A PROJECT REPORT ON

“FOREIGN DIRECT INVESTMENT”

A Project submitted to

University of Mumbai for partial completion of the degree of

Master in Commerce

Under the faculty of commerce

By

Mr. Saurabh Santosh Yadav

3240

Under the guidance of

Mr. M.S.Liman

Sheth J. N. Paliwala College, Pali, Tehsil- Sudhagad,

District – Raigad

Dec- 2021
 CERTIFICATE

This is to certify the Mr. Saurabh Santosh Yadav worked and duly complete his project work for the
degree of Master in Commerce under the faculty of Commerce in the subject of " " and his project is
entitled.
"A Project Report On FOREIGN DIRECT INVESTMENT " under my supervision. I further certify
that the entire work has been doneby the learner under my guidance and that no art of it has been
submitted previously for anyDegree of Diploma of any University.
It is his own work and facts reported by this personal findings and investigations.

Signature of External Examiner Mr. Mansing S. Liman

Signature of Guiding Teacher

Signature of Internal Examiner

Date of Submission :
 DECLARATION BY LEARNER

I the undersigned Mr. Saurabh Santosh Yadav here by, declare that the work in this project work
entitled " FOREIGN DIRECT INVESTMENT " forms my own contribution to the research work
carried out under the guidance of Mr. Mansing S. Liman is a result of my own research work and has
not been previously submitted to any other University for any other Degree/Diploma to this or any other
University.
Wherever reference has been made to previous works of others, it has been clearly indicated as such and
included in the by biography.
I, here by further declare that all information of this document has been obtained and presented in
accordance with academic rules and ethical conduct.

Name and Signature of the learner

Certified by

Name and signature of the Guiding Teacher

 ACKNOWLEDGMENT

To list who all have helped me is difficult because they are so numerous and the depth
is so enormous.
I would like to acknowledge the following as being idealistic channels and fresh dimensions in the
completion of this project.
I take this opportunity to thank the University of Mumbai for giving me chance to do
this project.
I would like to thank my Principal Mrs. Anjali S. Puranik for providing the necessary
facilities required for completion of this project.
I take this opportunity to thanks our Coordinator Mr. Mansing S. Liman for his support
and guidance.
I would also like to express my sincere gratitude toward my project guide Mr. Mansing S. Liman
whose guidance and care made the project successful.
I would like to thank my College Library, for having provided various reference books
and magazines related to my project.
Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of this project especially My Parents who supported me throughout my project.
 INDEX

SR NO TITLE PAGE NO
1 Introduction

1.2 Definition

1.3 History

1.4 Main Theories of FDI

2 Statements of Problem

2.1 Scope the Study

2.3 Objective of The Study

2.4 Hypotheses

2.5 Reasearch of Methodology

2.6 Limitation Of Study

2.7 Types Of FDI

3.0 Methods of Foreign Investment

4.0 Government Approval For Foreign Companies Doing

Business India
4.1 Procedure under automatic rules

4.2 Product Under Government approval

5 Conclusion

6 Bibliography
1.1 Introduction and overview

What is
Foreign
Direct
Investmen
t?

Meaning:
These three letters stand for foreign direct investment. The simplest explanation

of FDI would be a direct investment by a corporation in a commercial venture in

another country. A key to separating this action from involvement in other ventures in a

foreign country is that the business enterprise operates completely outside the economy

of the corporation’s home country. The investing corporation must control 10 percent or

more of the voting power of the new venture.

According to history the United States was the leader in the FDI activity dating back

as far as the end of World War II. Businesses from other nations have taken up the flag

of FDI, including many who were not in a financial position to do so just a few years

ago.

The practice has grown significantly in the last couple of decades, to the point that

FDI has generated quite a bit of opposition from groups such as labor unions. These

organizations have expressed concern that investing at such a level in another country

eliminates jobs. Legislation was introduced in the early 1970s that would have put an

end to the tax incentives of FDI. But members of the Nixon administration, Congress

and business interests rallied to make sure that this attack on their expansion plans was

not successful. One key to understanding FDI is to get a mental picture of the global

scale of corporations able to make such investment. A carefully planned FDI can

provide a huge new market for the company, perhaps introducing products and

services to an area
 where they have never been available

Not only that, but such an investment may also be more profitable if construction

costs and labor costs are less in the host country.

The definition of FDI originally meant that the investing corporation gained a

significant number of shares (10 percent or more) of the new venture. In recent

years, however, companies have been able to make a foreign direct investment that

is actually long-term management control as opposed to direct investment in

buildings and equipment.

FDI growth has been a key factor in the “international” nature of business

that many are familiar with in the 21st century. This growth has been facilitated by

changes in regulations both in the originating country and in the country where the

new installation is to be built. Corporations from some of the countries that lead the

world’s economy have found fertile soil for FDI in nations where commercial

development was limited, if it existed at all. The dollars invested in such developing-

country projects increased 40 times over in less than 30 years. The financial strength

of the investing corporations has sometimes meant failure for smaller competitors in

the target country. One of the reasons is that foreign direct investment in buildings

and equipment still accounts for a vast majority of FDI activity. Corporations from

the originating country gain a significant financial foothold in the host country.

Even with this factor, host countries may welcome FDI because of the positive

impact it has on thesmaller economy.

Foreign direct investment (FDI) is a measure of foreign ownership of

productive assets, such as factories, mines and land. Increasing foreign investment

can be used as one measure of growing economic globalization. Figure below

shows net inflows of foreign direct investment as a percentage of gross domestic

product (GDP). The largest flows of foreign investment occur between the

industrialized countries (North America, Western Europe and Japan).But flows to

non-industrialized countries are increasing sharply. Foreign direct investment (FDI)

refers to long term participation by country A into country B.

It usually involves participation in management, joint-venture, transfer of technology
and expertise. There are two types of FDI: inward foreign direct investment and outward
foreign direct investment, resulting in a net FDI inflow (positive or negative)
.Foreign direct investment reflects the objective of obtaining a lasting interest by a resident
entity in one economy (‘‘direct investor’’) in an entity resident in an economy other than that of
the investor (‘‘direct investment enterprise’’).The lasting interest implies the existence of a
long-term relationship between the direct investor and the enterprise and a significant degree
of influence on the management of the enterprise. Direct investment involves both the initial
transaction between the two entities and all subsequent capital transactions between them and
among affiliated enterprises, both incorporated and unincorporated.

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

or other facilities, over which it has effective control, in a foreign country.

• Manufacturing FDI requires the establishment of production facilities.

• Service FDI requires building service facilities or an investment foothold via

capital contributions or building office facilities.

• Foreign subsidiaries – overseas units or entities.

• Host country – the country in which a foreign subsidiary operates.

• Flow of FDI – the amount of FDI undertaken over a given time.

• Stock of FDI – total accumulated value of foreign-owned assets.

• Outflows/Inflows of FDI – the flow of FDI out of or into a country.

• Foreign Portfolio Investment – the investment by individuals, firms, or

public bodies in foreign financial instruments.

• Stocks, bonds, other forms of debt.

• Differs from FDI, which is the investment in physical assets.

 1.2 Definition

Foreign direct investment is that investment, which is made to serve the

business interests of the investor in a company, which is in a different nation
distinct from the investor's country of origin. A parent business enterprise and its
foreign affiliate are the two sides of the FDI relationship. Together they comprise an
MNC.
The parent enterprise through its foreign direct investment effort seeks to exercise
substantial control over the foreign affiliate company. 'Control' as defined by the
UN, is ownership of greater than or equal to 10% of ordinary shares or access to
voting rights in an incorporated firm. For an unincorporated firm one needs to
consider an equivalent criterion. Ownership share amounting to less than that stated
above is termed as portfolio investment and is not categorized as FDI.
FDI stands for Foreign Direct Investment, a component of a country's national
financial accounts. Foreign direct investment is investment of foreign assets into
domestic structures, equipment, and organizations. It does not include foreign
investment into the stock markets. Foreign direct investment is thought to be more
useful to a country than investments in the equity of its companies because equity
investments are potentially "hot money" which can leave at the first sign of trouble,
whereas FDI is durable and generally useful whether things go well or badly.
FDI or Foreign Direct Investment is any form of investment that earns interest in
enterprises which function outside of the domestic territory of the investor. FDIs
require a business relationship between a parent company and its foreign subsidiary.
Foreign direct business relationships give rise to multinational corporations. For an
investment to be regarded as an FDI, the parent firm needs to have at least 10% of the
ordinary shares of its foreign affiliates.
 1.3 History

In the years after the Second World War global FDI was dominated by the

United States, as much of the world recovered from the destruction brought by the

conflict. The US accounted for around three-quarters of new FDI (including

reinvested profits) between 1945 and 1960. Since that time FDI has spread to

become a truly global phenomenon, no longer the exclusive preserve countries.

FDI has grown in importance in the global economy with FDI stocks now

constituting over 20 percent of global GDP. Foreign direct investment (FDI) is a

measure of foreign ownership of productive assets, such as factories, mines and

land. Increasing foreign investment can be used as one measure of growing

economic globalization. Figure below shows net inflows of foreign direct

investment as a percentage of gross domestic product (GDP). The largest flows of

foreign investment occur between the industrialized countries (North America,

Western Europe and Japan). But flows to non-industrialized countries are

increasing sharply.

Foreign Direct investor

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

There have been a prolific number of empirical studies on the determinants and
motives of FDI. Some studies have concentrated upon the ownership specific
advantages of the foreign Firms which are necessary to out weigh the disadvantage
of being foreign. These studies have tried to find out the significance of various
ownership advantages arising due to propriety knowledge, financial assets, product
differentiation, plant economic of scale, size of the firm and multi-plant operations
etc. We hereby categorizes such theories as external (supply-side) approaches.
Other studies have focused on the location specific advantages as low cost of labor,
reduced tariffs, fiscal incentives, market size and characteristics of the host economy,
favorable FDI policies of the host government, political stability and other
locational. Here this study categorizes such theories as internal (demand-side)
approaches. In sum, the external factors include economic conditions outside the host
country, while internal factors include the economic conditions of the host country.
Traditionally, most empirical papers have focused on the role of the external
factors in determining FDI flows into developing countries. These theories so far
mainly stress on the ownership specific advantages of the firms and three of them
are examined as follows.

1.4.1 Industrial Organization Theory

Hymer and Kindleberger argue that the ‘ownership advantages’ (including

inventory, cost, financial or marketing advantages) motivate them to establish
subsidiaries in the host countries. These advantages which they assume to be
exclusive to the firm owing them explain why American-type FDI is predominant
in a particular sector of industry but it may be unable to portray a general pattern
of FDI. Another industrial organization approach,

developed by Caves, is based on models of ‘oligopolistic competition’. He treats a

MNC as a creature of market imperfections that lead a firm to possess specific
advantages over local firms in the host country (Caves 1982).
 1.4.2 Internalization Theory

The internationalization theory, created by Buckley and Casson, and developed by

Rugman and Hennart, is primarily concerned with the transactions cost approach.

 The basic hypothesis of this theory is that MNEs emerge when it is more

beneficial to internalize the use of such intermediate goods as technology than

externalize them through the market.

 The core prediction of the theory is that, given a particular distribution of

factor endowments, MNE activity will be positively related to the costs of

organizing cross- border markets in intermediate products.

1.4.3 Product Life-cycle Theory

In a classic article published in 1966, Vernon was the first to

investigate the relationship between FDI and technology. He uses a microeconomic

concept, ‘the product cycle’, to explain a macroeconomic phenomenon, which is the

foreign activity of US MNCs in the postwar period (Vernon1966). He argues that the

product life-cycle can be divided into three stages as new product stage, matured

product stage and standardized product stage. In the early new product stage, firms

place factories in the home country since the demand for a

new product is too small elsewhere. Therefore it develops into the second stage of

matured product.
 As the product turns into increasingly standardized and its

competition is based on price, the product is manufactured in less developed

countries (LDCs) for export. Although this theory considers changes in technology

and implicitly assumes that the MNCs would acquire the manufacturing plants in the

countries with abundant low-cost workers, it is not a dynamic theory for the rate of

change and the time-lag between product stages are not considered. Chen rebuts that

it is also unable to explain FDI in non-standardized products and special products for

overseas markets. The theories explained above mention only the home country

macro-economic, industry specific and firm specific external (supply-side) factors.

But it is necessary to bear in mind that the host country must possess certain

locational advantages to attract FDI. The O-L-I paradigm developed by Dunning

seeks to offer a comprehensive framework by combining the company comparative

advantages and host country location endowments.

1.4.4 Eclectic Theory of International Production

The eclectic paradigm of international production, which postulates that

FDI is determined by three sets of factors, namely ownership (firm-specific)

advantage, internalization advantage and location (country-specific) advantage, is

developed by Dunning and modified by associate Narula.

According to Dunning, the rationales of FDI can be well-defined by O-L-I paradigm:

  Ownership (O) advantages: economies of scale, exclusive production and

technical expertise, managerial and marketing skills. These are the

prerequisite to ensure or enable the MNCs to recover the costs of investing

abroad. Itaki further argues that these O advantages largely take the form of

privileged possession of intangible assets and the use made of them are

assumed to increase the wealth-creating capacity of a MNC hence the value

of its assets.

 Location (L) factors: low labor costs, potential foreign market, favorable

investment incentives. These pull factors of host country contribute to the

MNCs’ decision to employ ownership advantages to produce aboard.

 Internalization (I) factors: Comparing with licensing and exporting, by using

greater organizational efficiency or ability to exercise monopoly power over

the assets under the governance, an internal market is created between parent-

company and affiliates to control key resources of competitiveness or to

reduce the risk of selling them as well as the right of use of them, to foreign

firms. Compared with the above theories, which were founded on ownership

in the form of technology and finance, transaction costs and differential factor

endowments, the unique feature of Dunning’s O-L-I paradigm is to unify and

summarize the various theories, although it is still a frame which synthesizes

most FDI theories rather than a new theory per se.

It signified the ownership, locational and internalization advantages

of the firm and, by extension, the ownership and internalization advantages of the

home country, and locational advantages of the host country of FDI, which Dunning
stipulates that O-L-I is applicable to ‘home country’ and ‘host country FDI’

(Dunning 1981). According to this theory, FDI is chosen as a market entry

strategy so that a firm can exploit its ownership

advantages through internalizing transaction costs in a specific location, which

possess locational advantages.

 1.4.5 The Dynamic Capability Perspective

• A firm’s ability to diffuse, deploy, utilize and rebuild firm-specific

resources for a competitive advantage.

• Ownership specific resources or knowledge are necessary but not

sufficient for international investment or production success.

• It is necessary to effectively use and build dynamic capabilities for quantity

and/or quality based deployment that is transferable to the multinational

environment.

• Firms develop centers of excellence to concentrate core competencies to

the host environment.

1.4.6 Monopolistic Advantage Theory

• An MNE has and/or creates monopolistic advantages that enable it to

operate subsidiaries abroad more profitably than local competitors.

• Monopolistic Advantage comes from:

– Superior knowledge – production technologies, managerial skills,

industrial organization, knowledge of product.

– Economies of scale – through horizontal or vertical

FDI Internationalization Theory

• When external markets for supplies, production, or distribution fails to

provide efficiency, companies can invest FDI to create their own supply,

production, or distribution streams.

• Advantages
 – Avoid search and negotiating costs

– Avoid costs of moral hazard (hidden detrimental action by external partners)

– Avoid cost of violated contracts and litigation

– Capture economies of interdependent activities

– Avoid government intervention

– Control supplies

– Control market outlets

– Better apply cross-subsidization, predatory pricing and transfer pricing

Summary

To conclude, the relative significance of the motives and determinants as contained

in the above theories differs not only between firms and regions but also from time

to time for a particular firm or region. It is very difficult to generalize about the

determinants of FDI and it is true that most firms are influenced in their behavior by

more than one objective and sometimes different values are placed on the same

objective.

The difference in the strength of the determinants is most marked in India which

differ radically with regard to economic structure, development characteristics and

socio-economic profiles
 2.1 Introduction

“An analytical study of Foreign Direct Investment in India”

This study aims to provide a perspective on to know in which sector we can get more
foreign currency in terms of investment in India. It Examine the trends and patterns in
the FDI across different sectors and from different countries in India.

2.2 Review of Literature:

The comprehensive literature centered on economies pertaining to

empirical findings and theoretical rationale tends to demonstrate that FDI is

necessary for sustained economic growth and development of any economy in this era

of globalization. The reviewed Literature is divided under the following heads:

• Temporal studies

• Inter – Country studies

• Inter – Industry studies

• Studies in Indian Context

Temporal Studies

Study of “Institutional Reform, FDI and European Transition Economics” studied

the significance of institutional infrastructure and development as a determinant of

FDI inflows into the European Transition Economies. The study examines the

critical role of the institutional environment (comprising both institutions and the

strategies and policies of

organizations relating to these institutions) in reducing the transaction costs of both

domestic and cross border business activity. By setting up an analytical framework

the study identifies the determinants of FDI, and how these had changed over recent

years.

“The Value of Diversity: Foreign Direct Investment and Employment in Central

Europe during Economic Recovery”, examine the role of FDI in job creation and

job preservation as well as their role in changing the structure of employment. Their

analysis refers to Czech Republic, Hungary, Slovakia and Estonia. They present

descriptive stage model of FDI progression into Transition economy. They

analyzed the employment aspects of the model. The study concluded that the role of

FDI in employment creation/preservation has been most successful in Hungary than

in Estonia. The paper also find out that the increasing differences in sectoral

distribution of FDI employment across countries are closely relates to FDI inflows per

capita. The bigger diversity of types of FDI is more favorable for the host economy.

There is higher likelihood that it will lead to more diverse types of spillovers and

skill transfers. If policy is unable to maximize the scale of FDI inflows then policy

makers should focus much more on attracting diverse types of FDI Iyare Sunday O,

Bhaumik Pradip K, Banik Arindam, in their work “Explaining FDI Inflows to India,

China and the Caribbean: An Extended Neighborhood Approach” find out that FDI

flows are generally believed to be influenced by economic indicators like market

size, export intensity, institutions, etc, irrespective of the source and destination

countries. This paper looks at FDI inflows in an alternative approach based on the
 concepts of neighborhood and extended neighborhood. The study shows that the

neighborhood concepts are widely applicable in different contexts particularly for

China and India, and partly in the case of the Caribbean. There are significant

common factors in explaining FDI inflows in select regions. While a substantial

fraction of FDI inflows may be explained by select economic variables, country

specific factors and the idiosyncratic component account for more of the investment inflows in

Europe, China and India.

“Foreign Direct Investment and Employment in the Industrial Countries” point

out that while looking for evidence regarding a possible relationship between

foreign direct investment and employment, in particular between outflows and

employment in the source countries in response to outflows. They also find that

high labor costs encourage outflows and discourage inflows and that such effect can

be reinforced by exchange rate movements. The distribution of FDI towards services

also suggests that a large proportion of foreign investment is undertaken with the

purpose of expanding sales and improving the distribution of exports produced in the

source countries. According to this study the principle determinants of FDI flows

are prior trade patterns, IT related investments and the scopes for cross – border

mergers and acquisitions. Finally, the authors find clear evidence that outflows

complement rather than substitute for exports and thus help to protect rather than

destroy jobs.
 “The Effects of FDI Inflows on Host Country Economic Growth” discusses the potential

of FDI inflows to affect host country economic growth. The paper argues that FDI should

have a positive effect on economic growth as a result of technology spillovers and physical

capital inflows. Performing both cross – section and panel data analysis on a dataset

covering 90 countries during the period 1980 to 2002, the empirical part of the paper finds

indications that FDI inflows enhance economic Growth in developing economies but

not in developed economies. This paper has assumed that the direction of causality goes

from inflow of FDI to host country economic growth. However, economic growth could

itself cause an increase in FDI in flows. Economic growth increases the size of the host

country market and strengthens the incentives for market seeking FDI. This could result

in a situation where FDI and

economic growth are mutually supporting. However, for the ease of most of the developing
Economies growth is unlikely to result in market – seeking FDI due to the

low income levels. Therefore, causality is primarily expected to run from

FDI inflows to economic growth for these economies.

“Foreign Direct investment in Emerging Economies” focuses on the impact of FDI on host
economies and on policy and managerial implications arising from this (potential) impact.
The study finds out that as emerging economies integrate into the global economies
international trade and investment will continue to accelerate. MNEs will continue to act as
pivotal interface between domestic and international markets and their relative importance
may even increase further. The extensive and variety interaction of MNEs with their host
societies may tempt policy makers to micro – manage inwards foreign investment and to
target their instruments at attracting very specific types of projects. Yet, the potential impact
is hard to evaluate ex ante (or even ex post) and it is not clear if policy instruments would be
effective in attracting specifically the investors that would generate the desired impact.
 The study concluded that the first priority should be on enhancing the general

institutional framework such as to enhance the efficiency of markets, the effectiveness

of the public sector administration and the availability of infrastructure. On that

basis, then, carefully designed but flexible schemes of promoting new industries

may further enhance the chances of developing internationally competitive business

clusters.

“Foreign Direct Investment in Emerging Markets: A Comparative Study in Egypt,

India, South Africa and Vietnam” show considerable variations of the characteristics

of FDI across the four countries, all have had restrictive policy regimes, and have

gone through liberalization in the early 1990. Yet the effects of this liberalization

policy on characteristics of inward investment vary across countries. Hence, the

causality between the institutional framework, including informal institutions, and

entry strategies merits further investigation.

This analysis has to find appropriate ways to control for the determinants of mode choice,
when analyzing its consequences. The study concludes that the policy makers need

to understand how institutional arrangements may generate favorable outcomes for

both the home company and the host economy. Hence, we need to better understand

how the mode choice and the subsequent dynamics affect corporate performance

and how it influences externalities generated in favor of the local economy.

It is concluded from the above studies that market size, fiscal incentives, lower

tariff rates, export intensity, availability of infrastructure, institutional environment,

IT related investments and cross – border mergers and acquisitions are the main

determinants of FDI flows at temporal level. FDI helps in creation/preservation of

employment. It also facilitates exports. Diverse types of FDI lead to diverse types of

spillovers, skill transfers and physical capital flows. It enhances the chances of

developing internationally competitive business clusters. The increasing numbers of

BITs (Bilateral Investment Treaties among nations, which emphasizes non –

discriminatory treatment of FDI) between nations are found to have a significant

impact on attracting aggregate FDI flow as the concepts of neighborhood and

extended neighborhood are widely applicable in different contexts for different

countries. It is concluded that FDI plays a positive role in enhancing the economic

growth of the host country.

 2.3 Statement of the Problem

To analyse FDI across different sectors from different countries in India and which

sector we can get more foreign currency in terms of investment in India.

2.4 Scope of the study:

 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.

 The study attempts to analyze the important dimensions of FDI in India. The
study works out the trends and patterns, investment flows to India.
 The study also examines the role of FDI on economic growth in India for the
period 1991-2012. The period under study is important for a variety of
reasons. First of all, it was during July 1991 India opened its doors to private
sector and liberalized its economy.
 India’s experience with its first generation economic reforms and the
country’s economic growth performance were considered safe havens for
FDI which led to second generation of economic reforms in India in first
decade of this century.
 There is a considerable change in the attitude of both the developing and
developed countries towards FDI. They both consider FDI as the most
suitable form of external finance.
 Increase in competition for FDI inflows particularly among the developing nations.
The shift of the power center from the western countries to the Asia sub –
continent is yet another reason to take up this study.
  The study is important from the view point of the macroeconomic variables

included in the study as no other study has included the explanatory variables

which are included in this study. The study is appropriate in understanding

inflows.

2.5 Objectives of the study:

Primary objective

 To know in which sector we can get more foreign currency in terms of

investment in India.
 To know the flow of investment in India

 To know how can India Grow by Investment.

 To Examine the trends and patterns in the FDI across different sectors and

from different countries in India

Secondary objectives

 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.

2.6 Hypotheses:

The study has been taken up for the period 1991-2012 with the following

hypotheses: 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.

 Flow of FDI shows a positive trend over the period 2004-2009, after this

speriod FDI shows a negative trend upto Dec 2011 .

 FDI has a positive impact on economic growth of the country.

2.7Research methodology

Data collection

This study is based on secondary data. The required data have been collected from

various sources i.e. World Investment Reports, Asian Development Bank’s Reports,

various Bulletins of Reserve Bank of India, publications from Ministry of

Commerce, Govt. of India, Economic and Social Survey of Asia and the Pacific,

United Nations, Asian Development Outlook, Country Reports on Economic Policy

and Trade Practice- Bureau of Economic and Business Affairs, U.S. Department of

State and from websites of World Bank, IMF, WTO, RBI, UNCTAD, EXIM Bank

etc.. It is a time series data and the relevant data have been collected for the period

1991 to 2012.

Data collection:

Secondary Data:

Internet, Books, newspapers, journals and books, other reports and projects, literatures

Tools and techniques of analyzing

data-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

2.8 Limitations of the study

All the economic / scientific studies are faced with various limitations and this

study is no exception to the phenomena. The various limitations of the study are:

 The analysis was purely based on the secondary data. So, any error in the

secondary data might also affect the study undertaken.

 Research is done during college hence no exclusive time dedicated for this research.

 At various stages, the basic objective of the study is suffered due to

inadequacy of time series data from related agencies. There has also been a

problem of sufficient homogenous data from different sources. For example,

the time series used for different variables, the averages are used at certain

occasions. Therefore, the trends, growth rates and estimated regression

coefficients may deviate from the true ones.

 The assumption that FDI was the only cause for development of Indian

economy in the post liberalized period is debatable. No proper methods were

available to segregate the effect of FDI to support the validity of this

assumption.
  Above all, since it is a MBA project and the research was faced with the

problem of various resources like time and money.

2.9 Chapter Scheme:

Chapter No. 1: Introduction
Chapter No. 2: Research Design
Chapter No. 3: Profiles.
Chapter No.4: Applicability of foreign rating models to Indian microfinance institutions
- An Analysis

Chapter No. 5: Summary of Findings, Conclusions, and Suggestions


 2.9 Chapter Scheme:

Chapter No. 1: Introduction

Chapter No. 2: Research Design
Chapter No. 3: Profiles.
Chapter No.4: Applicability of foreign rating models to Indian microfinance institutions
- An Analysis

Chapter No. 5: Summary of Findings, Conclusions, and Suggestions

3.1 Introduction

One of the most striking developments during the last two decades is the spectacular

growth of FDI in the global economic landscape. This unprecedented growth of

global FDI in 1990 around the world make FDI an important and vital component of

development strategy in both developed and developing nations and policies are

designed in order to stimulate inward flows. In fact, FDI provides a win – win

situation to the host and the home countries. Both countries are directly interested in

inviting FDI, because they benefit a lot from such type of investment. The ‘home’

countries want to take the advantage of the vast markets opened by industrial

growth. On the other hand the ‘host’ countries want to acquire technological and

managerial skills and supplement domestic savings and foreign exchange.

Moreover, the paucity of all types of resources viz. financial, capital,

entrepreneurship, technological know- how, skills and practices, access to markets-

abroad- in their economic development, developing nations accepted FDI as a sole

visible panacea for all their scarcities. Further, the integration of global financial

markets paves ways to this explosive growth of FDI around the globe.

The historical background of FDI in India can be traced back with the

establishment of East India Company of Britain. British capital came to India during

the colonial era of Britain in India. However, researchers could not portray the

complete history of FDI pouring in India due to lack of abundant and authentic data.

Before independence major amount of FDI came from the British companies.

British companies setup their units in mining sector and in those sectors that suits
their own economic and business interest. After Second World War, Japanese

companies entered Indian market and enhanced their trade with India, yet

U.K. remained the most dominant investor in India. Further, after Independence

issues relating to foreign capital, operations of MNCs, gained attention of the

policy makers.
Keeping in mind the national interests the policy makers designed the FDI policy

which aims FDI as a medium for acquiring advanced technology and to mobilize

foreign exchange resources. The first Prime Minister of India considered foreign

investment as “necessary” not only to supplement domestic capital but also to secure

scientific, technical, and industrial knowledge and capital equipments. With time

and as per economic and political regimes there have been changes in the FDI

policy too.

The industrial policy of 1965, allowed MNCs to venture through technical

collaboration in India. However, the country faced two severe crisis in the form of

foreign exchange and financial resource mobilization during the second five year

plan (1956 -61). Therefore, the government adopted a liberal attitude by allowing

more frequent equity participation to foreign enterprises, and to accept equity

capital in technical collaborations. The government also provides many incentives

such as tax concessions, simplification of licensing procedures and de- reserving some

industries such as drugs, aluminum, heavy electrical equipments, fertilizers, etc in

order to further boost the FDI inflows in the country. This liberal attitude of

government towards foreign capital lures investors from other advanced countries

like USA, Japan, and Germany, etc. But due to significant outflow of foreign

reserves in the form of remittances of dividends, profits, royalties etc, the

government has to adopt stringent foreign policy in 1970s. During this period the

government adopted a selective and highly restrictive foreign policy as far as foreign

capital, type of FDI and ownerships of foreign companies was concerned.

Government setup Foreign Investment Board and enacted Foreign Exchange

Regulation Act in order to regulate flow of foreign capital and FDI flow to India. The

soaring oil prices continued low exports and deterioration in Balance of Payment

position during 1980s forced the government to make necessary changes in the

foreign policy. It is during this period the government encourages FDI, allow MNCs

to operate in India.Thus resulting in

the partial liberalization of Indian Economy. The government introduces reforms in the
industrial sector, aimed at increasing competency, efficiency and growth in industry

through a stable, pragmatic and non-discriminatory policy for FDI flow.

3.2 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, this high powered body discusses and examines proposals for foreign

investment in the country for restricted sectors ( as laid out in the Press notes and

extant foreign investment policy) on a regular basis. Currently proposals for

investment beyond 600 crores require the concurrence of the CCEA (Cabinet

Committee on Economic Affairs). The threshold limit is likely to be raised to 1200

crore soon. The Board thus plays an important role in the administration and

implementation of the Government’s FDI policy. In circumstances where there is

ambiguity or a conflict of interpretation, the FIPB has stepped in to provide

solutions. Through its fast track working it has established its reputation as a body

that does not unreasonably delay and is objective in its decision making. It therefore

has a strong record of actively encouraging the flow of FDI into the country. The

FIPB is assisted in this task by a FIPB Secretariat. The launch of e- filing facility is

an important initiative of the Secretariat to further the cause of enhanced

accessibility and transparency.

3.3 Types of FDI:

Figure 3.3
Types of Foreign Direct Investment: An Overview
FDIs can be broadly classified into two types:

1 Outward FDIs

2 Inward FDIs

This classification is based on the types of restrictions imposed, and the various

prerequisites required for these investments.

Outward FDI: An outward-bound FDI is backed by the government against all

types of associated risks. This form of FDI is subject to tax incentives as well as

disincentives of various forms. Risk coverage provided to the domestic industries and

subsidies granted to the local firms stand in the way of outward FDIs, which are also

known as 'direct investments abroad.'

Inward FDIs: Different economic factors encourage inward FDIs. These include
interest loans, tax breaks, grants, subsidies, and the removal of restrictions and
limitations. Factors detrimental to the growth of FDIs include necessities of
differential performance and limitations related with ownership patterns.

Other categorizations of FDI

Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes
place when a multinational corporation owns some shares of a foreign enterprise, which
supplies input for it or uses the output produced by the MNC.
Horizontal foreign direct investments happen when a multinational company carries

out a similar business operation in different nations.

• Horizontal FDI – the MNE enters a foreign country to produce the same

products product at home.

• Conglomerate FDI – the MNE produces products not manufactured at home.

 • Vertical FDI – the MNE produces intermediate goods either forward or

backward in the supply stream.

• Liability of foreignness – the costs of doing business abroad resulting in a

competitive disadvantage.

3.4 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)
 3.5 Entry Mode

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

– International franchising

– Branches

– Contractual alliances

– Equity joint ventures

– Wholly foreign-owned subsidiaries

• Investment approaches:

– Greenfield investment (building a new facility)

– Cross-border mergers

– Cross-border acquisitions

– Sharing existing facilities.

3.6 Why is FDI important for any consideration of going Global?

The simple answer is that making a direct foreign investment allows

companies toaccomplish several tasks:

1 .Avoiding foreign government pressure for local production.

2. Circumventing trade barriers, hidden and otherwise.

3. Making the move from domestic export sales to a locally-based national sales office.
4. Capability to increase total production capacity.

5. Opportunities for co-production, joint ventures with local partners, joint

marketing arrangements, licensing, etc;

A more complete response might address the issue of global business

partnering in very general terms. While it is nice that many business writers like the

expression, “think globally, act locally”, this often used cliché does not really mean

very much to the average business executive in a small and medium sized company.

The phrase does have significant connotations for multinational corporations. But

for executives in SME’s, it is still just another buzzword. The simple explanation

for this is the difference in perspective between executives of multinational

corporations and small and medium sized companies. Multinational

corporations are almost always concerned with worldwide manufacturing capacity

and proximity to major markets. Small and medium sized companies tend to be more

concerned with selling their products in overseas markets. The advent of the Internet

has ushered in a new and very different mindset that tends to focus more on access

issues. SME’s in particular are now focusing on access to markets, access to

expertise and most of all access to technology.

3.6.1 The Strategic Logic behind FDI

• Resources seeking – looking for resources at a lower real cost.

• Market seeking – secure market share and sales growth in target foreign market.

• Efficiency seeking – seeks to establish efficient structure through useful

factors, cultures, policies, or markets.

• Strategic asset seeking – seeks to acquire assets in foreign firms that

• promote corporate long term objectives.

 3.6.2 Enhancing Efficiency from Location Advantages

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

comparative advantages.- Better access to resources

– Lower real cost from operating in a host country

– Labor cost differentials

– Transportation costs, tariff and non-tariff barriers

– Governmental policies

3.6.3 Improving Performance from Structural Discrepancies

• Structural discrepancies are the differences in industry structure attributes

between home and host countries. Examples include areas where:

– Competition is less intense

– Products are in different stages of their life cycle

– Market demand is unsaturated

– There are differences in market sophistication

3.6.4 Increasing Return from Ownership Advantages

• Ownership Advantages come from the application of proprietary

tangible and intangible assets in the host country.

– Reputation, brand image, distribution channels

– Technological expertise, organizational skills, experience
• Core competence – skills within the firm that competitors cannot easily

imitate or match.

3.6.5 Ensuring Growth from Organizational Learning

• MNEs exposed to multiple stimuli, developing:

– Diversity capabilities

– Broader learning opportunities

• Exposed to:

– New markets

– New practices

– New ideas

– New cultures

– New competition

3.7 The Impact of FDI on the Host Country

3.7.1 Employment

– Firms attempt to capitalize on abundant and inexpensive labor.

– Host countries seek to have firms develop labor skills and sophistication.

– Host countries often feel like “least desirable” jobs are

transplanted from home countries.

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

 3.7.2 FDI Impact on Domestic Enterprises

– Foreign invested companies are likely more productive than local competitors.

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

building efforts in the longer term.

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

supporting industries, supplier relationships in the host country.

3.8 Foreign Direct Investment in India

The economy of India is the third largest in the world as measured by purchasing

power parity (PPP), with a gross domestic product (GDP) of US $3.611 trillion.

When measured in USD exchange-rate terms, it is the tenth largest in the world,

with a GDP of US $800.8 billion (2006). is the second fastest growing major

economy in the world, with a GDP growth rate of 8.9% at the end of the first quarter

of 2006-2007. However, India's huge population results in a per capita income of

$3,300 at PPP and $714 at nominal.

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

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

workforces still earn their livelihood directly or indirectly through agriculture,

services are a growing sector and are playing an increasingly important role of

India's economy. The advent of the digital age, and the large number of young and

educated populace fluent in English, is gradually transforming India as an important

'back office' destination for global companies for the outsourcing of their customer
services and technical support.

India is a major exporter of highly-skilled workers in software and financial

services, and software engineering. India followed a socialist-inspired approach for

most of its independent

history, with strict government control over private sector participation, foreign

trade, and foreign direct investment. However, since the early 1990s, India has

gradually opened up its markets through economic reforms by reducing government

controls on foreign trade and investment. The privatization of publicly owned

industries and the opening up of certain sectors to private and foreign interests has

proceeded slowly amid political debate. India faces a burgeoning population and the

challenge of reducing economic and social inequality. Poverty remains a serious

problem, although it has declined significantly since independence, mainly due to the

green revolution and economic reforms. FDI up to 100% is allowed under the

automatic route in all activities/sectors except the following which will require

approval of the Government: Activities/items that require an Industrial License;

Proposals in which the foreign collaborator has a previous/existing venture/tie up in

India
 FDI in India includes FDI inflows as well as FDI outflow from India. Also FDI

foreign direct investment and FII foreign institutional investors are a separate case

study while preparing a report on FDI and economic growth in India. FDI and FII in

India have registered growth in terms of both FDI flows in India and outflow from

India. The FDI statistics and data are evident of the emergence of India as both a

potential investment market and investing country. FDI has helped the Indian

economy grow, and the government continues to encourage more investments of this

sort - but with $5.3 billion in FDI . India gets less than 10% of the FDI of China.

Foreign direct investment (FDI) in India has played an important role in the

development of the Indian economy. FDI in India has - in a lot of ways - enabled

India to achieve a certain degree of financial stability, growth and development.

This money has allowed India to focus on the areas that may have needed economic

attention, and address the various problems that continue to challenge the country.

India has continually sought to attract FDI from the world’s major investors.
 In 1998 and 1999, the Indian national government announced a number of

reforms designed to encourage FDI and present a favorable scenario for investors.

FDI investments are permitted through financial collaborations, through private

equity or preferential allotments, by way of capital markets through Euro issues,

and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal &

lignite or mining industries. A number of projects have been announced in areas

such as electricity generation, distribution and transmission, as well as the

development of roads and highways, with opportunities for foreign investors. The

Indian national government also provided permission to FDIs to provide up to

100% of the financing required for the construction of bridges and tunnels, but with a

limit on foreign equity of INR 1,500 crores, approximately $352.5m. Currently, FDI

is allowed in financial services, including the growing credit card business.

These services include the non-banking financial services sector. Foreign

investors can buy up to 40% of the equity in private banks, although there is

condition that stipulates that these banks must be multilateral financial

organizations. Up to 45% of the shares of companies in the global mobile personal

communication by satellite services (GMPCSS) sector can also be purchased. By

2004, India received $5.3 billion in FDI, big growth compared to previous years,

but less than 10% of the $60.6 billion that flowed into China. Why does India, with

a stable democracy and a smoother approval process, lag so far behind China in FDI

amounts? Although the Chinese approval process is complex, it includes both

national and regional approval in the same process.

 3.9 Investment Risks in India

3.9.1 Sovereign Risk

India is an effervescent parliamentary democracy since its political freedom

from British rule more than 50 years ago. The country does not face any real threat

of a serious revolutionary movement which might lead to a collapse of state

machinery. Sovereign risk in India is hence nil for both "foreign direct investment"

and "foreign portfolio investment." Many Industrial and Business houses have

restrained themselves from investing in the North- Eastern part of the country due to

unstable conditions. Nonetheless investing in these parts is lucrative due to the rich

mineral reserves here and high level of literacy. Kashmir on the northern tip is a

militancy affected area and hence investment in the state of Kashmir are restricted

by law.

3.9.2 Political Risk

India has enjoyed successive years of elected representative government at

the Union as well as federal level. India suffered political instability for a few years

in the sense there was no single party which won clear majority and hence it led to

the formation of coalition governments. However, political stability has firmly

returned since the general elections in 1999, with strong and healthy coalition

governments emerging. Nonetheless, political instability did not change India's

bright economic course though it delayed certain decisions relating to the economy.

Economic liberalization which mostly interested foreign investors has been

accepted as essential by all political parties including the Communist Party of India

Though there are bleak chances of political instability in the future, even if such a

situation arises the economic policy of India would hardly be affected.. Being a

strong democratic

nation the chances of an army coup or foreign dictatorship are minimal. Hence,

political risk in India is practically absent.

 3.9.3 Commercial Risk

Commercial risk exists in any business ventures of a country. Not each and

every product or service is profitably accepted in the market. Hence it is advisable

to study the demand / supply condition for a particular product or service before

making any major investment. In India one can avail the facilities of a large number

of market research firms in exchange for a professional fee to study the state of

demand / supply for any product. As it is, entering the consumer market involves

some kind of gamble and hence involves commercial risk

3.9.4 Risk Due To Terrorism

In the recent past, India has witnessed several terrorist attacks on its soil

which could have a negative impact on investor confidence. Not only business

environment and return on investment, but also the overall security conditions in a

nation have an effect on FDI's. Though some of the financial experts think

otherwise. They believe the negative impact of terrorist attacks would be a short

term phenomenon. In the long run, it is the micro and macro economic conditions of

the Indian economy that would decide the flow of Foreign investment and in this

regard India would continue to be a favorable investment destination.

 3.10 Foreign direct investments in India are approved through two routes –

3.10.1 Automatic approval by RBI –

The Reserve Bank of India accords automatic approval within a period of two weeks

(subject to compliance of norms) to all proposals and permits foreign equity up to

24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries

and the sectoral caps applicable. The lists are comprehensive and cover most

industries of interest to foreign companies. Investments in high priority industries

or for trading companies primarily engaged in exporting are given almost automatic

approval by the RBI.

3.10.2 The FIPB Route – Processing of non-automatic approval cases –

FIPB stands for Foreign Investment Promotion Board which approves all other

cases where the parameters of automatic approval are not met. Normal processing

time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals,

and rejections are few. It is not necessary for foreign investors to have a local

partner, even when the foreign investor wishes to hold less than the entire equity of

the company. The portion of the equity not proposed to be held by the foreign

investor can be offered to the public.

 4.1 Government Approvals for Foreign Companies Doing Business in India

Government Approvals for Foreign Companies Doing Business in India or

Investment Routes for Investing in India, Entry Strategies for Foreign Investors

India's foreign trade policy has been formulated with a view to invite and encourage

FDI in India. The Reserve Bank of India has prescribed the administrative and

compliance aspects of FDI. A foreign company planning to set up business

operations in India has the following options:

 Investment under automatic route; and

 Investment through prior approval of Government.

4.1.1 Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does

not require any prior approval either by the Government or RBI. The investors are

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

receipt of inward remittances and file the required documents with that office

within 30 days of issue of shares to foreign investors.

List of activities or items for which automatic route for foreign investment is not

available, include the following:

 Banking

 NBFC's Activities in Financial Services Sector

 Civil Aviation

 Petroleum Including Exploration/Refinery/Marketing

 Housing & Real Estate Development Sector for Investment from

Persons other than NRIs/OCBs.

 Venture Capital Fund and Venture Capital Company

 Investing Companies in Infrastructure & Service Sector

 Atomic Energy & Related Projects

 Defense and Strategic Industries

 Agriculture (Including Plantation)

 Print Media

 Broadcasting

 Postal Services
 4.1.2 Procedure under Government approval

FDI in activities not covered under the automatic route, requires prior Government

approval and are considered by the Foreign Investment Promotion Board (FIPB).

Approvals of composite proposals involving foreign investment/foreign technical

collaboration are also granted on the recommendations of the FIPB. Application for

all FDI cases, except Non- Resident Indian (NRI) investments and 100% Export

Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of

Economic Affairs (DEA), Ministry of Finance. Application for NRI and 100% EOU

cases should be presented to SIA in Department of Industrial Policy & Promotion.

Investment by way of Share Acquisition

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

company without obtaining any prior permission of the FIPB subject to prescribed

parameters/ guidelines. If the acquisition of shares directly or indirectly results in

the acquisition of a

company listed on the stock exchange, it would require the approval of the Security

Exchange Board of India.

 4.1.4 New investment by an existing collaborator in India

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

financial) with an Indian partner in particular field proposes to invest in another

area, such type of additional investment is subject to a prior approval from the

FIPB, wherein both the parties are required to participate to demonstrate that the new

venture does not prejudice the old one.

4.1.5 General Permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do

not require any further clearance from RBI for receiving inward remittance and issue

of shares to the foreign investors. The companies are required to notify the

concerned Regional office of the RBI of receipt of inward remittances within 30 days

of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.

4.1.6 Participation by International Financial Institutions

Equity participation by international financial institutions such as ADB, IFC, CDC,

DEG, etc., in domestic companies is permitted through automatic route, subject to

SEBI/RBI regulations and sector specific cap on FDI.

 4.1.7 FDI in Small Scale Sector (SSI) Units

A small-scale unit cannot have more than 24 per cent equity in its paid up capital

from any industrial undertaking, either foreign or domestic.

If the equity from another company (including foreign equity) exceeds 24 per cent,

even if the investment in plant and machinery in the unit does not exceed Rs 10

million, the unit loses its small-scale status and shall require an industrial license to

manufacture items reserved for small-scale sector. See also FDI in Small Scale

Sector in India Further Liberalized.

4.2 Sector-wise FDI allowance in India

Is the process whereby residents of one country (the source country) acquire

ownership of assets for the purpose of controlling the production, distribution, and

other activities of a firm in another country (the host country). The international

monetary fund’s balance of payment manual defines FDI as an investment that is

made to acquire a lasting interest in an enterprise operating in an economy other than

that of the investor. The investors’ purpose being to have an effective voice in the

management of the enterprise’. The united nations 1999 world investment report

defines FDI as ‘an investment involving a long term relationship and reflecting a

lasting interest and control of a resident entity in one economy (foreign direct

investor or parent enterprise) in an enterprise resident in an economy other than that

of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign

affiliate).

Foreign direct investment: Indian scenario

FDI is permitted as under the following forms of investments –

· Through financial collaborations.

· Through joint ventures and technical collaborations.

· Through capital markets via Euro issues.

· Through private placements or preferential allotments.

Sector Specific Foreign Direct Investment in India

4.2.1 Hotel & Tourism: FDI in Hotel & Tourism sector in India

100% FDI is permissible in the sector on the automatic route,the term hotels

include restaurants, beach resorts, and other tourist complexes providing

accommodation and/or catering and food facilities to tourists. Tourism related

industry include travel agencies, tour operating agencies and tourist transport

operating agencies, units providing facilities for cultural, adventure and wild life

experience to tourists, surface, air and water transport facilities to tourists, leisure,

entertainment, amusement, sports, and health units for tourists and

Convention/Seminar units and organizations.

For foreign technology agreements, automatic approval is granted if

i. Up to 3% of the capital cost of the project is proposed to be paid for

technical and consultancy services including fees for architects, design,

supervision, etc.

ii. Up to 3% of net turnover is payable for franchising and marketing/publicity

support fee, and up to 10% of gross operating profit is payable for

management fee, includingincentive fee.

 4.2.2 Private Sector Banking:

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to guidelines

issued from RBI from time to time.

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

per levels indicated below:

i. Merchant banking

ii. Underwriting

iii. Portfolio Management Services

iv. Investment Advisory Services

v. Financial Consultancy

vi. Stock Broking

vii. Asset Management

viii. Venture Capital

ix. Custodial Services

x. Factoring

xi. Credit Reference Agencies

xii. Credit rating Agencies

xiii. Leasing & Finance

xiv. Housing Finance

xv. Foreign Exchange Brokering

xvi. Credit card business

xvii. Money changing Business

xviii. Micro Credit

xix. Rural Credit

b. Minimum Capitalization Norms for fund based NBFCs:

i) For FDI up to 51% - US$ 0.5 million to be brought upfront

ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront

iii) For FDI above 75% and up to 100% - US $ 50 million out of which
US $ 7.5 million to be brought up front and the balance in 24 months

c. Minimum capitalization norms for non-fund based activities:

Minimum capitalization norm of US $ 0.5 million is applicable in respect of all

permitted non-fund based NBFCs with foreign investment.

d. Foreign investors can set up 100% operating subsidiaries without the

condition to disinvest a minimum of 25% of its equity to Indian entities, subject to

bringing in US$ 50 million as at b) (iii) above (without any restriction on number of

operating subsidiaries without bringing in additional capital)

e. Joint Venture operating NBFC's that have 75% or less than 75% foreign

investment will also be allowed to set up subsidiaries for undertaking other NBFC

activities, subject to the subsidiaries also complying with the applicable minimum

capital inflow i.e. (b)(i) and (b)(ii) above.

f. FDI in the NBFC sector is put on automatic route subject to compliance with

guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in

this regard.
 4.2.3 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)

4.2.4 Telecommunication:

FDI in Telecommunication sector

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

communications by satellite, FDI is limited to 49% subject to licensing and

security requirements and adherence by the companies (who are investing

and the companies in which investment is being made) to the license

conditions for foreign equity cap and lock- in period for transfer and addition

of equity and other license provisions.

ii. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is

permitted up to 74% with FDI, beyond 49% requiring Government approval.

These services would be subject to licensing and security requirements.

iii. No equity cap is applicable to manufacturing activities.

iv. FDI up to 100% is allowed for the following activities in the telecom sector :

a. ISPs not providing gateways (both for satellite and submarine cables);

b. Infrastructure Providers providing dark fiber (IP Category 1);

c. Electronic Mail; and

d. Voice Mail

The above would be subject to the following conditions:

 e. FDI up to 100% is allowed subject to the condition that such companies

would divest 26% of their equity in favor of Indian public in 5 years, if

these companies are listed in other parts of the world.

f. The above services would be subject to licensing and security

requirements, wherever required.

Proposals for FDI beyond 49% shall be considered by FIPB (Foreign Investment

PromotionBoard) on case to case basis.

4.2.5 Trading:

FDI in Trading Companies in India

Trading is permitted under automatic route with FDI up to 51% provided it is

primarily export activities, and the undertaking is an export house/trading

house/super trading house/star trading house. However, under the FIPB route:-

i. 100% FDI is permitted in case of trading companies for the following activities:

 exports;

 bulk imports with ex-port/ex-bonded warehouse sales;

 cash and carry wholesale trading;

 Other import of goods or services provided at least 75% is for procurement

and sale of goods and services among the companies of the same group and

not for third party use or onward transfer/distribution/sales.

ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy:
 a. Companies for providing after sales services (that is not trading per se)

b. Domestic trading of products of JVs is permitted at the wholesale level for

such trading companies who wish to market manufactured products on behalf

of their joint ventures in which they have equity participation in India.

c. Trading of hi-tech items/items requiring specialized after sales service

d. Trading of items for social sector

e. Trading of hi-tech, medical and diagnostic items.

f. Trading of items sourced from the small scale sector under which, based on

technology provided and laid down quality specifications, a company can

market that item under its brand name.

g. Domestic sourcing of products for exports.

h. Test marketing of such items for which a company has approval for

manufacture provided such test marketing facility will be for a period of two

years, and investment in setting up manufacturing facilities commences

simultaneously with test marketing

FDI up to 100% permitted for e-commerce activities subject to the condition that

such companies would divest 26% of their equity in favor of the Indian public in

five years, if these companies are listed in other parts of the world. Such companies

would engage only in business to business (B2B) e-commerce and not in retail

trading.
 4.2.6 Power:

FDI in Power Sector in India

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

and distribution, other than atomic reactor power plants. There is no limit on the

project cost and quantum of foreign direct investment.

 4.2.7 Drugs & Pharmaceuticals

FDI up to 100% is permitted on the automatic route for manufacture of drugs and

pharmaceutical, provided the activity does not attract compulsory licensing or

involve use of recombinant DNA technology, and specific cell / tissue targeted

formulations.

FDI proposals for the manufacture of licensable drugs and pharmaceuticals and

bulk drugs produced by recombinant DNA technology, and specific cell / tissue

targeted formulations will require prior Government approval.

4.2.8 Roads, Highways, Ports and Harbors

FDI up to 100% under automatic route is permitted in projects for construction and

maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels,

ports and harbors.

Pollution control and management

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

consultancy for integration of pollution control systems is permitted on the

automatic route.
 4.2.9 Call Centers in India / Call Centre’s in India

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

Business Process Outsourcing BPO in India

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

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

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

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

2. Up to 100% equity with full repatriation facility for capital and dividends

in the following sectors

i. 34 High Priority Industry Groups

ii. Export Trading Companies

iii. Hotels and Tourism-related Projects

iv. Hospitals, Diagnostic Centers

v. Shipping

vi. Deep Sea Fishing

vii. Oil Exploration

viii. Power

ix. Housing and Real Estate Development

x. Highways, Bridges and Ports

xi. Sick Industrial Units

xii. Industries Requiring Compulsory Licensing

 3. Up to 40% Equity with full repatriation: New Issues of Existing Companies

raising Capital through Public Issue up to 40% of the new Capital Issue.

4. On non-repatriation basis: Up to 100% Equity in any Proprietary or

Partnership engaged in Industrial, Commercial or Trading Activity.

5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of

the equity Capital or Convertible Debentures of the Company by each NRI.

Investment in Government Securities, Units of UTI, National Plan/Saving

Certificates.

6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company,

through a General Body Resolution, up to 24% of the Paid Up Value of the

Company.

7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from

Shares or Debentures of an Indian

India further opens up key sectors for Foreign Investment

India has liberalized foreign investment regulations in key sectors, opening up

commodity exchanges, credit information services and aircraft maintenance

operations. The foreign investment limit in Public Sector Units (PSU) refineries has

been raised from 26% to 49%. An additional sweetener is that the mandatory

disinvestment clause within five years has been done away with. FDI in Civil

aviation up to 74% will now be allowed through the automatic route for non-

scheduled and cargo airlines, as also for ground handling activities. 100% FDI in
aircraft maintenance and repair operations has also been allowed. But the big one,

allowing foreign airlines to pick up a stake in domestic carriers has been given a miss

again. India has decided to allow 26% FDI and 23% FII investments in commodity

exchanges, subject to the proviso that no single entity will hold more than 5% of the

stake.

Sectors like credit information companies, industrial parks and construction and
development projects have also been opened up to more foreign investment. Also
keeping India's civilian nuclear ambitions in mind, India has also allowed 100% FDI
in mining of titanium, a mineral which is abundant in India. Sources say the
government wants to send out a signal that it is not done with reforms yet. At the
same time, critics say contentious issues like FDI and multi-brand retail are out of
the policy radar because of political compulsions.
 4.3 Sector-wise FDI Inflows ( From April 2000 to January 2012)

Sector-wise FDI Inflows ( From April 2000 to January

2012)
AMOUNT OF FDI
INFLOWS PERCENT OF
SECTOR TOTAL FDI
Sl.no
INFLOWS (In
In Rs In US$
terms of Rs)
CRORE Millio
n

1. Services Sector 124219.33 27806.80 20.22

2. Housing & Real estate 47,380.95 10,630.25 7.73

3. Telecommunications 48,369.49 10,622.99 7.73

4. Computer Software &

46,723.09 10,500.16
hardware 7.64

5. Construction Activities 39,686.54 8,885.38 6.46

6. Automobile 28,274.31 6,246.48 4.54

7. Power 28,135.78 6,228.33 4.53

8. Drugs & Pharmaceuticals 21,640.48 4,839.11 3.52

9. Metallurgical industries 18,767.82 4,295.18 3.12

10. Petroleum & Natural 13,687.09 3,142.64 2.29

Gas
11. 12,893.24 2,913.67 2.12
Trading

12. Chemicals (Other 12,366.34 2,745.84 2.00

than
Fertilizers)

13. Hotel and Tourism 12,108.20 2,687.51 1.95

14. Electrical Equipments 11,778.25 2,605.69 1.90

15. Cement & Gypsum 10,525.91 2,370.50

1.72
Products

16. Information & 10,165.24 2,239.76 1.63

Broadcasting (Incl.
Print media)

17 Consultancy Services 7,793.24 1,714.31 1.25

18. Ports 6,717.36 1,635.08 1.19

19 Industrial Machinery 6,540.34 1,451.66 1.06

20. Agriculture Services 6,763.07 1,413.41 1.03

21 Food Processing 5,798.95 1,270.24 0.92

Industrie
s

22. Non-Conventional Energy 5,102.91 1,113.89 0.81

23. Sea Transport 4,900.83 1,080.93 0.79

24. Hospital & diagnostic 4,635.83 1,056.93 0.77

centres
25. 4,442.61 981.55
Electronics 0.71
26 Misc. Mechanical & 4,369.66 978.05 0.71
Engineering industries

27. Fermentation Industries 4,213.30 967.12 0.70

28. Textiles (Incl. 4,355.71 966.20 0.70

Dyed,
Printed)

29 Mining 3,846.52 896.04 0.65

30. 2,155.67 500.40 0.36

Ceramics

31. Paper & Pulp 1,973.48 453.17 0.33

32. 1,955.35 419.92 0.31

Education

33. Air Transport ( Incl. 1,821.97 409.40 0.30

air freight)

34. Machine Tools 1,810.72 398.26 0.29

35. Medical And 1,760.35 380.03 0.28

Surgical
Appliances

36. Prime Mover (Other 1,705.87 379.05 0.28

Than Electrical
Generators)

37. Diamond & 1,393.82 311.21 0.23

Gold
Ornaments
38. 1,423.46 307.67
Rubber Goods 0.22

39. Soaps, Cosmetics 1,136.52 252.45 0.18

and Toilet
Preparations

40. Vegetable oils and 1,067.17 230.60 0.17

 Vanaspati

41. Printing of Books (Incl. 1,032.89 228.27 0.17

Litho printing industry)

42. 1,046.02 224.97 0.16

Fertilizers

43. Commercial, Office & 968.39 214.16 0.16

Household Equipments

44. Railway 925.43 206.75 0.15

relate
d components

45. Agriculture Services 894.40 198.25 0.14

46. Earth Moving 697.87 160.55 0.12

Machinery
47. 673.12 148.71 0.11
Glass

48. Tea & Coffee 446.61 99.38 0.07

49 Retail Trading 317.61 69.26 0.05

(Singlebrand)

50. Photographic Raw 269.26 66.54 0.05

FilmAnd
Paper

51. Industrial instruments 291.47 63.07 0.05

52. Leather, Leather goods 234.69 52.43 0.04

&Packers

53. Sugar 169.89 38.50 0.03

54. Timber products 130.89 27.76 0.02

55. Coal Production 103.11 24.78 0.02

56. Dye-Stuffs 84.42 18.92 0.01

57. Scientific instruments 66.21 15.00 0.01

58. Boilers & 45.22 9.98 0.01

steam
generating plants

59. Glue and Gelatine 39.88 8.71 0.01

60. Coir 6.67 1.47 0.00

61. Mathematical, 5.04 1.27 0.00

Surveying & drawing
instruments

62. Defence Industries 0.24 0.05 0.00

63. Misc. industries 32,658.73 7,294.89 5.28

137,501.53
Sub Total 615,514.83 100.00

RBI's NRI Schemes 5330.06 121.33 -

Grand Total 616,047.89 137,622.86 -

Sector wise FDI inflows

SOURCE: DIPP, Federal Ministry of Commerce and

Industry, Government of India
I
 4.4 AS PER INTERNATIONAL BEST PRACTICES:

(Amount US$ million)

Sl. Financi
n al Year
o (April-
March

FIPB Equit Re- Othe FDI Investm

Route/ y invest r FLO en t by
RBI’s capit ed capit WS FII’s
Automat al earnin al INTO Foreign
ic ofunin gs + INDIA Institutio
Route/ co + n al
Acquisit rporat Investor
io n ed s Fund
Route bodie
s
1 2000-01 2,339 61 279 4,029 - 1,847
1,350
2. 2001-02 3,904 191 1,645 390 6,130 (+) 52 1,505
%
3. 2002-03 2,574 190 1,833 438 5,035 (-) 18 377
%
4. 2003-04 2,197 32 1,460 633 4,322 (-) 14 10,918
%
5. 2004-05 3,250 528 1,904 369 6,051 (+) 40 8,686
%
6. 2005-06 5,540 435 2,760 226 8,961 (+) 48 9,926
%
7. 2006-07 15,585 896 5,828 517 22,826 (+) 146 3,225
%
8. 2007-08 24,573 2,291 7,679 292 34,835 (+) 53 20,328
%
9. 2008-09 27,329 702 9,030 777 37,838 (+) 09 (-) 15,017
%
10. 2009-10 25,609 1,540 8,669 1,94 37,763 (-) 0.2 29,048
(P) (+) 5 %
11. 2010-11 19,430 874 9,424 652 30,38
0 (-) 20 29,422
(P) (+)
%

2011-2012 7,785 0 0 0 -
12. 7,78 1,731
5
Cumulati 7740 51,528 6518 20,595 - 101,996
140,115
ve 5
Tota
l
(fro
m
Apri
l
2000 to
May 2011

4.5 DIPP’S – FINANCIAL YEAR-WISE FDI EQUITY INFLOWS:

(As per DIPP’s FDI data base – equity capital components only):
 %age
S.no Financial Amount of FDI
growth over
Year (April – Inflows
/ previous
March)
year/
(in terms of
US $)
In
crore In US$
s million
1 2000-01 10,733 2,463 -
2 2001-02 18,654 4,065 ( + ) 65 %
3 2002-03 12,871 2,705 ( - ) 50 %
4 2003-04 10,064 2,188 ( - ) 19 %
5 2004-05 14,653 3,219 ( + ) 47 %
6 2005-06 24,584 5,540 ( + ) 72 %
7 2006-07 56,390 12,492 (+ )125 %
8 2007-08 98,642 24,575 ( + ) 97 %
9 2008-09 123,025 27,330 ( + ) 11 %
10 2009-10 123,120 25,834 ( - ) 05 %
11 2010-11 88,520 19,427 -
12 2011-12 34,792 7,785 -

Cumulative 616,048 137,62

3
Total

Forbidden Territories:

 Arms and ammunition

 Atomic Energy
 Coal and lignite
 Rail Transport
 Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold,
diamonds, copper, zinc.
 Conclusion

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

economic policies heralded the liberalization era of the FDI policy regime in India

and brought about a structural breakthrough in the volume of the FDI inflows into

the economy maintained a fluctuating and unsteady trend during the study period. It

might be of interest to note that more than 50% of the total FDI inflows received by

India came from Mauritius, Singapore and the USA.

The main reason for higher levels of investment from Mauritius was that

the fact that India entered into a double taxation avoidance agreement (DTAA) with

Mauritius were protected from taxation in India. Among the different sectors, the

service sector had received the larger proportion followed by computer software and

hardware sector and telecommunication sector.

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 thebourses in the stock market.
 Bibliography :
 Thus, it is found that FDI as a strategic component of investment is needed

by India for its sustained economic growth and development. FDI is

necessary for creation of jobs, expansion of existing manufacturing industries

and development of the new one. Indeed, it is also needed in the healthcare,

education, R&D, infrastructure, retailing and in long term financial projects.

So, the study recommends the following suggestions:

 The study urges the policy makers to focus more on attracting diverse types of FDI.

 The policy makers should design policies where foreign investment can be

utilised as means of enhancing domestic production, savings, and exports; as

medium of technological learning and technology diffusion and also in

providing access to the external market.

 It is suggested that the government should push for the speedy improvement

of infrastructure sector’s requirements which are important for

diversification of business activities.

 Government should ensure the equitable distribution of FDI inflows among states.

The central government must give more freedom to states, so that they can

attract FDI inflows at their own level. The government should also provide

additional incentives to foreign investors to invest in states where the level of

FDI inflows is quite low.

 Government should open doors to foreign companies in the export – oriented

services which could increase the demand of unskilled workers and low

skilled services and also increases the wage level in these services.
 Government must target at attracting specific types of FDI that are able to
generate spillovers effects in the overall economy. This could be achieved by
investing in human capital, R&D activities, environmental issues, dynamic
products, productive capacity, infrastructure and sectors with high income
elasticity of demand.
 The government must promote policies which allow development process
starts from within (i.e. through productive capacity and by absorptive
capacity).
 It is also suggested that the government must promote sustainable
development through FDI by further strengthening of education, health and
R&D system, political involvement of people and by ensuring personal
security of the citizens.
 Government must pay attention to the emerging Asian continent as the new
economic power – house of business transaction and try to boost the trade
within this region through bilateral, multilateral agreements and also
concludes FTAs with the emerging economic Asian giants.
 As the appreciation of Indian rupee in the international market is providing
golden opportunity to the policy makers to attract more FDI in Greenfield
projects as compared to Brownfield investment. So the government must
invite Greenfield investments.
 Finally, it is suggested that the policy makers should ensure optimum
utilization of funds and timely implementation of projects. It is also observed
that the realization of approved FDI into actual disbursement is quite low.