CHANAKYA NATIONAL LAW

UNIVERSITY, PATNA

PROJECT OF CORPORATE LAW

Foreign Institutional Investment in India & its Impact on
Growth of Industries in India

SUBMITTED TO: -
Mrs. Nandita S. Jha
FACULTY OF CORPORATE LAW

SUBMITTED BY: -
ADITYA VIJAY SINGH
ROLL NO. -1507
B.A. LL. B
7TH SEMESTER

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ACKNOWLEDGEMENT

Writing a project is one of the most significant academic challenges, I have ever
faced. Though this project has been presented by me but there are many people
who remained in veil, who gave their all support and helped me to complete this
project.
First, I am very grateful to my subject teacher Mrs. Nandita S. Jha without the
kind support of whom and help the completion of the project was a herculean
task for me. He donated his valuable time from his busy schedule to help me to
complete this project and suggested me from where and how to collect data.
I acknowledge my friends who gave their valuable and meticulous advice which
was very useful and could not be ignored in writing the project.
Last but not the least, I am very much thankful to my parents and family, who
always stand aside me and helped me a lot in accessing all sorts of resources.

I thank all of them!

Aditya Vijay Singh
R.No.1507,
SEMESTER 7TH
B.A.L.L.B. (Hons.)

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 Contents

Foreign Institutional Investment in India & its Impact on Growth of Industries in India ................................... 1
ACKNOWLEDGEMENT ........................................................................................................................................ 2
1. INTRODUCTION ......................................................................................................................................... 4
1.1. OBJECTIVE OF STUDY ........................................................................................................................... 4
1.2. RESEARCH METHODOLOGY ................................................................................................................ 4
1.3. FORMATTING METHODOLOGY ............................................................................................................ 4
1.4. HYPOTHESIS ......................................................................................................................................... 5
 Foreign Direct Investment has elevated the growth of Industries in India. ............................................... 5
1.5. RESEARCH QUESTION ........................................................................................................................... 5

1. What is Foreign Direct Investment? ............................................................................................................... 5

2. Who are Foreign Direct Investors? ................................................................................................................. 5
3. What is the Impact of Foreign Direct Investment? ......................................................................................... 5
4. How does Foreign Direct Investment impact Industries? ............................................................................... 5
1.6. LIMITATION OF THE STUDY ................................................................................................................. 5
2. FOREIGN PORTFOLIO INVESTMENT REGULATIONS 2014 .......................................................................... 6
3. DIFFERENCE BETWEEN FPI & FDI ............................................................................................................... 8
4. Role of FII in Indian Economy Growth ............................................................................................................ 9
5. Conclusion ............................................................................................................................................... 10
BIBLIOGRAPHY .................................................................................................................................................. 11

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 1. INTRODUCTION

Foreign Institutional Investors (FII) are an investment fund or a gathering of investors. Such a
fund is registered in a foreign country, i.e. not in the country it is investing in. Such institutional
investors mostly involve hedge funds, mutual funds, pension funds, insurance bonds, high-
value debentures, investment banks etc.

We use this term FII for foreign players investing funds in the financial market of India. They
play a big role in the development of our economy. The amount of funds they invest is very
considerable.

So when such FII’s buy shares and securities the market is bullish and trends upwards. The
opposite may also happen when they withdraw their funds from the markets. So they have

considerable sway over the market.

1.1. OBJECTIVE OF STUDY

The objective of the researcher’s study on this topic is to dissect and give a holistic analysis
of Foreign Institutional Investment in India and its impact on growth of industries in India.
This project analysis various provisions related to the same.

1.2. RESEARCH METHODOLOGY

The nature of research methodology adopted by the researcher for this particular topic is
purely doctrinal. The researcher has used resources available at the library of CNLU and the
World Wide Web. Thus, the researcher of this project has used secondary data for the
successful completion of this project. No primary data has been included.

1.3. FORMATTING METHODOLOGY

The project is in Times New Roman, font Size 14 for the main headings and 12 for other
parts of the study with 1.5 spacing. The footnotes are of font size 10 with 1.0 spacing.
Uniform method of footnoting has been followed.

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1.4. HYPOTHESIS
 Foreign Direct Investment has elevated the growth of Industries in India.
1.5. RESEARCH QUESTION

1. What is Foreign Direct Investment?

2. Who are Foreign Direct Investors?

3. What is the Impact of Foreign Direct Investment?

4. How does Foreign Direct Investment impact Industries?

1.6. LIMITATION OF THE STUDY

Due to paucity of time and lack of resources, a complete comparative study with scheme
prevalent in other nations could not be be undertaken by the researcher. However exhaustive
use the internet and library resources for the successful completion of this project.

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 2. FOREIGN PORTFOLIO INVESTMENT
REGULATIONS 2014

Under the FPI regime, Securities and Exchange Board of India (“SEBI”) has harmonized
foreign institutional investors (“FIIs”), sub-accounts and qualified foreign investors
(“QFIs”) regimes into a single investor class – foreign portfolio investors (“FPI”) and
provide a single window clearance through designated depository participants (“DDPs”).
With each investor registering directly as an FPI (under the respective three categories
discussed later), the sponsored sub accounts structure seems to be over.
The FPI Regulations put into effect several recommendations made by the Committee on
Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments
chaired by Mr. K.M. Chandrasekhar in 2013.
From the point of view of KYC, the committee recommended (and the FPI Regulations
provide) for following categorization of FPIs based on their perceived risk profile1:
CATEGORY I: Government and Government-related investors such as central banks,
Governmental agencies, sovereign wealth funds or international and multilateral
organizations or agencies.
CATEGORY II: (i) Appropriately regulated broad based funds1;
(ii) Appropriately regulated persons;
(iii) Broad-based funds that are not appropriately regulated;
(iv) University funds and pension funds
CATEGORY III: Includes all eligible FPIs who are not eligible under Category I and II,
such as endowments, charitable societies, charitable trusts, foundations, corporate bodies,
trusts, individuals and family offices.
The FPI categorization follow the risk based KYC regime as set out in SEBI’s circular
dated September 12, 20134 for foreign investors investing under portfolio investment
scheme2.

CHANGES IN THE BROAD-BASED CRITERIA

1
https://www.bseindia.com/static/fpi/RegulatoryFrameworkandFPINorms.aspx accessed on 20/08/2019.
2

http://www.mondaq.com/india/x/828478/Inward+Foreign+Investment/Foreign+Portfolio+Investors+Regulatio
ns+Proposed+Changes accessed on 20/08/2019

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 Under the FII Regulations, a “broad-based fund” meant a fund, established or
incorporated outside India which has at least 20 investors with no investor holding more
than 49% of the shares or units of the fund. It was also provided that if the broad-based
fund had any institutional investor, it was not necessary for such fund to have 20
investors. Further, any institutional investor holding more than 49% of the shares or units
of the fund would have to itself satisfy the broad based criteria.
The FPI Regulations continue to follow the broad-based criteria with two notable
deviations. One, in order to satisfy the broad-based criteria, it would be necessary for a
fund to have 20 investors even if there is an institutional investor. Two, for the purpose of
computing the number of investors in a fund, both direct and underlying investors (i.e.
investors of entities that are set up for the sole purpose of pooling funds and making
investments) shall be counted.

‘NEW’ INVESTMENT LIMITS

Regulation 21(7) of the FPI Regulations states that a single FPI or an investor group shall
purchase below ten percent of the total issued capital of a company. The position under
the FII Regulations was that such shareholding was not to exceed ten percent of the share
capital. Effectively, a single FPI can now hold up to 9.99% of the share capital of an
Indian company3.
The FPI Regulations provide that in case the same set of ultimate beneficial owner(s)
invests through multiple FPI entities, such FPI entities shall be treated as part of the same
investor group5 and the investment limits of all such entities shall be clubbed at the
investment limit as applicable to a single FPI.

3
https://www.investopedia.com/terms/f/foreign-portfolio-investment-fpi.asp accessed on 24/08/2019

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 3. DIFFERENCE BETWEEN FPI & FDI

FDI- Foreign Direct Investment refers to international investment in which the investor
obtains a lasting interest in an enterprise in another country. Most concretely, it may take the
form of buying or constructing a factory in a foreign country or adding improvements to such
a facility, in the form of property, plants, or equipment.

FDI is calculated to include all kinds of capital contributions, such as the purchases of stocks,
as well as the reinvestment of earnings by a wholly owned company incorporated abroad
(subsidiary), and the lending of funds to a foreign subsidiary or branch. The reinvestment of
earnings and transfer of assets between a parent company and its subsidiary often constitutes
a significant part of FDI calculations.

FDI is more difficult to pull out or sell off. Consequently, direct investors may be more
committed to managing their international investments, and less likely to pull out at the first
sign of trouble.

On the other hand, FPI (Foreign Portfolio Investment) represents passive holdings of
securities such as foreign stocks, bonds, or other financial assets, none of which entails active
management or control of the securities' issuer by the investor4.

Unlike FDI, it is very easy to sell off the securities and pull out the foreign portfolio
investment. Hence, FPI can be much more volatile than FDI. For a country on the rise, FPI
can bring about rapid development, helping an emerging economy move quickly to take
advantage of economic opportunity, creating many new jobs and significant wealth 5.
However, when a country's economic situation takes a downturn, sometimes just by failing to
meet the expectations of international investors, the large flow of money into a country can
turn into a stampede away from it.

4
https://www.marketbhai.com/post.aspx?artid=5 accessed 22/08/2019
5
http://www.ijemr.net/DOC/ImpactOfForeignInstitutionalInvestorsOnEconomicGrowth(418-427).com
accessed on 22/08/2019

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 4. Role of FII in Indian Economy Growth
When considering the role of FII in Indian economy growth, it is important to note that
sudden influxes of FIIs can lead to vast impacts in the stock market. Consider what happened
in 2012 as an example of how FII activity in the Indian stock market plays a role in the
overall economy. The 25% rally seen in the Sensex that year occurred due to an inflow of Rs.
1.23 trillion that came from FIIs.
They also help in lowering the cost of capital and providing cheaper access to global credit.
Experts believe that the current account deficits that India is facing can largely be financed
with the help of FIIs, which is why many government entities are looking to drive more FIIs
in India.
Conversely, a decrease in FII in India would lead to catastrophic outcomes for the economy.
It may lead to a reduction of the wealth generated in the stock market, which may then lead to
a depreciation of the Indian currency. To avoid large fluctuations in exchange rates, the
Reserve Bank of India (RBI) could resort to increasing interest rates. As a result, any
company that finds it a challenge to stabilize its growth internally might capsize under the
pressure. This can further lead to fewer tech start-ups and businesses, loss of employment,
and a decline in the overall economy6.
What makes India a tempting market to invest in, is the fact that it has over 4,750 start-ups,
making it the world’s third largest base for start-ups. Investment opportunities in the country
are countless, for both FIIs and FDIs. Moreover, government policies like GST and
demonetization have also increased foreign investors’ confidence in India’s market. Some of
the other initiatives that have led to more investors being interested in FII investments in
India include:
- RBI has allowed investors to invest in redeemable/non-convertible shares or
debentures. These are applicable for companies that are listed in SEBI.
- SEBI has increased the limit of investment to 25% of the total offer. This initiative
took place to boost the overall investments in REITs and InvITs.
- The People’s Bank of China has also invested 500 million USD in Indian bonds.
- To encourage more FII investments in India, RBI increased the limit of holdings from
11,200 Crore to a whopping 3,01,500 Crore.

6
https://www.marketbhai.com/post.aspx?artid=5 accessed on 22/08/2019

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 5. Conclusion

To characterize portfolio investment as “bad” and direct investment as “good”

oversimplifies a much more complex situation. Both bring risks, and both require their
own policy approaches. There seems to be a certain fear attached to foreign portfolio
investment, due perhaps to its complexity and the central economic role of the financial
system. (At one time there was a fear of foreign direct investment.) Does foreign portfolio
investment engender greater concern? Certainly, financial disturbances have not been
confined to foreign investors. If you take “foreign” out of foreign portfolio or direct
investment, most policy makers would acknowledge that domestic portfolio and direct
investment are both necessary for healthy economic growth and development. Portfolio
investment and the financial system it is part of are central to any healthy economy. Put
“foreign” back in and you have effectively increased the quantity and diversity of
investment to even greater effect.

As shown above, both portfolio and direct investment can bring powerful benefits to the
economy, and together the benefits are increased. The best answer is not to shut either
type of investment out – not to label one “bad” and the other “good.” Instead, both should
be welcomed within the proper regulatory structure to maximize the benefits, and to
manage the drawbacks and potential negatives. Both portfolio and direct investment bring
value for economic growth. They are not intrinsically good or bad, but they are different.
Liberalize both with respect for their differences.

Beneficial if well functioning stock markets support the economic development of the
country. Impose significant fiscal cost on economy as has to maintain the value of rupee
in a very narrow band. Have to ensure the attractiveness for the Investors

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 BIBLIOGRAPHY

Sites referred:-
1. https://www.bseindia.com/static/fpi/RegulatoryFrameworkandFPINorms.aspx
2.http://www.ijemr.net/DOC/ImpactOfForeignInstitutionalInvestorsOnEconomicGrowth(418-427).com
3. https://www.marketbhai.com/post.aspx?artid=5
4. https://www.investopedia.com/terms/f/foreign-portfolio-investment-fpi.asp
5.http://www.mondaq.com/india/x/828478/Inward+Foreign+Investment/Foreign+Portfolio+Investors+Regulat
ions+Proposed+Changes

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