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“Analytical Study Of Foreign Direct Investment in India”
Project Report Submitted towards Partial fulfillment of requirements for obtaining the degree of Master of Business Administration Session 2009-10
SUBMITTED BY Deepak kumar Gautam 0826370012 V.S.B
SUBMITTED TO: Miss GarimaChaudhary Faculty Guide
VIDYA SCHOOL OF BUSINESS MEERUT
This is to certify that Deepak Kumar Gautam student of M.B.A IV SEM V.S.B. Meerut has under gone a research project on “Analytical Study Of Foreign Direct Investment in India ”And submitted a report based on the same as a mandatory requirement for obtaining the degree of Master of Business Administration from Uttar Pradesh Technical University, Lucknow.
Date: Director of V.S.B. Dr . J.R Bhatti Meerut
This is to certify that Deepak Kumar Gautam student of M.B.A IVsem, V.S.B. Meerut has under gone a research project on “Analytical Study Of Foreign Direct Investment in India ”And submitted a report based on the same as a mandatory requirement for obtaining the degree of Master of Business Administration from Uttar Pradesh Technical University, Lucknow
Miss Garima Chaudhray Faculty guide Meerut Date:
ACNOWLEDGEMENT 4 .
this project would not be what it is.ACKNOWLEDGEMENT I extend my sincere thanks to all those who helped me in the completion of this project. I specially extend my heartfelt thanks to my Faculty guide Miss Garima Chaudhray for helping me at every step. Without their undying help and guidance. This project would not have been successful without her throughout. A special note of thanks also goes out to the people from various fields for giving me their precious time and helping me with this project. Deepak Kumar Gautam 5 . and guiding me in every way help and continuous guidance possible. I also extend my appreciation towards my family who encouraged me and were by my side whenever I needed them.
INDEX INDEX 6 .
TOPIC PAGE NO. Introduction Meaning Definition History Objective of the study Research methodology Conclusion Recommendations & suggestions Limitations of research Bibliography Annexure 7 .
Introduction Introduction and overview What is Foreign Direct Investment ? Meaning: 8 .
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. These organizations have expressed concern that investing at such a level in another country eliminates jobs. host countries may welcome FDI because of the positive impact it has on the smaller economy. Businesses from other nations have taken up the flag of FDI. Legislation was introduced in the early 1970s that would have put an end to the tax incentives of FDI. The financial strength of the investing corporations has sometimes meant failure for smaller competitors in the target country. however. But members of the Nixon administration. The simplest explanation of FDI would be a direct investment by a corporation in a commercial venture in another country. perhaps introducing products and services to an area where they have never been available. The practice has grown significantly in the last couple of decades. but such an investment may also be more profitable if construction costs and labor costs are less in the host country. Not only that. One of the reasons is that foreign direct investment in buildings and equipment still accounts for a vast majority of FDI activity. including many who were not in a financial position to do so just a few years ago. In recent years. 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. The definition of FDI originally meant that the investing corporation gained a significant number of shares (10 percent or more) of the new venture. Congress and business interests rallied to make sure that this attack on their expansion plans was not successful. 9 . One key to understanding FDI is to get a mental picture of the global scale of corporations able to make such investment. to the point that FDI has generated quite a bit of opposition from groups such as labor unions. 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. if it existed at all. According to history the United States was the leader in the FDI activity dating back as far as the end of World War II. Corporations from the originating country gain a significant financial foothold in the host country. The investing corporation must control 10 percent or more of the voting power of the new venture. FDI growth has been a key factor in the “international” nature of business that many are familiar with in the 21st century. Even with this factor. A carefully planned FDI can provide a huge new market for the company.These three letters stand for foreign direct investment. 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 dollars invested in such developing-country projects increased 40 times over in less than 30 years.
Flow of FDI – the amount of FDI undertaken over a given time. mines and land. or public bodies in foreign financial instruments. Differs from FDI. Foreign direct investment (FDI) refers to long term participation by country A into country B. both incorporated and unincorporated.Foreign direct investment (FDI) is a measure of foreign ownership of productive assets. such as factories. firms. • Foreign Direct Investment – when a firm invests directly in production or other facilities. Stock of FDI – total accumulated value of foreign-owned assets. Foreign subsidiaries – overseas units or entities. resulting in a net FDI inflow (positive or negative) . bonds. • • • • • • • • • • 10 . Stocks. Increasing foreign investment can be used as one measure of growing economic globalization. It usually involves participation in management. over which it has effective control. Outflows/Inflows of FDI – the flow of FDI out of or into a country. Manufacturing FDI requires the establishment of production facilities. The largest flows of foreign investment occur between the industrialized countries (North America. There are two types of FDI: inward foreign direct investment and outward foreign direct investment.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’’). transfer of technology and expertise. which is the investment in physical assets. Western Europe and Japan). in a foreign country. Service FDI requires building service facilities or an investment foothold via capital contributions or building office facilities. joint-venture. Foreign Portfolio Investment – the investment by individuals. Host country – the country in which a foreign subsidiary operates. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic product (GDP). other forms of debt. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises.But flows to non-industrialized countries are increasing sharply.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.
deploy. Ownership specific resources or knowledge are necessary but not sufficient for international investment or production success. The FDI impact is similar: FDI flows to developed countries for innovation. It is necessary to effectively use and build dynamic capabilities for quantity and/or quality based deployment that is transferable to the multinational environment. Monopolistic Advantage Theory 11 . Firms develop centers of excellence to concentrate core competencies to the host environment. The Eclectic Paradigm • Distinguishes between: – Structural market failure – external condition that gives rise to monopoly advantages as a result of entry barriers Transactional market failure – failure of intermediate product markets to transact goods and services at a lower cost than internationalization – The Dynamic Capability Perspective • • • • A firm’s ability to diffuse. and from developed countries as products evolve from being innovative to being mass-produced. Product Life-Cycle Theory • • amounts of financial Ray Vernon asserted that product moves to lower income countries as products move through their product life cycle. utilize and rebuild firm-specific resources for a competitive advantage.Portfolio theory – the behavior of individuals or firms administering large assets.
or distribution streams. a component of a country's national financial accounts. is ownership of greater than or equal to 10% of ordinary shares or access to voting rights in an incorporated firm. Ownership share amounting to less than that stated above is termed as portfolio investment and is not categorized as FDI. production. or distribution fails to provide efficiency. A parent business enterprise and its foreign affiliate are the two sides of the FDI relationship. knowledge of product. Foreign direct investment is thought to be 12 . managerial skills. The parent enterprise through its foreign direct investment effort seeks to exercise substantial control over the foreign affiliate company. which is made to serve the business interests of the investor in a company. 'Control' as defined by the UN. Monopolistic Advantage comes from: – Superior knowledge – production technologies. predatory pricing and transfer pricing Definition Foreign direct investment is that investment. It does not include foreign investment into the stock markets. Foreign direct investment is investment of foreign assets into domestic structures. 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. Economies of scale – through horizontal or vertical FDI – Internationalization Theory • • When external markets for supplies. and organizations. equipment. industrial organization.• • An MNE has and/or creates monopolistic advantages that enable it to operate subsidiaries abroad more profitably than local competitors. which is in a different nation distinct from the investor's country of origin. For an unincorporated firm one needs to consider an equivalent criterion. companies can invest FDI to create their own supply. production. Together they comprise an MNC. FDI stands for Foreign Direct Investment.
the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP. Foreign Direct investor 13 . But flows to non-industrialized countries are increasing sharply. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. The largest flows of foreign investment occur between the industrialized countries (North America. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets. Increasing foreign investment can be used as one measure of growing economic globalization. FDIs require a business relationship between a parent company and its foreign subsidiary. Since that time FDI has spread to become a truly global phenomenon. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country. History In the years after the Second World War global FDI was dominated by the United States. 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. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic product (GDP). such as factories. no longer the exclusive preserve of OECD countries. mines and land. Foreign direct business relationships give rise to multinational corporations. Western Europe and Japan). For an investment to be regarded as an FDI. whereas FDI is durable and generally useful whether things go well or badly.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. as much of the world recovered from the destruction brought by the conflict.
an incorporated or unincorporated public or privateenterprise.A foreign direct investor is an individual. associate or branch – operating in a country other than the country or countries of residence of the foreign direct investor or investors. a subsidiary. a government. 14 . or a group of related incorporated and/or unincorporated enterprises which has a direct investment enterprise – that is. a group of related individuals.
Other categorizations of FDI 15 . and the various prerequisites required for these investments. and the removal of restrictions and limitations. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs. These include interest loans. subsidies. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns. This form of FDI is subject to tax incentives as well as disincentives of various forms.' Inward FDIs: Different economic factors encourage inward FDIs. grants.Types of Foreign Direct Investment: An Overview FDIs can be broadly classified into two types: 1 2 Outward FDIs Inward FDIs This classification is based on the types of restrictions imposed. tax breaks. Outward FDI: An outward-bound FDI is backed by the government against all types of associated risks. which are also known as 'direct investments abroad.
• • • • Horizontal FDI – the MNE enters a foreign country to produce the same products product at home. which supplies input for it or uses the output produced by the MNC. Conglomerate FDI – the MNE produces products not manufactured at home. Liability of foreignness – the costs of doing business abroad resulting in a competitive disadvantage. Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different nations.Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise. Vertical FDI – the MNE produces intermediate goods either forward or backward in the supply stream. 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 16 • • • .
– – – – – • 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 17 .• • investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support derogation from regulations (usually for very large projects) • • • • • • Entry Mode • The manner in which a firm chooses to enter a foreign market through FDI.
Circumventing trade barriers.Opportunities for co-production. Making the move from domestic export sales to a locally-based national sales office. A more complete response might address the issue of global business partnering in very general terms. 2. act locally”. 3. licensing.Avoiding foreign government pressure for local production. etc. But for executives in SME’s. this often used cliché does not really mean very much to the average business executive in a small and medium sized company. The simple explanation for this is the difference in perspective between executives of multinational corporations and small and medium sized companies. joint ventures with local partners. While it is nice that many business writers like the expression. 5. hidden and otherwise.– Sharing existing facilities Why is FDI important for any consideration of going global ? The simple answer is that making a direct foreign investment allows tasks: 1 . joint marketing arrangements. it is still just another buzzword. “think globally. Small and medium sized companies tend to be 18 companies to accomplish several . 4. Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets. Capability to increase total production capacity. The phrase does have significant connotations for multinational corporations.
tariff and non-tariff barriers Governmental policies Improving Performance from Structural Discrepancies • Structural discrepancies are the differences in industry structure attributes between home and host countries. Market seeking – secure market share and sales growth in target foreign market. policies. The advent of the Internet has ushered in a new and very different mindset that tends to focus more on access issues. access to expertise and most of all access to technology.Better access to resources – – – – Lower real cost from operating in a host country Labor cost differentials Transportation costs.more concerned with selling their products in overseas markets. The Strategic Logic Behind FDI • • • Resources seeking – looking for resources at a lower real cost.. Enhancing Efficiency from Location Advantages • Location advantages . or markets. – Examples include areas where: Competition is less intense 19 . cultures. SME’s in particular are now focusing on access to markets. Efficiency seeking – seeks to establish efficient structure through useful factors. • Strategic asset seeking – seeks to acquire assets in foreign firms that promote corporate long term objectives.defined as the benefits arising from a host country’s comparative advantages.
brand image.– – – Products are in different stages of their life cycle Market demand is unsaturated There are differences in market sophistication Increasing Return from Ownership Advantages • Ownership Advantages come from the application of proprietary tangible and intangible assets in the host country. distribution channels Technological expertise. – – Reputation. organizational skills. developing: – – • Diversity capabilities Broader learning opportunities Exposed to: – – – – – New markets New practices New ideas New cultures New competition 20 . Ensuring Growth from Organizational Learning • MNEs exposed to multiple stimuli. experience • Core competence – skills within the firm that competitors cannot easily imitate or match.
Home countries often face the loss of employment as jobs move. Host countries often feel like “least desirable” jobs are transplanted from home countries. and competency building efforts in the longer term. The result is uneven competition in the short run. FDI Impact on Domestic Enterprises – – Foreign invested companies are likely more productive than local competitors. supplier relationships in the host country. Host countries seek to have firms develop labor skills and sophistication. – It is likely that FDI developed enterprises will gradually develop local supporting industries.The Impact of FDI on the Host Country Employment – – – – Firms attempt to capitalize on abundant and inexpensive labor. 21 .
since the early 1990s. 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. foreign trade. FDI inflows as well as FDI outflow from India. although it has declined significantly since independence. The advent of the digital age. and the large number of young and educated populace fluent in English. with a GDP growth rate of 8. Proposals in which the foreign collaborator has a previous/existing venture/tie up in India FDI in India includes. with strict government control over private sector participation. and a multitude of services. services are a growing sector and are playing an increasingly important role of India's economy. The economy is diverse and encompasses agriculture. and foreign direct investment. it is the tenth largest in the world. India followed a socialist-inspired approach for most of its independent history. handicrafts. is the second fastest growing major economy in the world. India's huge population results in a per capita income of $3.8 billion (2006). is gradually transforming India as an important 'back office' destination for global companies for the outsourcing of their customer services and technical support. However. India has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment. and software engineering.300 at PPP and $714 at nominal. with a gross domestic product (GDP) of US $3. Poverty remains a serious problem. 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.Foreign Direct Investment in India The economy of India is the third largest in the world as measured by purchasing power parity (PPP). manufacturing. The FDI statistics and data are evident of the emergence of India as both a 22 . India is a major exporter of highly-skilled workers in software and financial services. 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. FDI and FII in India have registered growth in terms of both FDI flows in India and outflow from India.9% at the end of the first quarter of 2006-2007. When measured in USD exchange-rate terms. However. mainly due to the green revolution and economic reforms. textile. Although two-thirds of the Indian workforce still earn their livelihood directly or indirectly through agriculture.611 trillion. with a GDP of US $800.
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. Federal democracy is perversely an impediment for India. Local authorities are not part of the approvals process and have their own rights, and this often leads to projects getting bogged down in red tape and bureaucracy. India actually receives less than half the FDI that the federal government approves.
Investment Risks in India
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
India has enjoyed successive years of elected representative government at the Union as well as federal level. India suffered political instability for a few years in the sense there was no single party which won clear majority and hence it led to the formation of coalition governments. However, political stability has firmly returned since the general elections in 1999, with strong and healthy coalition governments emerging. Nonetheless, political instability did not change India's bright economic course though it delayed certain decisions relating to the economy. Economic liberalization which mostly interested foreign investors has been accepted as essential by all political parties including the Communist Party of India Though there are bleak chances of political instability in the future, even if such a situation arises the economic policy of India would hardly be affected.. Being a strong democratic nation the chances of an army coup or foreign dictatorship are minimal. Hence, political risk in India is practically absent.
Commercial risk 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
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.
1500 crores. The investors are required to notify the Regional office concerned of RBI of receipt of inward remittances within 30 days of such receipt and will have to file the required documents with that office within 30 days after issue of shares to foreign investors. The Foreign direct investment scheme and strategy depends on the respective FDI norms and policies in India. These include FDI limits in India for example: ○ Foreign direct investment in India in infrastructure development projects excluding arms and ammunitions. extraction of coal and lignite and mining industry is allowed upto 100% equity participation with the capping amount as Rs. All Press Notes are available at the website of Department of Industrial Policy & Promotion. FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route. ○ FDI figures in equity contribution in the finance sector cannot exceed more than 40% in banking services including credit card operations and in insurance sector only in joint ventures with local insurance companies.FDI Policy in India Foreign Direct Investment Policy FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. The FDI policy of India has imposed certain foreign direct investment regulations as per the FDI theory of the Government of India . FDI in sectors/activities under automatic route does not require any prior approval either by the Government or the RBI. railways system . Change in sectoral policy/sectoral equity cap is notified from time to time through Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy announcement by SIA are subsequently notified by RBI under FEMA. atomic energy sector. ○ FDI limit of maximum 49% in telecom industry especially in the GSM services Government Approvals for Foreign Companies Doing Business in India 26 .
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. A foreign company planning to set up business operations in India has the following options: • • Investment under automatic route. Procedure under automatic route FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. and Investment through prior approval of Government. Entry Strategies for Foreign Investors India's foreign trade policy has been formulated with a view to invite and encourage FDI in India. include the following: • • • • • • • • • • • • Banking NBFC's Activities in Financial Services Sector Civil Aviation Petroleum Including Exploration/Refinery/Marketing Housing & Real Estate Development Sector for Investment from Persons other than NRIs/OCBs.Government Approvals for Foreign Companies Doing Business in India or Investment Routes for Investing in India. The Reserve Bank of India has prescribed the administrative and compliance aspects of FDI. List of activities or items for which automatic route for foreign investment is not available. 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 27 .
requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB). Ministry of Finance. Department of Economic Affairs (DEA). should be submitted to the FIPB Unit.• Postal Services Procedure under Government approval FDI in activities not covered under the automatic route. Application for all FDI cases. 28 . 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. such type of additional investment is subject to a prior approval from the FIPB. Approvals of composite proposals involving foreign investment/foreign technical collaboration are also granted on the recommendations of the FIPB. it would require the approval of the Security Exchange Board of India. wherein both the parties are required to participate to demonstrate that the new venture does not prejudice the old one. If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange. Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy & Promotion. except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs). 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.
IFC. subject to SEBI/RBI regulations and sector specific cap on FDI. in domestic companies is permitted through automatic route. 29 . 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. the unit loses its small-scale status and shall require an industrial license to manufacture items reserved for small-scale sector. and other activities of a firm in another country (the host country)..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. distribution. 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. See also FDI in Small Scale Sector in India Further Liberalized About foreign direct investment In India. DEG. either foreign or domestic. Is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production. 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. If the equity from another company (including foreign equity) exceeds 24 per cent. etc. even if the investment in plant and machinery in the unit does not exceed Rs 10 million. CDC. The investors’ purpose being to have an effective voice in the management of the enterprise’. Participation by International Financial Institutions Equity participation by international financial institutions such as ADB.
· Through private placements or preferential allotments. I. units providing facilities for cultural. · Through joint ventures and technical collaborations. affiliate enterprise or foreign affiliate). and other tourist complexes providing accommodation and/or catering and food facilities to tourists. beach resorts. The term hotels include restaurants. Sector Specific Foreign Direct Investment in India Hotel & Tourism: FDI in Hotel & Tourism sector in India 100% FDI is permissible in the sector on the automatic route. Foreign direct investment: Indian scenario FDI is permitted as under the following forms of investments – · Through financial collaborations.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. tour operating agencies and tourist transport operating agencies. 30 . Tourism related industry include travel agencies. · Through capital markets via Euro issues.
Underwriting iii. Investment Advisory Services 31 . surface. design. 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. supervision. sports. For foreign technology agreements. and up to 10% of gross operating profit is payable for management fee. air and water transport facilities to tourists. leisure. Merchant banking ii.adventure and wild life experience to tourists. up to 3% of net turnover is payable for franchising and marketing/publicity support fee. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels indicated below: i. including incentive fee. etc. a. amusement. 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. ii. and health units for tourists and Convention/Seminar units and organizations. Portfolio Management Services iv. entertainment.
Factoring xi.Housing Finance xv. Minimum capitalization norms for non-fund based activities: Minimum capitalization norm of US $ 0. Foreign Exchange Brokering xvi. Asset Management viii. Stock Broking vii. 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) 32 .Credit card business xvii.Venture Capital ix. Custodial Services x.5 million to be brought up front and the balance in 24 months c.Rural Credit b.Leasing & Finance xiv.5 million to be brought upfront ii) For FDI above 51% and up to 75% .5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment.v. Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities. Credit Reference Agencies xii.Micro Credit xix. Minimum Capitalization Norms for fund based NBFCs: i) For FDI up to 51% . Financial Consultancy vi. Credit rating Agencies xiii.US $ 5 million to be brought upfront iii) For FDI above 75% and up to 100% . d.US $ 50 million out of which US $ 7.Money changing Business xviii.US$ 0.
Infrastructure Providers providing dark fiber (IP Category 1). In basic.e. Electronic Mail. RBI would issue appropriate guidelines in this regard. subject to the subsidiaries also complying with the applicable minimum capital inflow i.in period for transfer and addition of equity and other license provisions. beyond 49% requiring Government approval. value added services and global mobile personal communications by satellite. radio-paging and end-to-end bandwidth.e. ISPs with gateways. These services would be subject to licensing and security requirements. 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. cellular. iv. Insurance Sector: FDI in Insurance sector in India FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA) Telecommunication: FDI in Telecommunication sector i. and d. (b)(i) and (b)(ii) above. b. f. Voice Mail The above would be subject to the following conditions: 33 . ISPs not providing gateways (both for satellite and submarine cables). FDI up to 100% is allowed for the following activities in the telecom sector : a. No equity cap is applicable to manufacturing activities. ii. iii. c. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. 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. FDI is permitted up to 74% with FDI.
Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis. and the undertaking is an export house/trading house/super trading house/star trading house. if these companies are listed in other parts of the world.e. The above services would be subject to licensing and security requirements. under the FIPB route:i. The following kinds of trading are also permitted. Trading: FDI in Trading Companies in India Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities. wherever required. bulk imports with ex-port/ex-bonded warehouse sales. ii. cash and carry wholesale trading. c. 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. However. 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. f. 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. subject to provisions of EXIM Policy: a. Companies for providing after sales services (that is not trading per se) b. Trading of hi-tech items/items requiring specialized after sales service d. 100% FDI is permitted in case of trading companies for the following activities: • • • • exports. Trading of items for social sector 34 .
There is no limit on the project cost and quantum of foreign direct investment. highways. vehicular tunnels. 35 . FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology. Drugs & Pharmaceuticals FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical. Trading of hi-tech. Ports and Harbors FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads. 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. f. g. a company can market that item under its brand name. vehicular bridges. Domestic sourcing of products for exports. Trading of items sourced from the small scale sector under which. Roads. Highways.e. medical and diagnostic items. other than atomic reactor power plants. ports and harbors. Power: FDI In Power Sector in India Up to 100% FDI allowed in respect of projects relating to electricity generation. and specific cell / tissue targeted formulations will require prior Government approval. toll roads. and specific cell / tissue targeted formulations. 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. transmission and distribution. provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology. h. based on technology provided and laid down quality specifications.
Deep Sea Fishing vii. Highways. Bridges and Ports xi. Diagnostic Centers v. Special Facilities and Rules for NRI's and OCB's NRI's and OCB's are allowed the following special facilities: 1. Business Process Outsourcing BPO in India FDI up to 100% is allowed subject to certain conditions. Export Trading Companies iii.Power ix.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. Up to 100% equity with full repatriation facility for capital and dividends in the following sectors i. Shipping vi. Industries Requiring Compulsory Licensing 36 . 34 High Priority Industry Groups ii. Hospitals. Direct investment in industry. Housing and Real Estate Development x. Hotels and Tourism-related Projects iv. Sick Industrial Units xii. trade. Oil Exploration viii. infrastructure etc. 2. Call Centers in India / Call Centre’s in India FDI up to 100% is allowed subject to certain conditions.
Units of UTI. On Non-Repatriation Basis: Acquisition of shares of an Indian Company. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from Shares or Debentures of an Indian 37 . 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. 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. 4. Investment in Government Securities. National Plan/Saving Certificates. Commercial or Trading Activity. 6. 7. through a General Body Resolution.3. On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership engaged in Industrial. up to 24% of the Paid Up Value of the Company. 5.
100% FDI in aircraft maintenance and repair operations has also been allowed. opening up commodity exchanges.India Further Opens Up Key Sectors for Foreign Investment India has liberalized foreign investment regulations in key sectors. Also keeping India's civilian nuclear ambitions in mind. credit information services and aircraft maintenance operations. India has decided to allow 26% FDI and 23% FII investments in commodity exchanges. a mineral which is abundant in India. subject to the proviso that no single entity will hold more than 5% of the stake. India has also allowed 100% FDI in mining of titanium. Sectors like credit information companies. 38 . The foreign investment limit in Public Sector Units (PSU) refineries has been raised from 26% to 49%. critics say contentious issues like FDI and multi-brand retail are out of the policy radar because of political compulsions. as also for ground handling activities. FDI in Civil aviation up to 74% will now be allowed through the automatic route for non-scheduled and cargo airlines. Sources say the government wants to send out a signal that it is not done with reforms yet. But the big one. An additional sweetener is that the mandatory disinvestment clause within five years has been done away with. allowing foreign airlines to pick up a stake in domestic carriers has been given a miss again. At the same time. industrial parks and construction and development projects have also been opened up to more foreign investment.
50 760.50 57379.80 1.49 0.94 1112.85 3129.06 1551.77 1.48 39 Metallurgical industries 109563.66 1964.23 5118.05 34362.Sector-wise FDI Inflows ( From April 2000 to January 2010) SECTOR AMOUNT OF FDI INFLOWS In Rs Million Services Sector Computer Software & hardware Telecommunications Construction Activities Automobile Housing & Real estate Power Chemicals (Other than Fertilizers) Ports Electrical Equipments Cement & Gypsum Products Petroleum & Natural Gas Trading Consultancy Services Hotel and Tourism Food Processing Industries Electronics Misc.12 146799.86 1194.11 1.43 6215.37 87008.96 0.83 6.81 391109.75 28310. Print 52115.90 2.13 In US$ Million 18118.39 11.63 2.07 4.47 1.20 Information & Broadcasting (Incl.17 1480.02 137089.57 648.43 52500.49 33914.92 1217.17 6.38 1.85 48647.17 62416.19 94417.20 3.38 213595.80 3.03 2244.63 70781.88 2612.98 0.40 8876.32 748.07 63290.74 275441.55 5029.20 PERCENT OF TOTAL FDI INFLOWS (In terms of Rs) 22.01 3310.41 217936.68 1.92 1621.90 media) . Mechanical & Engineering industries 787420.12 7.85 1324.01 2.
gold. manganese. sulfur. diamonds. gypsum. chrome. copper.Forbidden Territories: • • • • • Arms and ammunition Atomic Energy Coal and lignite Rail Transport Mining of metals like iron. zinc. 40 .
Use of GDRs – The proceeds of the GDRs can be used for financing capital goods imports. telecommunication.Foreign Investment through GDRs (Euro Issues) – Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). equipment and building and investment in software development. A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III. This condition would be relaxed for infrastructure projects such as power generation. petroleum exploration and refining. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance. GDR investments are treated as FDI and are designated in dollars and are not subject to any ceilings on investment. 2. 1. and equity investment in JV/WOSs in India. Clearance from FIPB – There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year. ports. airports and roads. prepayment or scheduled repayment of earlier external borrowings. capital expenditure including domestic purchase/installation of plant. 41 .
Foreign direct investments in India are approved through two routes – 1. The portion of the equity not proposed to be held by the foreign investor can be offered to the public. 42 . 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%. 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. 2. Investments in high priority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. 50%. even when the foreign investor wishes to hold less than the entire equity of the company. 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. 51%. Normal processing time is 4 to 6 weeks. The lists are comprehensive and cover most industries of interest to foreign companies. 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.
value added services ISPs paging Electronic Mail & Voice Mail with gateways. Power(other than atomic reactor power plants) 100% 100% Automatic Automatic Automatic 7. 8. cash and carry wholesale trading 100% Automatic 51% Automatic 6. licence FDI cap/Equity 100% 49% 26% Entry/Route Automatic Automatic Automatic Automatic 5. Pollution Management Call Centers BPO Control Automatic 10 11. Sr. Ports and 100% Harbors and 100% 100% 100% 9. 1. No. Analysis of sector specific policy for FDI Sector/Activity Hotel & Tourism NBFC Insurance Telecommunication: cellular. 4.iii. 12. 3. radio74% 100% 49% Above 49% need Govt. Trading companies: primarily export activities bulk imports. Drugs & Pharmaceuticals Roads. 2. 34 High Priority 43 . Automatic Automatic For NRI's and OCB's: i. Highways.
Industry Groups ii. Export Trading 100% Automatic Companies iii. Shipping vi. Bridges and Ports xi. Airports: Greenfield projects 100% Automatic 44 and Tourism-related Industrial for Scale . Diagnostic Centers v. Hospitals.Industries Reserved Small Sector 13. Deep Sea Fishing vii. Housing and Real Estate Development x.Power ix. Oil Exploration viii. Hotels Projects iv. Industries Requiring Compulsory Licensing xiii. Highways. Sick Units xii.
322 6. 5. 10. 2.961 22. 6. 8.051 8.130 5. 7. Financial Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Total FDI Inflows 4.035 4.232 % Growth Over Previous Year ---(+) 52 (-) 18 (-) 14 (+) 40 (+) 48 (+) 146 (+) 51 (+) 02 ---- 45 . 16. Analysis of FDI inflow in India From April 2000 to August 2009-10 (Amount US$ in Millions) S.029 6. 3. Assets reconstruction company Cigars and cigarettes Courier services Investing infrastructure telecom sector) companies (other 100% 49% 100% 100% in 49% than Beyond 74% FIPB FIPB FIPB FIPB FIPB iii. 17. 9.No 1.826 34.362 35. 4.168 16.Existing projects 14 15.
64 5.iv. 2.98 1. 19.974. 6. U. No Country Amount of FDI Inflows % As To FDI Total Inflow 1.17 47 .50.76 1.80.61 3.42 1.935.56 3.06 61.047.142.40.04 2.915. 188.8.131.52.S.K.60 2. 10. 5.44 3.53 4.39 50.32. Analysis of share of top ten investing countries FDI equity in flows From April 2000 to January 2010 (Amount in Millions) Sr.08 3.A.129.01 8. 3.04 1.E. 9.59 44.05 1.12.57 1. Mauritius Singapore U. 4.633.686.72 7. 8.18.A.448. Netherlands Japan Cyprus Germany France U.
and services.142 crores up to January 2010 Sector-wise distribution of FDI inflows received from Singapore the highest inflows have been in the services sector (financial and non financial). the two top sectors attracting FDI inflows from the United States are computer systems design and programming and manufacturing 49 . The potential loss of tax revenue is of particular concern to the Indian government. electrical equipment. The DTAA allows foreign firms to bypass Indian capital gains taxes. According to the available M&A data. equal to 44. and may allow some India-based firms to avoid paying certain taxes through a process known as “round tripping. Petroleum and natural gas occupies the second place followed by computer software and hardware.” The extent of round tripping by Indian companies through Mauritius is unknown.Mauritius Mauritius invested Rs.64 % of the total). These are the sectors which attracting more FDI from Mauritius Electrical equipment Gypsum and cement products Telecommunications Services sector that includes both non.A. telecommunications. Singapore Singapore continues to be the single largest investor in India amongst the Singapore with FDI inflows into Rs. 3.80. valued at 732335 crore in cumulative inflows up to January 2010. which accounts for about 30% of FDI inflows from Singapore. mining and construction. However.financial and financial Fuels. food processing. Many companies based outside of India utilize Mauritian holding companies to take advantage of the India. U. According to the Indian government. the Indian government is concerned enough about this problem to have asked the government of Mauritius to set up a joint monitoring mechanism to study these investment flows.633 million in India Up to the January 2010. the top sectors attracting FDI from the United States to India are fuel.01 percent of total FDI inflows.18.S. The United States is the third largest source of FDI in India (7.Mauritius Double Taxation Avoidance Agreement (DTAA).19.
IT. 78.40. Netherlands ranks fifth among all the countries that make investments in India.974 crores in cumulative inflows up to January 2010 Over 17 UK companies under the aegis of the Nuclear Industry Association of UK have tied up with Ficci to identify joint venture and FDI possibilities in the civil nuclear energy sector. The United Kingdom is the fourth largest source of FDI in India (5. 50 .08% out of the total foreign direct investment in the country up to August 2009.K. and trade are nonconventional energy. partnerships.53 % of the total).U.047 crores between 1991 and 2002. UK companies and policy makers the focus sectors for joint ventures. and creative industries. medical equipment. infrastructure equipment. precision engineering. The total percentage of FDI from Netherlands to India stood at 4. The total flow of FDI from Netherlands to India came to Rs. 1. Netherlands FDI from Netherlands to India has increased at a very fast pace over the last few years. valued at 2.
18 9. 8.77 22.68. 5.46 7.89 2. Computer Software & Hardware Telecommunication Housing & Real Estate Construction Activities Automobile Industry Power Metallurgical Industries Petroleum & Natural Gas Chemical 4.Following Various industries attracting FDI from Netherlands to India are: • • • • • Food processing industries Telecommunications that includes services of cellular mobile.65. 7.96 1.36 2.90.03 3.492.25.01.419. Service Sector (Financial & Non Financial) 9.09 4.46 6.62 3. 10.36 4.79.172.financial and financial services iii. 4. Analysis of sectors attracting highest FDI equity inflows From April 2000 to March 2010 (Amount in Millions) Sr.13.785. 6.48 8.14 2. 3.92 1.899.57 1. 9.210.680.25.11.00 1.57 2.021.849.957.65. and radio paging Horticulture Electrical equipment that includes computer software and electronics Service sector that includes non.13 2. basic telephone. No Country Amount Inflows of FDI % As To FDI Total Inflow 1.22 1.33 51 .
The sector attracted USD 2558 million FDI in FY ‘09 as compared to the USD 1261 million in FY ’08. real estate. The other sectors which registered growth in highest FDI inflow during April – March 2009 were housing & real estate (28. information. and professional. These sectors correspond closely with the sectors identified by the Indian government as attracting the largest shares of FDI inflows overall. each accounting for 22. 52 . India automobile sector has been able to record 70 per cent growth in foreign investment. During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent to 74 per.86 per cent).71 per cent during the last fiscal. construction activities including road & highways (16. The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers) registered maximum growth of 227 per cent during April 2008 – March 2009 as compared to 11.37 per cent share in total FDI inflow.152 million in FY ’09 over FY ’08. construction and automobile sectors.94 per cent). which has contributed to the robust growth of FDI. The FDI inflow in automobile sector has increased from USD 675 million to 1.48 percent respectively. acquired 9. The telecom sector registered a growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal. These were followed by the telecommunications. scientific. The sector attracted USD 749 million FDI in FY ‘09 as compared to USD 229 million in FY ’08. computer software & hardware (18. and technical services.35 per cent) and power (1.14 and 9.The sectors receiving the largest shares of total FDI inflows up to arch 2010 were the service sector and computer software and hardware sector.55 per cent). The top sectors attracting FDI into India via M&A activity were manufacturing.
filing facility is an important initiative of the Secretariat to further the cause of enhanced accessibility and transparency .Economic Affairs in the chair. Consisting of Senior Secretaries drawn from different ministries with Secretary . the foreign direct investment is made mostly into the extractive industries. However. The launch of e. the situation has not been the same in the countries with a middle income range. 53 . Low Income Countries in Global FDI Race The situation of foreign direct investment has been relatively good in the recent times with an increase of 38%. 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. However. The threshold limit is likely to be raised to 1200 crore soon.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. The FIPB is assisted in this task by a FIPB Secretariat. 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. Currently proposals for investment beyond 600 crores require the concurrence of the CCEA (Cabinet Committee on Economic Affairs).The Board thus plays an important role in the administration and implementation of the Government’s FDI policy. now the foreign direct investors are also looking to pump money into the manufacturing industry that has garnered 47% of the total foreign direct investment made in 1992. the FIPB has stepped in to provide solutions. It therefore has a strong record of actively encouraging the flow of FDI into the country. In circumstances where there is ambiguity or a conflict of interpretation. Normally.
9 billion from 1991 to 1995. vehicles and petrochemicals Vietnam is a low income country. which again had been caused by the absence of proper financial markets. This led to an increase in the foreign direct investment made in the country. During the same period Nigeria had been the second best in terms of receiving foreign direct investment. China has received the most of the foreign direct investment that was pumped into the countries with low income. The gas and petroleum industries were the biggest beneficiaries of the foreign direct 54 . In the years between 1982 and 1991 the average foreign direct investment in China was US$ 2. During the later phases of the decade of 70s the Asian countries started encouraging foreign direct investments in their economies. The economic liberalization in China started in 1979. The situation is comparatively better in the low income countries. It was as much as 68%. The foreign direct investment laws were introduced in Vietnam in 1987-88. as well as the fact that their economies were not open to foreign direct investment. which is supposed to have the same potential as China to generate foreign direct investment. This was a significant increase from the previous twenty years when the total foreign direct investment in India was US$1 billion. This average increased by seven times to become US$ 37. It accounted for as much as 86% of the total foreign direct investment made in the lower income countries in 1995.The middle income countries have not received a steady inflow of foreign direct income coming their way. It accounted for as much as 86% of the total foreign direct investment made in the lower income countries in with low income. Around 20% of the foreign direct investment of China was made in the real estate sector. This led to an increase in the foreign direct investment in China. other forms of economic crises have had less effect on these countries. In the recent times India has risen to be the third major foreign direct investment destination in the recent years. The amount stood at US$ 25 million in 1993 compared to US$ 8 million in 1993. This amount increased by 3 times after the USA removed its economic sanctions in 1994. They have had an uninterrupted and continually increasing flow of foreign direct investment. It has been observed that the various debt crises. as well as. A significant amount of the foreign direct investment in China was provided in the industrial sector. These countries had lesser amounts of commercial bank obligations. Most of the foreign direct investment made in India has been in the infrastructural areas like telecommunications and power. Foreign direct investment started in India in 1991 with the initiation of the economic liberation. In the manufacturing industry the emphasis has been on petroleum refining.5 billion. There were more initiatives that enabled India to garner foreign direct investments worth US$ 2.5 billion during 1995.
This improvement was brought about by the privatization of the Ashanti Goldfields. on an average. After 1991 it was possible for foreign companies to set up companies in Bangladesh without taking permission beforehand. on an average. Bangladesh started receiving increasing foreign direct investment after 1991. chemicals and electric machinery were also important in this regard. the Government of India embarked on liberalization and economic reforms with a view of bringing about rapid and substantial economic growth and move towards globalization of the economy. The increase in the foreign direct investment in Ghana was remarkable as well. Food processing. when the economic reforms took place in the country. 55 . augmentation of foreign exchange reserves and globalization of the Indian economy. Introduction to FII Since 1990-91. FOREIGN INSTITUTIONAL INVESTMENT I. comprising of clothing and textiles took up 20% of the total approved foreign direct investment. The figures increased from US$11. the Government under its New Industrial Policy revamped its foreign investment policy recognizing the growing importance of foreign direct investment as an instrument of technology transfer. from 1986 to 1992 to US$ 201 million. The foreign direct investment rose from US$ 11 million in 1994 to US$ 125 million in 1995. from 1993 to 1995. As per the available statistics the manufacturing industry.7 million. As a part of the reforms process.investment.
foundations. From September 14. for the first time. ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FII invests. A Working Group for Streamlining of the Procedures relating to FIIs. While presenting the Budget for 1992-93. a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or with no single investor holding more than 10 per cent of the shares or units of the fund. partnership firms. This recommendation was implemented in December 2003. permitted portfolio investments from abroad by foreign institutional investors in the Indian capital market.. entities eligible to invest under the FII route are as follows: i) As FII: Overseas pension funds. 1992 with suitable restrictions. however did not elaborate on the objectives of the suggested policy. asset management company. Manmohan Singh had announced a proposal to allow reputed foreign investors. Market design in India for foreign institutional investors Foreign Institutional Investors means an institution established or incorporated outside India which proposes to make investment in India in securities. the Government. FIIs registered with SEBI fall under the following categories: 56 . charitable societies. public company. FIIs were permitted to invest in all the securities traded on the primary and secondary markets. the then Finance Minister Dr. Currently. The entry of FIIs seems to be a follow up of the recommendation of the Narsimhan Committee Report on Financial System.Simultaneously. the Committee. institutional portfolio manager. constituted in April. university funds. The following entities are eligible to be registered as sub-accounts. and suggested that dual approval process of SEBI and RBI be changed to a single approval process of SEBI. The committee only suggested that the capital market should be gradually opened up to foreign portfolio investments. recommended streamlining of SEBI registration procedure. pension fund. investment trust. 2003. investment trust. nominee company. viz. bank. inter alia. such as Pension Funds etc. II. including shares. mutual funds. and individuals. to invest in Indian capital market. While recommending their entry. charitable trusts. endowments. debentures and warrants issued by companies which were listed or were to be listed on the Stock Exchanges in India. private company.
who would be registered as FIIs in India. iii. iv. The Government guidelines for FII of 1992 allowed. entities such as asset management companies. 5) Trading in Transferable Development Rights (TDRs). b) 100 % debt-fund FIIs.those who are permitted to invest only in debt instruments. in the application form the details of clients on whose behalf investments were being made were sought. the intention of the guidelines was to allow these categories of investors to invest funds in India on behalf of their 'clients'. including individuals. Asset management companies/portfolio managers are basically in the business of managing funds and investing them on behalf of their funds/clients. 57 . permission was also granted for making investments in the names of such clients. nominee companies and incorporated/institutional portfolio managers or their power of attorney holders (providing discretionary and non-discretionary portfolio management services) to be registered as FIIs.a) Regular FIIs.those who are required to invest not less than 70 % of their investment in equity-related instruments and 30 % in non-equity instruments. The broad strategy consisted of having a wide variety of clients. roads or bridges). While the guidelines did not have a specific provision regarding clients. Hence. inter-alia. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: 1) Business of chit fund 2) Nidhi Company 3) Agricultural or plantation activities 4) Real estate business or construction of farm houses (real estate business does not include development of townships. construction of residential/commercial premises. Prohibitions on Investments: FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. Trends of Foreign Institutional Investments in India. intermediated through institutional investors. These 'clients' later came to be known as sub-accounts. FIIs are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme. While granting registration to the FII.
the Indian stock markets were opened up for direct participation by FIIs. Thereafter.Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs). only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. They were allowed to invest in all the securities traded on the primary and the secondary market including the equity and other securities/instruments of companies listed/to be listed on stock exchanges in India. It can be observed from the table below that India is one of the preferred investment destinations for FIIs over the years. Before 1992. there were 1609 FIIs registered with SEBI. SEBI Registered FIIs in India Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 End of March 0 3 156 353 439 496 450 506 527 58 . As of March 2009. Foreign Institutional Investments and investments in offshore funds.
crore) Net b) (Rs. crore) Gross Sales (b) (Rs. crore) % increase in Investment (a.45 44. Year FII trend in India Gross Purchases (a) (Rs.2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 490 502 540 685 882 996 1279 1609 2009-10 1805 v.75 59 .FII inflow 1992-93 1993-94 1994-95 1995-96 17 5593 7631 9694 4 466 2835 2752 13 5127 4796 6942 39338.46 -6.
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 15554 18695 16115 56856 74051 49920 47061 144858 16953 346978 520508 896686 548876 - 6979 12737 17699 46734 64116 41165 44373 99094 171072 305512 489667 844504 594608 - 8575 5958 1584 10122 9935 8755 2688 45764 45881 41466 30841 52182 -45732 - 23.85 -11. Re.62 69.52 126.88 69. FII and dependent variable is indices of nifty.62 -25. But for my study I have selected only one independent variable i.53 0. bullion market.52 -30. budgets.e. economic and political condition of the country.26 -9./Dollar exchange rate etc.30 1602.59 739. inflation.e. FDI.02 -1. Government policies.20 187. 60 .64 - 2010 data was not available There may be many other factors on which a stock index may depend i.
80 0.33 0.44 From the above table we can say that FII has a positive impact on all the indices which means that if FIIs come in India then it is goods for the Indian economy.18 0.vi. Co – relation with Indices Indices Sensex Bankex Power IT Capital Goods Co-relation with FII 0.13 0. 61 . FIIs have more co-relation with Sensex so we can say that they are mostly invest in big and reputed companies which are included in Sensex. Power and Capital Goods sector have more co-relation with FII investment which shows more interest of FIIs in those sectors.
Difference Between FDI and FII FDI v/s FII Both FDI and FII is related to investment in a foreign country. this is not possible. The FII investment flows only into the secondary market. the companies only need to get registered in the stock exchange to make investments. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise. But in Foreign Direct Investment. FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country.In FII. In simple words. The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. This difference is what makes nations to choose FDI’s more than then FIIs. On the contrary. FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation. FII can enter the stock market easily and also withdraw from it easily. It aims to increase the enterprises capacity or productivity or change its management control.The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor. specific enterprise. But FDI cannot enter and exit that easily. Though the Foreign Institutional Investor helps in promoting good governance and improving 62 . FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreign investment for the whole economy. But FDI is quite different from it as they invest in a foreign nation. the capital inflow is translated into additional production. FDI not only brings in capital but also helps in good governance practices and better management skills and even technology transfer. In an FDI.
The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor Objective of the study 63 . it does not come out with any other benefits of the FDI. But FDI cannot enter and exit easily. The FII increasing capital availability in general. 3. FDI is an investment that a parent company makes in a foreign country. Foreign Direct Investment targets a specific enterprise. While the FDI flows into the primary market. While FIIs are short-term investments. the FDI’s are long term. 4. 2. FII can enter the stock market easily and also withdraw from it easily.accounting. 1. the FII flows into secondary market. On the contrary. FII is an investment made by an investor in the markets of a foreign nation.
➢ To know Which sector is good for investment .Objective of the study: ➢ To know the flow of investment in India ➢ To know how can India Grow by Investment . ➢ To know which country in investing in which country ➢ To know the reason for investment in India ➢ Influence of FII on movement of Indian stock exchange ➢ To understand the FII & FDI policy in India. 64 . ➢ To Examine the trends and patterns in the FDI across different sectors and from different countries in India ➢ To know in which sector we can get more foreign currency in terms of investment in India ➢ To know which country s safe to invest . ➢ To know how much to invest in a developed country or in a developing.
Research methodology 65 .
66 . FII is taken as independent variable. computer hardware and software. service sector. journals and books. Data collection: Secondary Data: Internet. USA etc. Singapore. Mauritius. If the hypothesis is rejected. or in other words if the null hypothesis is accepted. other reports and projects. telecommunications etc. then FIIs will have no significant impact on the Indian bourses. Power and Capital Goods are related to the FII which may be positive relation. how the Sensex. Stock indices are taken as dependent variable • Hypothesis Test: If the hypothesis holds good then we can infer that FIIs have significant impact on the Indian capital market.g. FII: • Correlation: We have used the Correlation tool to determine whether two ranges of data move together — that is.g. Books . This will help the investors to decide on their investments in stocks and shares. IT.Research methodology In order to accomplish this project successfully we will take following steps. negative relation or no relation. We will use this model for understanding the relationship between FII and stock indices returns. which had attracted larger inflow of FDI from different countries. literatures FDI: The study is limited to a sample of investing countries e. and sectors e. Bankex. newspapers.
Conclusion 67 .
Among the different sectors. It might be of interest to note that more than 50% of the total FDI inflows received by India . Also FII is not the only factor affecting the stock indices. The data on daily basis can give more positive results (may be). 68 . the service sector had received the larger proportion followed by computer software and hardware sector and telecommunication sector.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. Singapore and the USA. we have concluded that FII did have significant impact on Sensex but there is less co-relation with Bankex and IT. came from Mauritius. One of the reasons for high degree of any linear relation can also be due to the sample data. According to findings and results. The data was taken on monthly basis. There are other major factors that influence the bourses in the stock market. 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.
Recommendations & suggestions 69 .
Recommendations & suggestions 70 .
Limitations of research 71 .
Limitations of research 72 .
rbi.Bibliography www.org 73 .
org http://books.fin.htm 74 .sebi.in/books? id=0VUafaE3pOIC&pg=PA4&dq=types+of+foreign+direct+investment&hl=en&ei=efzrS_rE Aoy5rAfv34DbBg&sa=X&oi=book_result&ct=bookthumbnail&resnum=1&ved=0CDUQ6wEwAA#v=onepage&q=types%20of%20foreign %20direct%20investment&f=false http://www.pdf http://www.google.unctad.co.html http://www.nic www.com/fdi-foreign-direct-investment.indiamart.com/investment_in_india/fdi.com/articles/fdi_india.html http://finance.economywatch.legalserviceindia.com/foreign-direct-investment/ http://www.in.indiahousing.www.answers.org/sections/dite_iiab/docs/diteiiab20041_en.com/topic/foreign-direct-investment#History http://www.
Annexure 75 .
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