rights in an incorporated firm. FDIs require a business relationship between a parent company and its foreign subsidiary. For an investment to be regarded as an FDI. equipment. which is made to serve the business interests of the investor in a company.Definition Foreign direct investment is that investment. and organizations. which is in a different nation distinct from the investor's country of origin. Ownership share amounting to less than that stated above is termed as portfolio investment and is not categorized as FDI. The parent enterprise through its foreign direct investment effort seeks to exercise substantial control over the foreign affiliate company. whereas FDI is durable and generally useful whether things go well or badly. It does not include foreign investment into the stock markets. the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. 'Control' as defined by the UN. Foreign direct business relationships give rise to multinational corporations. a component of a country's national financial accounts.
But flows to non-industrialized countries are increasing sharply. a government. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP. or a group of related incorporated and/or unincorporated enterprises which has a direct investment enterprise – that is. a subsidiary. Foreign Direct investor A foreign direct investor is an individual. an incorporated or unincorporated public or privateenterprise. Since that time FDI has spread to become a truly global phenomenon. associate or branch – operating in a country other than the country or countries of residence of the foreign direct investor or investors. a group of related individuals. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic product (GDP). Foreign direct investment (FDI) is a measure of foreign ownership of productive assets. The largest flows of foreign investment occur between the industrialized countries (North America. 14 . mines and land. such as factories. no longer the exclusive preserve of OECD countries.History In the years after the Second World War global FDI was dominated by the United States. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Increasing foreign investment can be used as one measure of growing economic globalization. Western Europe and Japan). as much of the world recovered from the destruction brought by the conflict.
Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise. Liability of foreignness – the costs of doing business abroad resulting in a competitive disadvantage. which supplies input for it or uses the output produced by the MNC. and the various prerequisites required for these investments. 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. 16 . which are also known as 'direct investments abroad. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs. Vertical FDI – the MNE produces intermediate goods either forward or backward in the supply stream. These include interest loans. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.Types of Foreign Direct Investment: An Overview FDIs can be broadly classified into two types: 1 2 Outward FDIs Inward FDIs This classification is based on the types of restrictions imposed. This form of FDI is subject to tax incentives as well as disincentives of various forms. subsidies. and the removal of restrictions and limitations.' Inward FDIs: Different economic factors encourage inward FDIs. Conglomerate FDI – the MNE produces products not manufactured at home. Outward FDI: An outward-bound FDI is backed by the government against all types of associated risks. Other categorizations of FDI Other categorizations of FDI exist as well. grants. tax breaks.
Methods of Foreign Direct Investments The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods: by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise Foreign direct investment incentives may take the following forms: low corporate tax and income tax rates tax holidays other types of tax concessions preferential tariffs special economic zones investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support derogation from regulations (usually for very large projects) 17 .
– – – – – • International franchising Branches Contractual alliances Equity joint ventures Wholly foreign-owned subsidiaries Investment approaches: – – – – Greenfield investment (building a new facility) Cross-border mergers Cross-border acquisitions Sharing existing facilities 18 .Entry Mode • The manner in which a firm chooses to enter a foreign market through FDI.
companies to accomplish several A more complete response might address the issue of global business partnering in very general terms. 4.Opportunities for co-production. joint marketing arrangements.Why is FDI important for any consideration of going global ? The simple answer is that making a direct foreign investment allows tasks: 1 . it is still just another buzzword. access to expertise and most of all access to technology. joint ventures with local partners.Avoiding foreign government pressure for local production. licensing. this often used cliché does not really mean very much to the average business executive in a small and medium sized company. But for executives in SME‘s. 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. Making the move from domestic export sales to a locally-based national sales office. While it is nice that many business writers like the expression. ―think globally. 19 . etc. SME‘s in particular are now focusing on access to markets. Capability to increase total production capacity. 5. Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets. hidden and otherwise. 3. 2. act locally‖. Circumventing trade barriers. The simple explanation for this is the difference in perspective between executives of multinational corporations and small and medium sized companies. The phrase does have significant connotations for multinational corporations.
• Market seeking – secure market share and sales growth in target foreign market. • Strategic asset seeking – seeks to acquire assets in foreign firms that promote corporate long term objectives.The Strategic Logic Behind FDI • Resources seeking – looking for resources at a lower real cost. cultures.defined as the benefits arising from a host country‘s comparative advantages. policies. • Efficiency seeking – seeks to establish efficient structure through useful factors. – – – – 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 20 ..Better access to resources – – – – Lower real cost from operating in a host country Labor cost differentials Transportation costs. Enhancing Efficiency from Location Advantages • Location advantages . 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. or markets.
– – • Reputation. Ensuring Growth from Organizational Learning • MNEs exposed to multiple stimuli.Increasing Return from Ownership Advantages • Ownership Advantages come from the application of proprietary tangible and intangible assets in the host country. developing: – – • Diversity capabilities Broader learning opportunities Exposed to: – – – – – New markets New practices New ideas New cultures New competition 21 . distribution channels Technological expertise. brand image. organizational skills. experience Core competence – skills within the firm that competitors cannot easily imitate or match.
Host countries seek to have firms develop labor skills and sophistication. The result is uneven competition in the short run. – It is likely that FDI developed enterprises will gradually develop local supporting industries. supplier relationships in the host country. Home countries often face the loss of employment as jobs move. Host countries often feel like ―least desirable‖ jobs are transplanted from home countries. and competency building efforts in the longer term.The Impact of FDI on the Host Country Employment – – – – Firms attempt to capitalize on abundant and inexpensive labor. FDI Impact on Domestic Enterprises – – Foreign invested companies are likely more productive than local competitors. 22 .
handicrafts. with a GDP growth rate of 8. although it has declined significantly since independence. 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. India has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment.611 trillion. and a multitude of services. India followed a socialist-inspired approach for most of its independent history. and the large number of young and educated populace fluent in English. it is the tenth largest in the world. and foreign direct investment. since the early 1990s. textile. with strict government control over private sector participation. is gradually transforming India as an important 'back office' destination for global companies for the outsourcing of their customer services and technical support.9% at the end of the first quarter of 2006-2007. India faces a burgeoning population and the challenge of reducing economic and social inequality. The privatization of publicly owned industries and the opening up of certain sectors to private and foreign interests has proceeded slowly amid political debate. However.300 at PPP and $714 at nominal. When measured in USD exchange-rate terms. Poverty remains a serious problem. Proposals in which the foreign collaborator has a previous/existing venture/tie up in India FDI in India includes. is the second fastest growing major economy in the world. FDI inflows as well as FDI outflow from India. FDI and FII in India have registered growth in terms of both FDI flows in India 23 .Foreign Direct Investment in India The economy of India is the third largest in the world as measured by purchasing power parity (PPP). India's huge population results in a per capita income of $3. 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. manufacturing. Although two-thirds of the Indian workforce still earn their livelihood directly or indirectly through agriculture. with a GDP of US $800. with a gross domestic product (GDP) of US $3. mainly due to the green revolution and economic reforms. However. India is a major exporter of highly-skilled workers in software and financial services. The advent of the digital age.8 billion (2006). and software engineering. services are a growing sector and are playing an increasingly important role of India's economy. foreign trade. The economy is diverse and encompasses agriculture.
nuclear. and the government continues to encourage more investments of this sort . railway. By 2004. big growth compared to previous years.5m. FDI investments are permitted through financial collaborations. lag so far behind China in FDI amounts? Although the Chinese approval process is complex.6 billion that flowed into China. although there is condition that stipulates that these banks must be multilateral financial organizations. These services include the non-banking financial services sector. India received $5. by way of capital markets through Euro issues. India has continually sought to attract FDI from the world‘s major investors. and address the various problems that continue to challenge the country. 24 .in a lot of ways . In 1998 and 1999.and outflow from India. Local authorities are not part of the approvals process and have their own rights. the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. A number of projects have been announced in areas such as electricity generation.500 crores. as well as the development of roads and highways. Federal democracy is perversely an impediment for India. Currently. The FDI statistics and data are evident of the emergence of India as both a potential investment market and investing country. growth and development. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased. coal & lignite or mining industries. but less than 10% of the $60. including the growing credit card business. 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. and in joint ventures. approximately $352. India gets less than 10% of the FDI of China. Foreign investors can buy up to 40% of the equity in private banks.but with $5. but with a limit on foreign equity of INR 1. FDI has helped the Indian economy grow. FDI in India has . through private equity or preferential allotments. distribution and transmission. with a stable democracy and a smoother approval process.enabled India to achieve a certain degree of financial stability. and this often leads to projects getting bogged down in red tape and bureaucracy.3 billion in FDI. with opportunities for foreign investors. FDI is allowed in financial services. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. This money has allowed India to focus on the areas that may have needed economic attention. Why does India. India actually receives less than half the FDI that the federal government approves. it includes both national and regional approval in the same process.3 billion in FDI . FDI is not permitted in the arms.
even if such a situation arises the economic policy of India would hardly be affected. Nonetheless. Commercial Risk Commercial risk exists in any business ventures of a country. Hence. Sovereign risk in India is hence nil for both "foreign direct investment" and "foreign portfolio investment. with strong and healthy coalition governments emerging. 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. As it is. 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.Investment Risks in India Sovereign Risk India is an effervescent parliamentary democracy since its political freedom from British rule more than 50 years ago." Many Industrial and Business houses have restrained themselves from investing in the North-Eastern part of the country due to unstable conditions. political stability has firmly returned since the general elections in 1999. Being a strong democratic nation the chances of an army coup or foreign dictatorship are minimal. Nonetheless investing in these parts is lucrative due to the rich mineral reserves here and high level of literacy. Hence it is advisable to study the demand / supply condition for a particular product or service before making any major investment. political instability did not change India's bright economic course though it delayed certain decisions relating to the economy. entering the consumer market involves some kind of gamble and hence involves commercial risk 25 . The country does not face any real threat of a serious revolutionary movement which might lead to a collapse of state machinery. 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.. 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. However. Not each and every product or service is profitably accepted in the market. political risk in India is practically absent.
but also the overall security conditions in a nation have an effect on FDI's.Risk Due To Terrorism In the recent past. 26 . Though some of the financial experts think otherwise. 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. Not only business environment and return on investment. In the long run. They believe the negative impact of terrorist attacks would be a short term phenomenon. India has witnessed several terrorist attacks on its soil which could have a negative impact on investor confidence.
railways system . 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 FDI policy of India has imposed certain foreign direct investment regulations as per the FDI theory of the Government of India . 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. All Press Notes are available at the website of Department of Industrial Policy & Promotion.FDI Policy in India Foreign Direct Investment Policy FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. 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. atomic energy sector. 1500 crores. 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. These include FDI limits in India for example: o Foreign direct investment in India in infrastructure development projects excluding arms and ammunitions. o FDI limit of maximum 49% in telecom industry especially in the GSM services 27 . FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. extraction of coal and lignite and mining industry is allowed upto 100% equity participation with the capping amount as Rs. The Foreign direct investment scheme and strategy depends on the respective FDI norms and policies in India.
List of activities or items for which automatic route for foreign investment is not available. 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. 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. and Investment through prior approval of Government. Venture Capital Fund and Venture Capital Company Investing Companies in Infrastructure & Service Sector Atomic Energy & Related Projects Defense and Strategic Industries 28 . A foreign company planning to set up business operations in India has the following options: Investment under automatic route. 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.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. 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.
except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs). should be submitted to the FIPB Unit. Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy & Promotion. Department of Economic Affairs (DEA). 29 . such type of additional investment is subject to a prior approval from the FIPB. 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. wherein both the parties are required to participate to demonstrate that the new venture does not prejudice the old one. Agriculture (Including Plantation) Print Media Broadcasting Postal Services Procedure under Government approval FDI in activities not covered under the automatic route. Ministry of Finance. it would require the approval of the Security Exchange Board of India. Approvals of composite proposals involving foreign investment/foreign technical collaboration are also granted on the recommendations of the FIPB. If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange. requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB). 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. Application for all FDI cases.
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. 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. CDC. the unit loses its small-scale status and shall require an industrial license to manufacture items reserved for small-scale sector. Participation by International Financial Institutions Equity participation by international financial institutions such as ADB. IFC. See also FDI in Small Scale Sector in India Further Liberalized 30 . even if the investment in plant and machinery in the unit does not exceed Rs 10 million. subject to SEBI/RBI regulations and sector specific cap on FDI. etc.. DEG.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. in domestic companies is permitted through automatic route. If the equity from another company (including foreign equity) exceeds 24 per cent. either foreign or domestic.
31 . 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 investor. · Through joint ventures and technical collaborations. affiliate enterprise or foreign affiliate). The investors‘ purpose being to have an effective voice in the management of the enterprise‘. and other activities of a firm in another country (the host country). 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. distribution. · Through private placements or preferential allotments. · Through capital markets via Euro issues. I. Foreign direct investment: Indian scenario FDI is permitted as under the following forms of investments – · Through financial collaborations.About foreign direct investment In India. Is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production.
tour operating agencies and tourist transport operating agencies. sports. up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects. For foreign technology agreements. Tourism related industry include travel agencies. surface. amusement. The term hotels include restaurants. including incentive fee. leisure. adventure and wild life experience to tourists. and up to 10% of gross operating profit is payable for management fee. up to 3% of net turnover is payable for franchising and marketing/publicity support fee. ii. supervision. entertainment. etc. and other tourist complexes providing accommodation and/or catering and food facilities to tourists. design. units providing facilities for cultural.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. beach resorts. and health units for tourists and Convention/Seminar units and organizations. automatic approval is granted if i. air and water transport facilities to tourists. 32 .
xiii. xv. ix. xvii. iv. v. iii. xix. viii. Merchant banking Underwriting Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring Credit Reference Agencies Credit rating Agencies Leasing & Finance Housing Finance Foreign Exchange Brokering Credit card business Money changing Business Micro Credit Rural Credit 33 . xiv. ii. xii. xi. vii. xvi.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. x. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels indicated below: i. vi. xviii.
b. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India.5 million to be brought upfront ii) For FDI above 51% and up to 75% . 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) 34 . f.US $ 50 million out of which US $ 7.US $ 5 million to be brought upfront iii) For FDI above 75% and up to 100% . Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities.5 million to be brought up front and the balance in 24 months c. 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 bringing in US$ 50 million as at b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital) e. d.e. Minimum capitalization norms for non-fund based activities: Minimum capitalization norm of US $ 0. RBI would issue appropriate guidelines in this regard.US$ 0. (b)(i) and (b)(ii) above. Minimum Capitalization Norms for fund based NBFCs: i) For FDI up to 51% .5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment. subject to the subsidiaries also complying with the applicable minimum capital inflow i.
FDI up to 100% is allowed for the following activities in the telecom sector : a.Telecommunication: FDI in Telecommunication sector i. In basic. 35 . 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. f.in period for transfer and addition of equity and other license provisions. iv. wherever required. The above services would be subject to licensing and security requirements. FDI is permitted up to 74% with FDI. b. iii. if these companies are listed in other parts of the world. cellular. ISPs with gateways. Infrastructure Providers providing dark fiber (IP Category 1). radio-paging and end-to-end bandwidth. d. No equity cap is applicable to manufacturing activities. c. ii. These services would be subject to licensing and security requirements. beyond 49% requiring Government approval. ISPs not providing gateways (both for satellite and submarine cables). 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. Electronic Mail. value added services and global mobile personal communications by satellite. and Voice Mail The above would be subject to the following conditions: e. Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.
f. and investment in setting up manufacturing facilities commences simultaneously with test marketing 36 . Trading of items for social sector e. under the FIPB route:i. The following kinds of trading are also permitted. c.Trading: FDI in Trading Companies in India Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities. g. ii. based on technology provided and laid down quality specifications. medical and diagnostic items. However. Companies for providing after sales services (that is not trading per se) b. h. and the undertaking is an export house/trading house/super trading house/star trading house. 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. cash and carry wholesale trading. 100% FDI is permitted in case of trading companies for the following activities: exports. 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. subject to provisions of EXIM Policy: a. a company can market that item under its brand name. bulk imports with ex-port/ex-bonded warehouse sales. Domestic sourcing of products for exports. Trading of hi-tech items/items requiring specialized after sales service d. Trading of items sourced from the small scale sector under which. 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. Trading of hi-tech.
transmission and distribution. 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. toll roads. Ports and Harbors FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads. Highways. There is no limit on the project cost and quantum of foreign direct investment. other than atomic reactor power plants. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading. vehicular bridges. FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology. 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. 37 . if these companies are listed in other parts of the world. highways.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. Roads. ports and harbors. Power: FDI In Power Sector in India Up to 100% FDI allowed in respect of projects relating to electricity generation. vehicular tunnels. and specific cell / tissue targeted formulations. and specific cell / tissue targeted formulations will require prior Government approval.
On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership engaged in Industrial. ii. Direct investment in industry. ix. infrastructure etc. 2. 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. iv. Investment in Government Securities. National Plan/Saving Certificates. 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. x. Units of UTI. vi. 5. vii. viii. 38 . Commercial or Trading Activity. 34 High Priority Industry Groups Export Trading Companies Hotels and Tourism-related Projects Hospitals. Diagnostic Centers Shipping Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development Highways. trade. v. xii. iii.Call Centers in India / Call Centre’s in India FDI up to 100% is allowed subject to certain conditions. xi. 4. 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. Bridges and Ports Sick Industrial Units Industries Requiring Compulsory Licensing 3. Up to 100% equity with full repatriation facility for capital and dividends in the following sectors i.
7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from Shares or Debentures of an Indian 39 . On Non-Repatriation Basis: Acquisition of shares of an Indian Company. through a General Body Resolution.6. up to 24% of the Paid Up Value of the Company.
as also for ground handling activities. Sources say the government wants to send out a signal that it is not done with reforms yet. India has decided to allow 26% FDI and 23% FII investments in commodity exchanges. An additional sweetener is that the mandatory disinvestment clause within five years has been done away with. At the same time. Also keeping India's civilian nuclear ambitions in mind. The foreign investment limit in Public Sector Units (PSU) refineries has been raised from 26% to 49%. FDI in Civil aviation up to 74% will now be allowed through the automatic route for non-scheduled and cargo airlines. critics say contentious issues like FDI and multi-brand retail are out of the policy radar because of political compulsions. credit information services and aircraft maintenance operations. industrial parks and construction and development projects have also been opened up to more foreign investment. But the big one. a mineral which is abundant in India.India Further Opens Up Key Sectors for Foreign Investment India has liberalized foreign investment regulations in key sectors. Sectors like credit information companies. subject to the proviso that no single entity will hold more than 5% of the stake. allowing foreign airlines to pick up a stake in domestic carriers has been given a miss again. India has also allowed 100% FDI in mining of titanium. 40 . 100% FDI in aircraft maintenance and repair operations has also been allowed. opening up commodity exchanges.
01 3310.80 3.77 1.55 5029.88 2612.85 3129.32 748.92 1217.90 2.38 213595.49 0.96 0.92 1621.39 11.20 3.03 2244.12 146799.63 70781.17 62416.94 1112.06 1551.Sector-wise FDI Inflows ( From April 2000 to January 2010) SECTOR AMOUNT OF FDI INFLOWS In Rs Million Services Sector Computer Software & hardware Telecommunications Construction Activities Automobile Housing & Real estate Power Chemicals (Other than Fertilizers) Ports Metallurgical industries Electrical Equipments Cement & Gypsum Products Petroleum & Natural Gas Trading Consultancy Services Hotel and Tourism Food Processing Industries Electronics Misc.86 PERCENT OF TOTAL FDI INFLOWS (In terms of Rs) 22.83 6.66 1964.74 275441.43 52500.98 0.68 1.05 34362.20 57379. Mechanical & Engineering industries 787420.37 87008.81 391109.49 33914.12 7.17 6.38 1.75 28310.85 48647.50 760.85 1324.80 41 .40 8876.01 2.47 1.57 648.07 63290.43 6215.41 217936.17 1480.23 5118.11 1.13 In US$ Million 18118.50 109563.19 94417.07 4.63 2.02 137089.
71 5683.60 6066.94 17653. Print 52115.16 0.73 658.60 0.80 114.23 0.76 7937.86 611. air freight) Ceramics Rubber Goods Agriculture Services Industrial Machinery Paper & Pulp Diamond & Gold Ornaments Agricultural Machinery Earth Moving Machinery Commercial.50 0.76 11014.16 0.16 0.Information & Broadcasting (Incl.31 0.34 5798.97 429.50 0.17 0.81 27241.62 6649.43 11392. Dyed.39 0.54 177.42 27743.42 1.06 248.71 409.79 0.32 10552.87 1194.22 132.48 0.74 126.88 240.46 10955.03 402.27 18612.12 5749.31 0.88 8087.13 13748. Litho printing industry) Soaps.77 0.20 522.92 247.19 17462.04 247.51 135. Cosmetics and Toilet Preparations Medical & Surgical Appliances 21204.53 0.30 0.94 26736.15 148.90 media) Mining Textiles (Incl.37 134.23 42 . Office & Household Equipments Glass Printing of Books (Incl.19 0.60 188. Printed) Sea Transport Hospital & Diagnostic Centers Fermentation Industries Machine Tools Air Transport ( Incl.59 644.32 0.39 316.14 0.23 4984.76 0.
02 0.09 96.55 0.48 1074.42 1.15 1.Education Fertilizers Photographic raw Film & Paper Railway related components Vegetable oils and Vanaspati Sugar Tea & Coffee Leather.58 84. industries 180561.54 .90 75.11 83.17 139.18 1836.80 238.05 0.01 0.30 electrical generators Defence Industries 6.20 3281.12 3.44 5.05 0.40 9.36 511.67 614. Leather goods & Piackers Non-conventional energy Industrial instruments Scientific instruments Glue and Gelatine Boilers & steam generating plants Dye-Stuffs Retail Trading (Single brand) Coal Production Coir Timber products 14374.87 Mathematical.58 1368.84 29.00 0.01 0.19 43 Prime Mover (Other than 178.01 0.27 4162.85 3769.44 385.04 0.17 2580.10 0.52 25.69 41.72 0.74 86.12 0.09 0.18 15.59 63.56 3640.59 309.11 4282.28 36.00 0.47 11.64 3774.10 3. Surveying 50.01 0.00 0.81 1621.01 0.41 0.67 406.03 0.11 0.11 0.00 5.35 & drawing instruments Misc.10 50.64 8.07 0.
82 121.33 86395.79 145466.35 89622.63 3391. Government of India 44 .22 5330. Federal Ministry of Commerce and Industry.07 1962.85 100.60 3757729.96 81010.00 - SOURCE: DIPP.Sub Total Stock Swapped (from 2002 to 2008) Advance of Inflows (from 2000 to 2004) RBI's NRI Schemes Grand Total Sector wise FDI inflows 3517310.
sulfur. gypsum. zinc. gold. manganese.Forbidden Territories: Arms and ammunition Atomic Energy Coal and lignite Rail Transport Mining of metals like iron. chrome. diamonds. copper. 45 .
1. 2.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). equipment and building and investment in software development. telecommunication. 46 . GDR investments are treated as FDI and are designated in dollars and are not subject to any ceilings on investment. ports. capital expenditure including domestic purchase/installation of plant. and equity investment in JV/WOSs in India. petroleum exploration and refining. prepayment or scheduled repayment of earlier external borrowings. This condition would be relaxed for infrastructure projects such as power generation. 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. Use of GDRs – The proceeds of the GDRs can be used for financing capital goods imports. 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. would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance. airports and roads. 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.
The lists are comprehensive and cover most industries of interest to foreign companies. 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%.Foreign direct investments in India are approved through two routes – 1. even when the foreign investor wishes to hold less than the entire equity of the company. 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. Its approach is liberal for all sectors and all types of proposals. The portion of the equity not proposed to be held by the foreign investor can be offered to the public. and rejections are few. iii. It is not necessary for foreign investors to have a local partner. Normal processing time is 4 to 6 weeks. Investments in high priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. Analysis of sector specific policy for FDI 47 . 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. 50%. 51%. 2.
Sr. 34 High Priority Industry Groups ii. Drugs & Pharmaceuticals Roads. licence 74% 100% 5. cash and carry wholesale trading 100% Automatic 51% Automatic 6. value added services ISPs paging Electronic Mail & Voice Mail with gateways. Highways. radio- FDI cap/Equity 100% 49% 26% Entry/Route Automatic Automatic Automatic Automatic 49% Above 49% need Govt. Pollution Management Control and 100% Automatic 10 11. Power(other than atomic reactor power plants) 100% 100% Automatic Automatic Automatic 7. 2. No. Call Centers BPO For NRI's and OCB's: i. 12. 8. Hospitals. 4. 3. Trading companies: primarily export activities bulk imports. Sector/Activity Hotel & Tourism NBFC Insurance Telecommunication: cellular. Ports and 100% Harbors 9. Diagnostic 48 . Hotels and TourismTrading 100% 100% Automatic Automatic 100% Automatic related Projects iv. Export Companies iii. 1.
Centers v. Shipping Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development x. vi. ix. Assets reconstruction company Cigars and cigarettes Courier services Investing infrastructure telecom sector) companies (other 100% 100% 49% 100% 100% in 49% than Automatic Beyond 74% FIPB FIPB FIPB FIPB FIPB 49 . viii. Bridges and Ports xi. xii. 16. vii. Sick Industrial Units Industries Requiring Compulsory Licensing xiii. Airports: Greenfield projects Existing projects 14 15. 17. Highways. Industries Reserved for Small Scale Sector 13.
322 6. Analysis of FDI inflow in India From April 2000 to August 2009-10 (Amount US$ in Millions) S.168 16. 10. 2. 7.130 5.232 % Growth Over Previous Year ---(+) 52 (-) 18 (-) 14 (+) 40 (+) 48 (+) 146 (+) 51 (+) 02 ---- 50 .051 8.029 6.iv. 8.826 34. 4. 3. 5.035 4.No 1. 9.362 35. 6.961 22. Financial Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Total FDI Inflows 4.
000 0 6.362 8.130 4.000 10.168 34.000 30.000 35.232 TOTAL FDI INFLOWS 35.000 15.000 22.322 51 .000 5.000 25.035 4.029 6.826 20.961 5.TOTAL FDI INFLOWS IN INDIA 40.051 16.
64 5.242.v.129.18. No Country Amount of FDI Inflows % As To FDI Total Inflow 1. U.06 61.17 52 .61 3.04 2.42 1.76 1.04 1.72 7.01 8.K.A.08 3. 7.05 18.104.22.168 1.44 22.214.171.124 44.60 2. 19. Analysis of share of top ten investing countries FDI equity in flows From April 2000 to January 2010 (Amount in Millions) Sr.686.56 3.448.974.A.047.935. Netherlands Japan Cyprus Germany France U.S. 3.E.40. 8. 9.12. 6. Mauritius Singapore U.633.915. 10.32. 5.98 1.80. 4. 2.39 50.53 4.
the top sectors attracting FDI from the United States to India are fuel.Mauritius Double Taxation Avoidance Agreement (DTAA). 3.A.64 % of the total).633 million in India Up to the January 2010. and services.80. which accounts for about 30% of FDI inflows from Singapore. food processing.S. valued at 732335 crore in cumulative inflows up to January 2010. 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. Many companies based outside of India utilize Mauritian holding companies to take advantage of the India.19. However. the two top sectors attracting FDI inflows from the United States are computer systems design and programming and manufacturing 54 . These are the sectors which attracting more FDI from Mauritius Electrical equipment Gypsum and cement products Telecommunications Services sector that includes both non. Petroleum and natural gas occupies the second place followed by computer software and hardware. According to the Indian government. telecommunications. According to the available M&A data. mining and construction. The United States is the third largest source of FDI in India (7. equal to 44. and may allow some India-based firms to avoid paying certain taxes through a process known as ―round tripping.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). The DTAA allows foreign firms to bypass Indian capital gains taxes. electrical equipment.18. The potential loss of tax revenue is of particular concern to the Indian government.Mauritius Mauritius invested Rs.financial and financial Fuels. Singapore Singapore continues to be the single largest investor in India amongst the Singapore with FDI inflows into Rs.‖ The extent of round tripping by Indian companies through Mauritius is unknown.01 percent of total FDI inflows. U.
78. Netherlands ranks fifth among all the countries that make investments in India.08% out of the total foreign direct investment in the country up to August 2009.974 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.40. partnerships. The total flow of FDI from Netherlands to India came to Rs.K. medical equipment. The total percentage of FDI from Netherlands to India stood at 4. and creative industries. and trade are nonconventional energy. infrastructure equipment.047 crores between 1991 and 2002.53 % of the total). IT. 55 . Netherlands FDI from Netherlands to India has increased at a very fast pace over the last few years. valued at 2. 1. UK companies and policy makers the focus sectors for joint ventures. precision engineering.U. The United Kingdom is the fourth largest source of FDI in India (5.
11.57 2.68.899.financial and financial services vi. 8.172. 9.680.957.8126.96.36.199 4.62 3. 6. Service Sector (Financial & Non Financial) 9.65. Computer Software & Hardware Telecommunication Housing & Real Estate Construction Activities Automobile Industry Power Metallurgical Industries Petroleum & Natural Gas Chemical 4.021.33 56 .Following Various industries attracting FDI from Netherlands to India are: Food processing industries Telecommunications that includes services of cellular mobile.785. 5.89 2. Analysis of sectors attracting highest FDI equity inflows From April 2000 to March 2010 (Amount in Millions) Sr.48 8. and radio paging Horticulture Electrical equipment that includes computer software and electronics Service sector that includes non.25.419.46 7.14 2.92 1.46 6.96 1.210.25.03 3. 7.13 2. No Country Amount Inflows of FDI % As To FDI Total Inflow 1.01.77 22. 4.57 1.36 2.09 4. 10.22 1.18 9. 3.13. basic telephone.492.00 1.90.
152 million in FY ‘09 over FY ‘08.37 per cent share in total FDI inflow.14 and 9. each accounting for 22. These were followed by the telecommunications.94 per cent).86 per cent).55 per cent). real estate. India automobile sector has been able to record 70 per cent growth in foreign investment. 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. construction activities including road & highways (16. acquired 9.The sectors receiving the largest shares of total FDI inflows up to arch 2010 were the service sector and computer software and hardware sector. The telecom sector registered a growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal.48 percent respectively. The other sectors which registered growth in highest FDI inflow during April – March 2009 were housing & real estate (28. 57 . These sectors correspond closely with the sectors identified by the Indian government as attracting the largest shares of FDI inflows overall. and professional. The FDI inflow in automobile sector has increased from USD 675 million to 1.71 per cent during the last fiscal. construction and automobile sectors. and technical services. The sector attracted USD 2558 million FDI in FY ‗09 as compared to the USD 1261 million in FY ‘08. computer software & hardware (18. During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent to 74 per. scientific. The top sectors attracting FDI into India via M&A activity were manufacturing. information. which has contributed to the robust growth of FDI.35 per cent) and power (1. The sector attracted USD 749 million FDI in FY ‗09 as compared to USD 229 million in FY ‘08.
It therefore has a strong record of actively encouraging the flow of FDI into the country. 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 Board thus plays an important role in the administration and implementation of the Government‘s FDI policy. 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. The threshold limit is likely to be raised to 1200 crore soon. The launch of e. the FIPB has stepped in to provide solutions. In circumstances where there is ambiguity or a conflict of interpretation.filing facility is an important initiative of the Secretariat to further the cause of enhanced accessibility and transparency .Foreign Investment Promotion Board The FIPB (Foreign Investment Promotion Board) is a government body that offers a single window clearance for proposals on foreign direct investment in the country that are not allowed access through the automatic route. Consisting of Senior Secretaries drawn from different ministries with Secretary .Economic Affairs in the chair. 58 . The FIPB is assisted in this task by a FIPB Secretariat.
It accounted for as much as 86% of the total foreign direct investment made in the lower income countries in 1995. It has been observed that the various debt crises. It was as much as 68%. as well as. 59 . as well as the fact that their economies were not open to foreign direct investment. 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. The middle income countries have not received a steady inflow of foreign direct income coming their way. Normally. A significant amount of the foreign direct investment in China was provided in the industrial sector. The situation is comparatively better in the low income countries.5 billion. This average increased by seven times to become US$ 37. However. However. Foreign direct investment started in India in 1991 with the initiation of the economic liberation.5 billion during 1995.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%. These countries had lesser amounts of commercial bank obligations. The economic liberalization in China started in 1979. They have had an uninterrupted and continually increasing flow of foreign direct investment. China has received the most of the foreign direct investment that was pumped into the countries with low income. During the later phases of the decade of 70s the Asian countries started encouraging foreign direct investments in their economies. the situation has not been the same in the countries with a middle income range. In the recent times India has risen to be the third major foreign direct investment destination in the recent years. other forms of economic crises have had less effect on these countries. It accounted for as much as 86% of the total foreign direct investment made in the lower income countries in with low income. the foreign direct investment is made mostly into the extractive industries. In the years between 1982 and 1991 the average foreign direct investment in China was US$ 2. This led to an increase in the foreign direct investment in China. During the same period Nigeria had been the second best in terms of receiving foreign direct investment. Around 20% of the foreign direct investment of China was made in the real estate sector. which again had been caused by the absence of proper financial markets.
This led to an increase in the foreign direct investment made 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. on an average. Food processing.7 million. 60 . The amount stood at US$ 25 million in 1993 compared to US$ 8 million in 1993. vehicles and petrochemicals Vietnam is a low income country. This amount increased by 3 times after the USA removed its economic sanctions in 1994. The figures increased from US$11. This was a significant increase from the previous twenty years when the total foreign direct investment in India was US$1 billion. The foreign direct investment laws were introduced in Vietnam in 1987-88. This improvement was brought about by the privatization of the Ashanti Goldfields. when the economic reforms took place in the country. from 1993 to 1995. The gas and petroleum industries were the biggest beneficiaries of the foreign direct investment. which is supposed to have the same potential as China to generate foreign direct investment. Bangladesh started receiving increasing foreign direct investment after 1991. from 1986 to 1992 to US$ 201 million. The increase in the foreign direct investment in Ghana was remarkable as well.There were more initiatives that enabled India to garner foreign direct investments worth US$ 2. chemicals and electric machinery were also important in this regard. As per the available statistics the manufacturing industry. comprising of clothing and textiles took up 20% of the total approved foreign direct investment. In the manufacturing industry the emphasis has been on petroleum refining.9 billion from 1991 to 1995. on an average. Most of the foreign direct investment made in India has been in the infrastructural areas like telecommunications and power.
and suggested that dual approval process of SEBI and RBI be changed to a single approval process of SEBI. such as Pension Funds etc. II. to invest in Indian capital market. Manmohan Singh had announced a proposal to allow reputed foreign investors. FIIs were permitted to invest in all the securities traded on the primary and secondary markets. Simultaneously. 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. for the first time. 61 . 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. debentures and warrants issued by companies which were listed or were to be listed on the Stock Exchanges in India. A Working Group for Streamlining of the Procedures relating to FIIs. inter alia. While recommending their entry. the then Finance Minister Dr. This recommendation was implemented in December 2003. including shares. 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. permitted portfolio investments from abroad by foreign institutional investors in the Indian capital market.. While presenting the Budget for 1992-93. As a part of the reforms process. the Committee. From September 14. however did not elaborate on the objectives of the suggested policy.FOREIGN INSTITUTIONAL INVESTMENT I. The committee only suggested that the capital market should be gradually opened up to foreign portfolio investments. 1992 with suitable restrictions. recommended streamlining of SEBI registration procedure. constituted in April. The entry of FIIs seems to be a follow up of the recommendation of the Narsimhan Committee Report on Financial System. Introduction to FII Since 1990-91. augmentation of foreign exchange reserves and globalization of the Indian economy. the Government. 2003.
including individuals. Hence. charitable societies.those who are permitted to invest only in debt instruments. nominee company. who would be registered as FIIs in India. FIIs registered with SEBI fall under the following categories: a) Regular FIIs. investment trust. intermediated through institutional investors. Asset management companies/portfolio managers are basically in the business of managing funds and investing them on behalf of their funds/clients. partnership firms. investment trust.those who are required to invest not less than 70 % of their investment in equity-related instruments and 30 % in non-equity instruments. permission was also granted for making investments in the names of such clients. entities eligible to invest under the FII route are as follows: i) As FII: Overseas pension funds. bank. university funds. mutual funds. 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. 62 . inter-alia. pension fund. The following entities are eligible to be registered as sub-accounts. While granting registration to the FII. While the guidelines did not have a specific provision regarding clients. b) 100 % debt-fund FIIs. public company. viz. FIIs are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme. endowments. These 'clients' later came to be known as sub-accounts.Currently. in the application form the details of clients on whose behalf investments were being made were sought. and individuals. charitable trusts. ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FII invests. institutional portfolio manager. asset management company. The broad strategy consisted of having a wide variety of clients. private company. foundations. The Government guidelines for FII of 1992 allowed. 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. the intention of the guidelines was to allow these categories of investors to invest funds in India on behalf of their 'clients'.
5) Trading in Transferable Development Rights (TDRs). iv. the Indian stock markets were opened up for direct participation by FIIs. Trends of Foreign Institutional Investments in India.iii. Before 1992. Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs). Thereafter. there were 1609 FIIs registered with SEBI. Prohibitions on Investments: FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. roads or bridges). 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. 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. Foreign Institutional Investments and investments in offshore funds. 63 . As of March 2009. construction of residential/commercial premises. only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. It can be observed from the table below that India is one of the preferred investment destinations for FIIs over the years.
SEBI Registered FIIs in India Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 End of March 0 3 156 353 439 496 450 506 527 490 502 540 685 882 996 1279 1609 2009-10 1805 64 .
64 - 2010 data was not available 65 .53 0. crore) 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 17 5593 7631 9694 15554 18695 16115 56856 74051 49920 47061 144858 16953 346978 520508 896686 548876 - 4 466 2835 2752 6979 12737 17699 46734 64116 41165 44373 99094 171072 305512 489667 844504 594608 - 13 5127 4796 6942 8575 5958 1584 10122 9935 8755 2688 45764 45881 41466 30841 52182 -45732 - 39338.crore) Net % increase in Investment (a. crore) Gross Sales (b) (Rs.59 739.46 -6.52 126.88 69.30 1602.45 44.26 -9.52 -30.FII inflow b) (Rs.75 23.v.20 187.62 -25.02 -1. Year FII trend in India Gross Purchases (a) (Rs.85 -11.62 69.
crore) Gross Sales (b) (Rs./Dollar exchange rate etc. But for my study I have selected only one independent variable i. inflation. Government policies. FII and dependent variable is indices of nifty.crore) Net Investment (a-b) (Rs.crore) 600000 400000 200000 0 -200000 There may be many other factors on which a stock index may depend i. bullion market. 66 .e. budgets.FII INFLOW 1000000 800000 Gross Purchases (a) (Rs. FDI. Re.e. economic and political condition of the country.
18 0. Co – relation with Indices Indices Sensex Bankex Power IT Capital Goods Co-relation with FII 0. Power and Capital Goods sector have more co-relation with FII investment which shows more interest of FIIs in those sectors. 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.33 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. 67 .vi.13 0.80 0.
FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. In an FDI. Foreign Direct Investment targets a specific enterprise. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise. FII can enter the stock market easily and also withdraw from it easily. specific enterprise. 4. The FII increasing capital availability in general. The FII investment flows only into the secondary market. On the contrary. FII is an investment made by an investor in the markets of a foreign nation. 3. But FDI cannot enter and exit that easily. This difference is what makes nations to choose FDI‘s more than then FIIs. 1. FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreign investment for the whole economy. FII can enter the stock market easily and also withdraw from it easily. While the FDI flows into the primary market. the FII flows into secondary market. Though the Foreign Institutional Investor helps in promoting good governance and improving accounting. the capital inflow is translated into additional production. While FIIs are short-term investments. FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation. But in Foreign Direct Investment. But FDI cannot enter and exit easily. It aims to increase the enterprises capacity or productivity or change its management control. it does not come out with any other benefits of the FDI. On the contrary. In simple words. this is not possible. But FDI is quite different from it as they invest in a foreign nation. FDI is an investment that a parent company makes in a foreign country.The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor.Difference Between FDI and FII FDI v/s FII Both FDI and FII is related to investment in a foreign country. The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. FDI not only brings in capital but also helps in good governance practices and better management skills and even technology transfer. the FDI‘s are long term. 2.In FII. the companies only need to get registered in the stock exchange to make investments. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor 68 .
Objective of the study 69 .
To know which country in investing in which country To know the reason for investment in India Influence of FII on movement of Indian stock exchange To understand the FII & FDI policy in India. To Examine the trends and patterns in the FDI across different sectors and from different countries in India To know in which sector we can get more foreign currency in terms of investment in India To know which country s safe to invest . To know Which sector is good for investment . To know how much to invest in a developed country or in a developing.Objective of the study: To know the flow of investment in India To know how can India Grow by Investment . 70 .
Research methodology 71 .
In order to accomplish this project successfully we will take following steps. Data collection: Secondary Data: Internet, Books , newspapers, journals and books, other reports and projects, literatures FDI: The study is limited to a sample of investing countries e.g. Mauritius, Singapore, USA etc. and sectors e.g. service sector, computer hardware and software, telecommunications etc. which had attracted larger inflow of FDI from different countries. FII: Correlation: We have used the Correlation tool to determine whether two ranges of data move together — that is, how the Sensex, Bankex, IT, Power and Capital Goods are related to the FII which may be positive relation, negative relation or no relation.
We will use this model for understanding the relationship between FII and stock indices returns. FII is taken as independent variable. Stock indices are taken as dependent variable
Hypothesis Test: If the hypothesis holds good then we can infer that FIIs have significant impact on the Indian capital market. This will help the investors to decide on their investments in stocks and shares. If the hypothesis is rejected, or in other words if the null hypothesis is accepted, then FIIs will have no significant impact on the Indian bourses.
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. 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
Recommendations & suggestions 76 .
Limitations of research 77 .
Limitations of research 78 .
com/investment_in_india/fdi.html http://www.rbi.com/articles/fdi_india.sebi.unctad.google.org www.pdf http://www.com/topic/foreign-direct-investment#History http://www.org/sections/dite_iiab/docs/diteiiab20041_en.org http://books.Bibliography www.in.co.legalserviceindia.htm 80 .indiahousing.html http://finance.in/books?id=0VUafaE3pOIC&pg=PA4&dq=types+of+foreign+direct+investment&hl=en&ei= efzrS_rEAoy5rAfv34DbBg&sa=X&oi=book_result&ct=bookthumbnail&resnum=1&ved=0CDUQ6wEwAA#v=onepage&q=types%20of%20foreign%20direct%20investment&f=f alse http://www.indiamart.economywatch.fin.answers.com/foreign-direct-investment/ http://www.nic www.com/fdi-foreign-direct-investment.
Annexure 81 .
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