A PROJECT REPORT ON “Foreign direct investment (FDI) and foreign institutional investors (FII) in India A critical analysis”

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RASHMI SOMANI (READER)

PROJECT GUIDE :

SUBMITTED BY :

NIKHIL KABRA MBA-IV SEM 2008-10 BATCH FINANCE+ MARKETING

using official government data from Indian official government internet site like that of RBI. This study examines FDI in India. To illustrate the driving forces behind these trends. and foreign exchange markets. Hence.“Foreign direct investment (FDI) and foreign institutional investors (FII) in India A critical analysis” INTRODUCTION The FDI and FII is the process by which the resident of one country (the source Country) acquire the ownership of assets for the purpose of controlling the production. mostly in the financial markets. SEBI. According to the international monetary fund (IMF). being a capital scarce country. India. given its short-term nature. understanding the determinants of FII is very important for any emerging economy as FII exerts a larger impact on the domestic financial markets in the short run and a real impact in the long run. however. and bilateral trade agreements on investment from top 10 FDI investing countries. the Indian regulatory environment as it affects investment. varies from country to country. distribution and other productive activities of a firm in another country (the host country). It can affect the factor productivity of the recipient country and can also affect the balance of payments. such as factories. The effect of foreign investment. . means increase of 433% of the 24613 crore recorded during 2005–06 but decrease of 06% from 139747 crore recorded in 2008-09.to long-term nature. Finally. Foreign direct investment involves in direct production activities and is also of a medium. by country and by sectors during the post liberalization period that is 1991 to 2009 year. It can come in two forms: FDI and foreign institutional investment (FII). the study examines global FDI in India’s in top 10 sectors of industry. can have bidirectional causation with the returns of other domestic financial markets such as money markets. in the context of the Indian economic and regulatory environment. the study also discusses the investment climate in India. FDI and FII is defined as “an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of investor”. regional. Net foreign direct investment (FDI) flows into India reached 131237 crore (27098mn in US$ ) in India’s 2009–10 fiscal year. stock markets. FOREIGN DIRECT INVESTMENT (FDI): Foreign direct investment (FDI) is a measure of foreign ownership of productive assets. This study present FDI trends in India. and the effect of India’s global. United States of Ameica 8% and the United Kingdom 5%. Foreign investment provides a channel through which countries can gain access to foreign capital. has taken many measures to attract foreign investment since the beginning of reforms in 1991. FII. Indian government incentives to foreign investors. Increasing foreign investment can be used as one measure of growing economic globalization. But foreign institutional investment is a short-term investment. mines and land. followed by the Singapore 9%. with the largest share of FDI flows from Mauritius 44%.

2 billion.05 billion in debt instruments during the said period. Foreign institutional investors (FIIs) were gross buyers of shares worth US$ 3.46 billion in domestic equities during the calendar year 2009. FIIs infused a net US$ 1. Securities and Exchange Board of India (SEBI). This FII investment in 2009 proved to be the highest ever inflow in the country in rupee terms in a single year. . which invests money in the financial markets of a country different from the one where in the institution or entity was originally incorporated. and sold equities valued worth US$ 2. resulting in a net investment of US$ 823. reflecting a positive start for the year after record inflows in the last year. according to data released by SEBI.mostly of the form of an institution or entity. statutory agencies like SEBI have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs.96 billion parked by foreign fund houses in domestic equities in 2007. FIIs transferred a record US$ 17. FIIs were net investors of US$ 973. According to SEBI.FOREIGN INSTITUTIONAL INVESTORS (FII’S): Foreign Institutional Investor (FII) is used to denote an investor . according to the capital market regulator.74 million. Overseas investors have infused US$ 816.69 million into the stock market in the first trading week of 2010.22 million in debt instruments in the first trading week of the year. breaking the previous high of US$ 14.In countries like India. FII investment is frequently referred to as hot money for the reason that it can leave the country at the same speed at which it comes in.03 billion.

scribd. and the United Kingdom.540 0.292 670.634 0. and more than tripled. .820 51 -0.159 0. thus reducing their tax obligations.658 which are high.431 1319. the largest investors in India are Mauritius. b) By country. For objective 2 Table no.583 94 1.com. 7: correlation and regression matrix S&P CNX NIFTY BANK NIFTY CNX 100 CNX IT CNX NIFTY JUNIOR S&P CNX 500 Correlation with FII Multiple R R2 Standard Error observation 0.656 0. Almost one-half of all FDI is invested in the Mumbai and New Delhi regions.191 0.651 0.191 0. services. Jyotirmayee Kar and posted it on www.423 575.651 0.656 0.159 0. Investors based in many countries have taken advantage of the India-Mauritius bilateral tax treaty to set up holding companies in Mauritius which subsequently invest in India.402 1229. the largest destinations for FDI are electrical equipment (including computer software and electronics). and transportation.540 0. This does not mean the relation is false but we can say that the error in linear relation is high.025 898. telecommunications.658 180 0.644 87 -0.036 12896.7 billion in the 2005–06 Indian fiscal year.7 billion. in the 2006–07 fiscal year. Impact of FII on S&P CNX Nifty: The effect of FII on Nifty is positive and the coefficient of correlation is high so the effect is also high.REVIEW OF RELATED LITERATURE : A project on FDI and FII in India has been already done by Nitin Kansal in the year 0708 and submitted to Dr. c) By industry.629 138 0. The key findings of that project were- For objective 1 a) Net FDI in India was valued at $4.634 0. to $15.703 135 0. The standard error comes out to be 575. the United States.

5.2. This means that the deviation from the mean value is high. It shows the absence of linear relation between the two variables but not a lack of relationship altogether. 3.6 which is high compared to other standard errors between FII and other stock indices.30-March-07. We can say that FII have significant impact on Bank Nifty during the period of 31January-2000. Impact of FII on CNX IT: FII has inversely little significant relation with CNX IT. But the extent of impact is low as co-efficient of correlation is -0. Impact of FII on CNX 100: CNX 100 is inversely related to FII for the period of 31January-03. as the value of correlation is -0. The standard error comes out to be 1229. But the co-efficient of correlation is high so the effect is also high. In this case again the degree of relation is high. This does not mean that there is no relation at all between them. The value of multiple-R is also high.30-March-2007. FII is directly related to Bank Nifty. This does not mean the relation is false but we can say that the error in linear relation is high.159. Standard error in this case is 1319. Impact of FII on Bank Nifty: The effect of FII on Bank Nifty is positive. Impact of FII on CNX NIFTY JUNIOR: CNX NIFTY JUNIOR directly related to FII for the period of 31-Oct-1995.30-March-2007. So.644 which are very high.191. Impact of FII on S&P CNX 500: S&P CNX 500 is also highly correlated with FII. It also help Government of India to force foreign investor to invest their money in the sector which government want to raise and also help to check which sector help us in economic growth and which one not. 6. . But the value of R is high so the degree of relation is also high low. 4. RATIONALE To find out the area where more FDI is needed to build our infrastructure and to check control over FII through various regulatory agencies.

HYPOTHESIS Null Hypothesis (Ho): The various NSE indices do not rise with the increase in FIIs investment means FIIs have no influence on Indian stock exchange. Objective 2: pertaining to FII: influence of FII on movement of Indian stock exchange during the post liberalization period that is 1991 to 2009. Alternate Hypothesis (H1): The various NSE indices rise with the increase in FIIs investment means FIIs have influence on Indian stock exchange. The data regarding indices of NSE was taken from the site of NSE (the data for monthly closing value is given in appendice 1). . Objective 3: To understand the FII & FDI policy in India.OBJECTIVE Objective 1: pertaining to FDI: examines the trends and patterns in the foreign direct investment (FDI) across different sectors and from different countries in India during 1991-2009 period means during post liberalization period. I got the data on FIIs investment from “HANDBOOK OF STATISTICS ON THE INDIAN SECURITIES MARKET 2009”.

In order to accomplish this project successfully I will take following steps. electrical instruments. . Mauritius. the liner trend model will be used. evaluate. Further the percentage analysis will be used to measure the share of each investing countries and the share of each sectors in the overall flow of FDI and FII into India. analyze.The study is limited to a sample of top 10 investing countries e. research reports. database available etc. World Bank reports. which had attracted larger inflow of FDI and data of NSE stock exchange will be taken to know the impact of FII.g. USA etc. and top 10 sectors e.  The data is collected mainly from websites.g.METHODOLGY The lifeblood of business and commerce in the modern world is information. 1) Sampling. present and utilize information is therefore is a vital skill for the manager of today. 2) Data Collection:  The research will be done with the help Secondary data (from internet site and journals). already conducted survey analysis. telecommunications etc. The ability to gather. annual reports. 3) Analysis: Appropriate Statistical tools like correlation and regression will be used to analyze the data like to analyze the growth and patterns of the FDI and FII flows in India during the post liberalization period.

1 Internet sites: a) www. newspaper article annual reports of RBI.scribd.g. vol. b) Handbook of statistics on the Indian securities market 2009. 7.rbi. Seethe Pathi. b) FDI (issues in emerging economies) by K.in g) www. VI.in/fdi_statistics/india_fdi_index.google. issue.com 7.htm e) www. 7.nseindia.org. c) Foreign institutional investors by G Gopal Krishna Murthy.2 Journals: a) ICFAI Journal: E.gov.com f) www. . the ICFAI journal of public finance.sebi.nic.February.fdimagazine. magazines etc.aspx b) www.BIBLIOGRAPHY A number of websites.com c) www.3 Books: a) Foreign direct investment in India by Lata Chakravarthy.com d) http://dipp.in/home.