Modified FDI & FII in India _A Comparative Analysis

FDI & FII In India _A Comparative Analysis

SECTION 1:

INTRODUCTION AND RESEARCH METHODOLOGY

1.1 GENERAL INTRODUCTION OF THE PROJECT

The Government of India has recognized the key role of the foreign direct investment

(FDI) and foreign institutional investment (FII) in its process of economic development,

not only as an addition to its own domestic capital but also as an important source of

technology and other global trade practices. In order to attract the required amount of FDI

and FII, it has bought about a number of changes in its economic policies and has put in

its practice a liberal and more transparent FDI and FII policy with a view to attract more

foreign direct institutional investment inflows into its economy. These changes have

heralded the liberalization era of the foreign investment policy regime into India and have

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

economy

The influx of FIIs has indeed influenced the secondary market segment of the Indian

stock market. But the supposed linkage effects with the real economy have not worked in

the way the mainstream model predicts. Instead there has been an increased uncertainty

and skepticism about the stock market in this country. On the other hand, the surge in

foreign portfolio investment in the Indian economy has introduced some serious

problems of macroeconomic management for the policymakers like inflation, currency

appreciation etc.

On the other hand FDI is what the government really needs to attract in various sectors

like infrastructure, education etc. it is much more stable than the foreign institutional

investment which comes via the stock market route, and has more accountability and

brings fundamental and tangible benefits to the economy.

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In this context, this report is going to analyze the trends and patterns of foreign direct

investment (FDI) and foreign institutional investment (FII) flows into India during the

post liberalization period.

1.2 Objective of the Study

To examine the trends and patterns in the FDI and FII’s across different sectors

and from different countries in India

To understand the FII & FDI policy in India.

To check Influence of FII on movement of Indian stock exchange

To do comparative analysis on FDI & FII and its impact on Indian economy

1.3 Scope of Study

The study is confined to sector wise flow of FDI and FII’s in India and the impact of the

same on Indian economy. As it is seen that FII is a volatile investment as compared to

FDI the factors affecting the inflow of both types of investment are explored and their

investment annually is compared on the basis of certain common parameters.

1.4 Significance of study

This study makes a humble effort to get an overview of both types investments first then

study their trends and make a comparative analysis between the two to see which factors

are they most sensitive to, whether the two types of investment are equally sensitive to

the same factors, which is more stable and also which type of investment direct or

portfolio is preferred by an emerging economy like India. Thus the study is beneficial for

foreign investors to analysis the future prospects of FDI and FIIs in India.

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1.5 Research Methodology

1.5.1 Formation of problem

Should FDI and FII be strictly regulated?

What impact it has on Indian economy?

What are the areas or sectors that need more investment?

1.5.2 Methods of Collection of data

The research has been carried out by collection of secondary data with the use of

primarily the internet, books on banking and finance, various business magazines,

journals, newspapers.

1.5.3 Research Limitation

It is mainly based on the data available in various websites &other secondary sources.

The inference made is purely from the past year’s performance.

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CHAPTER 2: REVIEW OF LITERATURE

Foreign Direct Investment (FDI) as an important driver of growth. It is an important

source of non debt financial resources for country for economic development. Besides it

is a means of achieving technical knowhow and employment generation of employment.

However, many are of the view that FDI is a big threat to sovereignty of host and

domestic business houses. Faster exploitation of natural resources for profit may deprive

host from such resources in long run. Midst of debate on pros and cons of FDI, world

economy has observed a phenomenal change in volume and pattern of FDI. There is

clearly an intense global competition of FDI. India is not behind this global race of

attracting foreign investment. India emerged as an attractive

A favorable business environment fostered Indian economy after 1991-92, when

the government of India opened the door for foreign capital in the way of direct

investment and through foreign institutional investors. Consequently, the international

capital inflows have been increased tremendously during last two decades. The capital is

being invested by foreign investor through mutual funs, investment trusts, banks,

portfolio mangers, charitable trusts etc. and it has been boosting the growth of Indian

economy since then. Moreover, the growth rates in GDP i.e. around 7 to 8 percent per

year as compared to 2 to 4 percent in most of the developed economies and higher

interest rate attracted the foreign capital the most. This paper is an attempt to analyze the

relationship of FII investment with economic growth of India, in addition to comparative

analysis of preferred investment stock of FII.

FDI destination in services but has failed to evolve a manufacturing hub which

has greater economic benefit. FDI though one of the important sources of financing the

economic development, but not is not a solution for poverty eradication, unemployment

and other economic ills. India needs a massive investment to achieve the goals of vision

20-20. Policy makers need to ensure transparency and consistency in policy making

along with comprehensive long term development strategy.

The report of the project “Foreign direct investment (FDI) and foreign institutional

investors(FII) in India” mainly focused on the following areas:

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A) FOREIGN DIRECT INVESTMENT (FDI)

Net foreign direct investment (FDI) flows into India reached 70630 crore in India’s

2006–07 fiscal year, means increase of 187% of the 24613 crore recorded during 2005–

06, with the largest share of FDI flows from Mauritius, followed by the United States and

the United Kingdom. This study examines FDI in India, in the context of the Indian

economic and regulatory environment. This study present FDI trends in India, by country

and by sectors during the post liberalization period that is 1991 to 2007 year, using

official government data from Indian official government internet site like

that of RBI, SEBI. To illustrate the driving forces behind these trends, the study also

discusses the investment climate in India, Indian government incentives to foreign

investors, the Indian regulatory environment as it affects investment, and the effect of

India’s global, regional, and bilateral trade agreements on investment from top 10 FDI

investing countries. Finally, the study examines global FDI in India’s in top 10 sectors of

industry.

B) FOREIGN INSTITUTIONAL INVESTORS (FII)

Institutional Investor is any investor or investment fund that is from or registered in a

country outside of the one in which it is currently investing. Institutional investors

include hedge funds, insurance companies, pension funds and mutual funds. The growing

Indian market had attracted the foreign investors, which are called Foreign Institutional

Investors (FII) to Indian equity market, and this study present try to explain the impact

and extent of foreign institutional investors in Indian stock market and examining

whether market movement can be explained by these investors. It is often hear that

whenever there is a rise in market, it is explained that it is due to foreign investors' money and

a decline in market is termed as withdrawal of money from FIIs. This study tries to examine

the influence of FII on movement of Indian stock exchange during the post liberalization

period that is 1991 to 2007.

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CHAPTER 3:

FDI - AN OVERVIEW

3.1 INTRODUCTION: FOREIGN INVESTMENT

Investment in Indian market

India is believed to be a good investment despite political uncertainty, bureaucratic

hassles, and shortages of power and infrastructure deficiencies. India presents a vast

potential for overseas investment and is actively encouraging the entrance of foreign

players into the market. No company, of any size, aspiring to be a global player can, for

long ignores this country, which is expected to become one of the top three emerging

economies.

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Foreign Investments

Investments made by residents of a country inFinancial assets and production processes of

another country

Foreign Entitywants to enter inthe Indian Market

Foreign Direct Investment (FDI)

Portfolio Investment Scheme( PIS)→FII

But HOW?


TABLE 1: FOREIGN INVESTMENT INFLOWS

Year A. Direct investment B. Portfolio investmentTotal (A+B)

US $ million US $ million US$ million2000-01 4029 2760 67892001-02 6130 2021 81512002-03 5035 979 60142003-04 4322 11377 156992004-05 6051 9315 153662005-06 8961 12492 214532006-07 22826 7003 298292007-08 34835 27271 621062008-09 37838 -13855 239832009-10 37763 32376 701392010-11 30380 31471 61851

SOURCE: Handbook of Statistics of Indian Economy 2011

Chart 1: FOREIGN INVESTMENT IN INDIA

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

-20000

-10000

0

10000

20000

30000

40000

50000

FOREIGN INVESTMENT IN INDIA

Direct investment Portfolio investment

Year

US $

mn

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3.2 FOREIGN DIRECT INVESTMENT

FDI 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).

3.2.1 FDI AND ECONOMIC GROWTH

The IMF definition of FDI includes as many as twelve different elements-equity capital,

reinvested earnings of foreign companies, inter company debt transactions, short‐term

and long-term loans, financial leasing, trade credits, grants, bonds, non-cash acquisition

of equity, investment made by foreign venture capital investors, earnings data of

indirectly-held FDI enterprises, control premium and non-competition fee. India,

however, does not adopt any other element other than equity capital reported on the basis

of issue or transfer of equity or preference shares to foreign direct investors.

Figure - 01 exploring the process how FDI is important in utilizing of our economic

resources and generating the employment in country as well as important for creating

economic prosperity.

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Link Model: FDI and Economic Growth

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FDI Flow of Money in Economy

Employment Generation Skilled Unskilled

Processing of Economic Resource

Disposable Income Increased


3.2.2 TYPES OF FOREIGN DIRECT INVESTMENT

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TYPES OF FDI

BY DIRECTIO

BY TARGET

BY MOTIVE

INWARD

OUTWARD

GREENFIELD INVESTMENT

HORIZONTAL FDI

RESOURCE SEEKING

MARKET SEEKING

EFFICIENCY SEEKING

VERTICAL FDI


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

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 MNC enters a foreign country to produce the same products

product at home.

Conglomerate FDI – the MNC produces products not manufactured at home.

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Vertical FDI – the MNC 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.

3.2.3 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)

3.2.4 ENTRY MODE

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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

3.2.5 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.

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

Improving Performance from Structural Discrepancies

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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

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.

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

3.2.6 THE IMPACT OF FDI ON THE HOST COUNTRY

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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.

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.

3.2.7 ADVANTAGES OF FDI

Attracting foreign direct investment has become an integral part of the economic

development strategies for India. FDI ensures a huge amount of domestic capital,

production level, and employment opportunities in the developing countries, which is a

major step towards the economic growth of the country. FDI has been a booming factor

that has bolstered the economic life of India, but on the other hand it is also being blamed

for ousting domestic inflows. FDI is also claimed to have lowered few regulatory

standards in terms of investment patterns. The effects of FDI are by and large

transformative. The incorporation of a range of well- composed and relevant policies will

boost up the profit ratio from Foreign Direct Investment higher. Some of the biggest

advantages of FDI enjoyed by India have been listed as under:

Economic growth -

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This is one of the major sectors, which is enormously benefited from foreign direct

investment. A remarkable inflow of FDI in various industrial units in India has boosted

the economic life of country.

Trade -

Foreign Direct Investments have opened a wide spectrum of opportunities in the trading

of goods and services in India both in terms of import and export production. Products of

superior quality are manufactured by various industries in India due to greater amount of

FDI inflows in the country.

Employment and skill levels -

FDI has also ensured a number of employment opportunities by aiding the setting up of

industrial units in various corners of India.

Technology diffusion and knowledge transfer -

FDI apparently helps in the outsourcing of knowledge from India especially in the

Information Technology sector. It helps in developing the know-how process in India in

terms of enhancing the technological advancement in India.

Linkages and spillover to domestic firms -

Various foreign firms are now occupying a position in the Indian market through Joint

Ventures and collaboration concerns. The maximum amount of the profits gained by the

foreign firms through these joint ventures is spent on the Indian market.

3.2.8 DISADVANTAGES OF FDI

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The disadvantages of foreign direct investment occur mostly in case of matters related to

operation, distribution of the profits made on the investment and the personnel. One of

the most indirect disadvantages of foreign direct investment is that the economically

backward section of the host country is always inconvenienced when the stream of

foreign direct investment is negatively affected.

The situations in countries like Ireland, Singapore, Chile and China corroborate such an

opinion. It is normally the responsibility of the host country to limit the extent of impact

that may be made by the foreign direct investment. They should be making sure that the

entities that are making the foreign direct investment in their country adhere to the

environmental, governance and social regulations that have been laid down in the

country. The various disadvantages of foreign direct investment are understood where the

host country has some sort of national secret – something that is not meant to be

disclosed to the rest of the world. It has been observed that the defense of a country has

faced risks as a result of the foreign direct investment in the country.

At times it has been observed that certain foreign policies are adopted that are not

appreciated by the workers of the recipient country. Foreign direct investment, at times, is

also disadvantageous for the ones who are making the investment themselves.

Foreign direct investment may entail high travel and communications expenses. The

differences of language and culture that exist between the country of the investor and the

host country could also pose problems in case of foreign direct investment.

Yet another major disadvantage of foreign direct investment is that there is a chance that

a company may lose out on its ownership to an overseas company. This has often caused

many companies to approach foreign direct investment with a certain amount of caution.

At times it has been observed that there is considerable instability in a particular

geographical region. This causes a lot of inconvenience to the investor.

The size of the market, as well as, the condition of the host country could be important

factors in the case of the foreign direct investment. In case the host country is not well

connected with their more advanced neighbors, it poses a lot of challenge for the

investors.

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At times it has been observed that the governments of the host country are facing

problems with foreign direct investment. It has less control over the functioning of the

company that is functioning as the wholly owned subsidiary of an overseas company.

This leads to serious issues. The investor does not have to be completely obedient to the

economic policies of the country where they have invested the money. At times there

have been adverse effects of foreign direct investment on the balance of payments of a

country. Even in view of the various disadvantages of foreign direct investment it may be

said that foreign direct investment has played an important role in shaping the economic

fortunes of a number of countries around the world.

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3.3 FOREIGN DIRECT INVESTMENT IN

INDIA

India is a country that has been able to restore investor confidence in its markets, even

during the toughest of times. Increase in capital inflows, foreign direct investments (FDI)

and overseas entities’ participation reflect the fact that Indian markets have fared well in

recent times. Moreover, foreign companies are viewing the South-Asian nation as a

strategic hub for their operations and investments owing to investor-friendly policy

environment, positive eco-system and huge potential for growth.

India Inc’s increasing presence over the global canvas and Indian government’s

consistent support to the FDI space have facilitated remarkable developments and

investments from overseas partners

PRE-LIBERALIZATION PERIOD (1947–1991)

Indian economic policy after independence was influenced by the colonial experience,

which was seen by Indian leaders as exploitative, and by those leaders exposure to

democratic socialism as well as the progress achieved by the economy of the Soviet

Union. Domestic policy tended towards protectionism, with a strong emphasis on import

substitution, industrialization, economic interventionism, a large public sector, business

regulation, and central planning, while trade and foreign investment policies were

relatively liberal. Five-Year Plans of India resembled central planning in the Soviet

Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical

plants, among other industries, were effectively nationalized in the mid-1950s.

POST-LIBERALIZATION PERIOD (SINCE 1991)

In the late 1970s, the government led by Morarji Desai eased restrictions on capacity

expansion for incumbent companies; removed price controls, reduced corporate taxes and

promoted the creation of small scale industries in large numbers. However, the

subsequent government policy of Fabian socialism hampered the benefits of the

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economy, leading to high fiscal deficits and a worsening current account. The collapse of

the Soviet Union, which was India's major trading partner, and the first Gulf War, which

caused a spike in oil prices, caused a major balance-of-payments crisis for India, which

found it facing the prospect of defaulting on its loans. India asked for a $1.8 billion

bailout loan from the International Monetary Fund (IMF), which in return demanded

reforms. In response, Prime Minister Narasimha Rao, along with his finance minister

Manmohan Singh, initiated the economic liberalization of 1991. The reforms did away

with the License Raj (investment, industrial and import licensing), reduced tariffs and

interest rates and ended many public monopolies, allowing automatic approval of foreign

direct investment in many sectors. By the turn of the 20th century, India had progressed

towards a free-market economy, with a substantial reduction in state control of the

economy and increased financial liberalization. This has been accompanied by increases

in life expectancy, literacy rates and food security, although the beneficiaries have largely

been urban residents.

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

parity (PPP); the economy is diverse and encompasses agriculture, handicrafts, textile,

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

still earns 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

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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 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

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.

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.

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3.3.1 INVESTMENT RISKS IN INDIA

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

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.

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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

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.

3.3.2 In India, Foreign Direct Investment Policy allows for investment only in case of

the following form of investments:

Through financial alliance

Through joint schemes and technical alliance

Through capital markets, via Euro issues

Through private placements or preferential allotments

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3.3.3 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). GDR investments are treated as FDI and

are designated in dollars and are not subject to any ceilings on investment. 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.

This condition would be relaxed for infrastructure projects such as power generation,

telecommunication, petroleum exploration and refining, ports, airports and roads.

1. 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. 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, would need to obtain prior FIPB

clearance before seeking final approval from Ministry of Finance.

2. Use of GDRs – The proceeds of the GDRs can be used for financing capital goods

imports, capital expenditure including domestic purchase/installation of plant, equipment

and building and investment in software development, prepayment or scheduled

repayment of earlier external borrowings, and equity investment in JV/WOSs in India.

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3.3.4 FOREIGN DIRECT INVESTMENTS IN INDIA ARE APPROVED

THROUGH TWO ROUTES –

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 sector wise 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.

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.

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3.4 FDI POLICY IN INDIA

3.4.1 FOREIGN DIRECT INVESTMENT POLICY

FDI policy is reviewed on an ongoing basis and measures for its further liberalization are

taken. 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.

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

in sectors/activities under automatic route does not require any prior approval either by

the Government or the RBI. 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. The FDI policy of India has imposed certain foreign direct

investment regulations as per the FDI theory of the Government of India. These include

FDI limits in India for example:

Foreign direct investment in India in infrastructure development projects excluding arms

and ammunitions, atomic energy sector, railways system , extraction of coal and lignite

and mining industry is allowed up to 100% equity participation with the capping amount

as Rs. 1500 crores.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 limit of maximum 49%

in telecom industry especially in the GSM services

Page 26


3.4.2 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.

I. 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

Page 27


Defense and Strategic Industries

Agriculture (Including Plantation)

Print Media

Broadcasting

Postal Services

II. 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.

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.

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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.

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.

3.4.3 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

3.4.5 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 is

Page 29


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

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%. Normally, the foreign direct investment is made mostly into the

extractive industries. However, 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. However, the situation has not been the same in the countries

with a middle income range.

The middle income countries have not received a steady inflow of foreign direct income

coming their way. The situation is comparatively better in the low income countries.

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, other forms of

economic crises have had less effect on these countries.

These countries had lesser amounts of commercial bank obligations, which again had

Page 30


been caused by the absence of proper financial markets, as well as the fact that their

economies were not open to foreign direct investment. During the later phases of the

decade of 70s the Asian countries started encouraging foreign direct investments in their

economies. China has received the most of the foreign direct investment that was pumped

into the countries

with low income. It accounted for as much as 86% of the total foreign direct investment

made in the lower income countries in with low income. It accounted for as much as 86%

of the total foreign direct investment made in the lower income countries in 1995.

The economic liberalization in China started in 1979. This led to an increase in the

foreign direct investment in China. In the years between 1982 and 1991 the average

foreign direct investment in China was US$ 2.5 billion. This average increased by seven

times to become US$ 37.5 billion during 1995. A significant amount of the foreign direct

investment in China was provided in the industrial sector.

It was as much as 68%. Around 20% of the foreign direct investment of China was made

in the real estate sector. During the same period Nigeria had been the second best in

terms of receiving foreign direct investment. In the recent times India has risen to be the

third major foreign direct investment destination in the recent years. Foreign direct

investment started in India in 1991 with the initiation of the economic liberation.

There were more initiatives that enabled India to garner foreign direct investments worth

US$ 2.9 billion from 1991 to 1995. This was a significant increase from the previous

twenty years when the total foreign direct investment in India was US$1 billion. Most of

the foreign direct investment made in India has been in the infrastructural areas like

telecommunications and power. In the manufacturing industry the emphasis has been on

petroleum refining, vehicles and petrochemicals Vietnam is a low income country, which

is supposed to have the same potential as China to generate foreign direct investment.

The foreign direct investment laws were introduced in Vietnam in 1987-88. This led to an

increase in the foreign direct investment made in the country. The amount stood at US$

25 million in 1993 compared to US$ 8 million in 1993. This amount increased by 3 times

Page 31


after the USA removed its economic sanctions in 1994. The gas and petroleum industries

were the biggest beneficiaries of the foreign direct investment. Bangladesh started

receiving increasing foreign direct investment after 1991, when the economic reforms

took place in the country.

After 1991 it was possible for foreign companies to set up companies in Bangladesh

without taking permission beforehand. The foreign direct investment rose from US$ 11

million in 1994 to US$ 125 million in 1995. As per the available statistics the

manufacturing industry, comprising of clothing and textiles took up 20% of the total

approved foreign direct investment. Food processing, chemicals and electric machinery

were also important in this regard. The increase in the foreign direct investment in Ghana

was remarkable as well. The figures increased from US$11.7 million, on an average,

from 1986 to 1992 to US$ 201 million, on an average, from 1993 to 1995. This

improvement was brought about by the privatization of the Ashanti Goldfields.

About foreign direct investment In India.

It 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).

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3.4.5 PROHIBITED SECTORS

FDI is prohibited in:

(a) Retail Trading (except single brand product retailing)

(b) Lottery Business including Government /private lottery, online lotteries, etc.

(c) Gambling and Betting including casinos etc.

(d) Chit funds

(e) Nidhi company

(f) Trading in Transferable Development Rights (TDRs)

(g) Real Estate Business or Construction of Farm Houses

(h) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco

substitutes

(i) Activities / sectors not open to private sector investment e.g. Atomic Energy and

Railway Transport (other than Mass Rapid Transport Systems).

Foreign technology collaboration in any form including licensing for franchise,

trademark, brand name, management contract is also prohibited for Lottery Business and

Gambling and Betting activities.

3.4.6 PERMITTED SECTORS

In the following sectors/activities, FDI up to the limit indicated against each

sector/activity is allowed, subject to applicable laws/ regulations; security and other

conditionalities. In sectors/activities not listed below, FDI is permitted up to 100% on the

automatic route, subject to applicable laws/ regulations; security and other

conditionalities.

Wherever there is a requirement of minimum capitalization, it shall include share

premium received along with the face value of the share, only when it is received by the

Page 33


company upon issue of the shares to the non-resident investor. Amount paid by the

transferee during post-issue transfer of shares beyond the issue price of the share, cannot

be taken into account while calculating minimum capitalization requirement

Table 2: FDI in Permitted Sectors to the limit indicated in %

Sl.No. Sector/Activity % of FDI Cap/Equity

Entry Route

1)AGRICULTURE 1.1 Agriculture & Animal Husbandry 100% Automatic1.2 Tea Plantation 100% Government

2)MINING2.1 Mining and Exploration of metal 100% Automatic2.2 Coal and Lignite Mining 100% Automatic2.3 Mining and mineral separation of

titanium bearing minerals and ores 100% Government

3)Petroleum & Natural Gas 3.1 Exploration activities of oil and natural

gas fields 100% Automatic

3.2 Petroleum refining by the Public Sector Undertakings

49% Government

4)DEFENCE Defence Industry subject to Industrial license under the Industries Act 1951

26% Government

5)Information Services5.1 Broadcasting 5.2 Terrestrial Broadcasting FM (FM

Radio) 26% Government

5.3 Cable Network 49% Government 5.4 ISPs with gateways, radiopaging 74% Above 49% need

Govt. license5.5 FDI limit in (HITS) Broadcasting

Service 74% Automatic up to

49% Government route beyond

Headend-In-The-Sky (HITS) Broadcasting Service refers to the multichannel downlinking and distribution of television programme in C-Band or Ku Band wherein all the pay channels are downlinked at a central facility (Hub/teleport) and again uplinked to a satellite after encryption of channel. At the cable headend these encrypted pay channels are downlinked using a single satellite antenna, transmodulated and sent to the subscribers by using a land based transmission system comprising of infrastructure of cable/optical fibers network.

Page 34


6)Print Media6.1 Publishing of Newspaper and

periodicals 26% Government

6.2 Publication of Indian editions of foreign magazines

26% Government

6.3 Publishing/printing of Scientific and Technical

100% Government

6.4 Publication of facsimile edition of foreign newspapers

100% Government

7)CIVIL AVIATION 7.1 Airports

(a) Greenfield projects 100% Automatic (b) Existing projects 100% Automatic up to

74% Government route beyond 74%

7.2 Air Transport Services

(1) Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline

49% FDI Automatic

(2) Non-Scheduled Air Transport Service

74% FDI Automatic up to 49% Government route beyond 49% and up to 74%

(3) Helicopter services/seaplane services requiring DGCA approval

100% Automatic

7.3 Other services under Civil Aviation sector (1) Ground Handling Services 74% FDI Automatic up to

49% Government route beyond 49% and up to 74%

(2) Maintenance and Repair organizations

100% Automatic

8) Courier services for carrying packages, parcels and other items

100% Government

9) Construction Development: Townships, Housing, Built-up infrastructure

100% Automatic

10) Industrial Parks – new and existing 100% Automatic Satellites – Establishment and operation 74% Government

Page 35


11) Private Security Agencies 49 % Government

12) Telecom services 74% Automatic up to 49% Government route beyond 49% and up to 74%

13) TRADING 13.1 (i) Cash & Carry Wholesale Trading/

Wholesale Trading 100% Automatic

13.2 Single Brand product trading 51% Government

13.3 E-commerce activities 100% Automatic

14) FINANCIAL SERVICES Asset Reconstruction Company‘ (ARC) 49% Government

Banking –Private sector 74% Automatic up to 49% Government route beyond 49% and up to 74%

Banking- Public Sector 20% Government

15) Commodity Exchanges 49% Government

16) Credit Information Companies 49% Government

17) Infrastructure Company in the Securities Market

49% Government

18) Insurance 26% Automatic

19) Non-Banking Finance Companies (NBFC) 100% Automatic

20) Drugs & Pharmaceuticals 100% Automatic 21) Power(other than atomicreactor power plants)

100% Automatic

22) Hotel & Tourism 100% Automatic

Page 36


3.5 CAUSES AND REASONS FOR LOW FDI

1. Image and Attitude

Though economic reforms welcoming foreign capital were introduced in the nineties it

does not seem so far to be really evident in our overall attitude. There is a lingering

perception abroad that foreign investors are still looked at with some suspicion. There is

also a view that some unhappy episodes in the past have a multiplier effect by adversely

affecting the business environment in India. Besides the “Made in India” label is not

conceived by the world as synonymous with quality.

We do not get across effectively to the decision-making “board room” levels of corporate

entities where a final decision is taken. Our promotional effort is quite often of a general

nature and not corporate specific. India is, moreover, a multi-cultural society and a large

number of multinational companies (MNC) do not understand the diversity and the

Multi-plural nature of the society and the different stakeholders in this country.

On the other hand China is viewed as ‘more business oriented,’ its decision- making is

faster and has more FDI friendly policies (ATK 2001). Despite a very similar historical

mistrust of foreigners and foreign investment arising from colonial experience, modern

(post 1980 China) differs fundamentally from India. Its official attitude to FDI, reflected

from the highest level of government (PM, President) to the lowest level of government

bureaucracy (provinces) is one of consciously enticing FDI with a warm welcome. They

recognize the multifaceted and mutual benefits arising from FDI.

Page 37


2. Policy Frameworks

Foreign companies or investors that have set up an Indian company or Joint Venture have

become indigenized and thus can operate more or less competitively with other Indian

company. They adjust themselves to the milieu. This is not, however, true of foreign

direct investors who are coming into India for the first time. To the uninitiated the hurdles

look daunting and the complexity somewhat perplexing.

Among the policy problems that have been identified by surveys as acting as additional

hurdles for FDI are laws, regulatory systems and Government monopolies that do not

have contemporary relevance.

3. Procedures

According to Boston Consulting Group, investors find it frustrating to navigate through

the tangles of bureaucratic controls and procedures.11 McKinsey (2001) found that, the

time taken for application/bidding/approval of FDI projects was too long.

Multiple approvals, excessive time taken (2-3years) such as in food processing and long

lead times of up to six months for licenses for duty free exports, lead to “loss of

investors’ confidence despite promises of a considerable market size.”

Bureaucracy and red tape topped the list of investor concerns as they were cited by 39 per

cent of respondents in the A T Kearney survey. According to a CII study, a typical power

project requires 43 Central Government clearances and 57 State Government level

(including the local administration) clearances. Similarly, the number of clearances for a

typical mining project is 37 at the Central Government level and 47 at the State

Government level. Though the number of approvals/clearances may not always be much

lower in the OECD countries such as the USA and Japan the regulatory process is

transparent with clear documentation requirements and decision rules based largely on

self-certification, and generally implemented through the legal profession.

The FICCI (2001) study similarly cites centre-state duality as creating difficulties at both

Page 38


the approval and project implementation stages. These studies find that the bureaucracy

in general is quite unhelpful in extending infra-structural facilities to any project that is

being set up. This leads to time and cost overruns. At an operational level, multiple

returns have to be filed every month. The precise reason for the low levels of realization

is the post approval procedure, which has in the past played havoc with project

implementation.

4. Quality of Infrastructure

Poor infrastructure affects the productivity of the economy as a whole and hence it’s

GDP/per capita.It also reduces the comparative advantage of industries that are more

intensive in the use of such infrastructure. In the context of FDI, poor infrastructure has a

greater effect on export production than on production for the domestic market. FDI

directed at the domestic market suffers the same handicap and additional costs as

domestic manufacturers that are competing for the domestic market. Inadequate and poor

quality roads, railroads and ports, however raise export costs vis-a-vis global competitors

having better quality and lower cost infrastructure.

5. State Obstacles

Taxes levied on transportation of goods from State to State (such as octroi and entry tax)

adversely impact the economic environment for export production. Such taxes impose

both cost and time delays on movement of inputs used in production of export products

as well as in transport of the latter to the ports. Differential sale and excise taxes (States

and Centre) on small and large companies are found to be a deterrent to FDI in sectors

such as textiles (McKinsey 2001). Investments that could raise the productivity and

quality of textiles and thus make them competitive in global markets remain unprofitable

because they cannot overcome the tax advantage given to small producers in the domestic

market.

Page 39


At the local level (sub-state) issues pertaining to land acquisition, land use change, power

connection, building plan approval are sources of project implementation delay. The

State level issues are also being considered by the Govindarajan committee with a view

to seeing how they can be alleviated.

6. Legal Delays

Though India’s Anglo Saxon legal system as codified is considered by many legal

experts to be superior to that of many other emerging economies it is often found in

practice to be an obstacle to investment. One of the reasons is the inordinate delay are the

interlocutory procedures that characterize judicial procedures.

Page 40


3.6 ANALYSIS OF FDI INFLOW IN INDIA

Table 3: FINANCIAL YEAR-WISE FDI INFLOWS DATA

(Amount US$ million)

FINANCIAL YEAR-WISE FDI INFLOWS DATA:

EquityFDI FLOWS INTO INDIA

S. No.

Financial Year (April-March)

FIPB Route/RBI‟s

Automatic Route/

Acquisition Route

Equity capital of

unincorporated bodies

Re-investedearning

Other capital

+

TotalFDI

Flows

%age growth over previous year(in US$ terms)

A1991-2000 15,483 15483

1 2000-01 2,339 61 1,350 279 4,029 -

2 2001-02 3,904 191 1,645 390 6,130 (+) 52 %

3 2002-03 2,574 190 1,833 438 5,035 (-) 18 %

4 2003-04 2,197 32 1,460 633 4,322 (-) 14 %

5 2004-05 3,250 528 1,904 369 6,051 (+) 40 %

6 2005-06 5,540 435 2,760 226 8,961 (+) 48 %

7 2006-07 15,585 896 5,828 517 22,826 (+) 146 %

8 2007-08 24,573 2,291 7,679 292 34,835 (+) 53 %

9 2008-09 31,364 702 9,032 776 41,874 (+) 20 %

10 2009-10 (P) (+) 25,606 1,540 8,668 1,931 37,745 (-) 10 %

11 2010-11 (P) (+) 19,430 874 11,939 658 32,901 (-) 13 %

12 2011-12 (P) 24,188 765 8,190 2,204 35,347

B CUMULATIVE TOTAL

160,550 8,505 62,288 8,713 240,056

A+B 176033

Source: Department of Industrial Policy & Promotion

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3.6.1 FIPB Route has been the most important source of FDI inflow for India and has

been reported at cumulative 176033 Million US$ since 1991. For the period 1991-2000

and 2001-2009 FDI inflows though this FIPB route was 15,483 Million US$ and 1,

60,550 US Million $ respectively which is seven time than previous decade. However,

due to liberalization in economic policy of the government other routes of FDI are also

becoming popular. For the corresponding period FDI inflow of reinvested earning has

been 62,288 Million US$, which is about one-fifth of the total FDI inflow so far. This

may be attributed to government initiatives of providing special tax benefits and other

facilities for reinvestment of earnings.

Despite the global financial credit squeeze brought by the recession India continues to be

an attractive destination for investment as there is tremendous potential for growth in the

vast and diverse markets of our country.

Page 42


Chart 2: FDI inflows in India from 2000-2012

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10 (P) (+)

2010-11 (P) (+)

2011-12 (P)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

TOTAL FDI INFLOWS IN INDIA

TotalFDIFlows

year

$ m

n

The graph from 2000-01 to 2004-05 have been almost hovering the same levels but

importantly haven’t gone down which is because the foreign investors saw immense

potential but were not getting enough incentives to enter with huge business propositions.

The breakout came from the year 2005-06 when the investment nearly doubled as

compared to 2000-01, after which there was no looking back as consistent economic

growth, de-regulation, liberal investment rules, and operational flexibility helped increase

the inflow of Foreign Direct Investment or FDI. So much so that even during the year

2008-09 when the recession had taken its toll on the western countries there was no

indication of falling investment via the FDI route as can be seen from the chart.

In percentage terms FDI inflow increased by 20% from 2007-08 to 2008-09.

Page 43


3.6.2 Table 4: SHARE OF TOP 10 INVESTING COUNTRIES IN FDI INFLOWS

FROM APRIL 2000 TO DECEMBER 2011

Sr.No Country

Amount of Foreign Direct Investment Inflows In Rs crore

%age to total Inflows(in terms of US $)

1 MAURITIUS 280,915.57 40%2 SINGAPORE 71,312.78 10%3 JAPAN 56,431.86 8%4 U.S.A. 46,731.47 7%5 U.K. 41,025.66 6%6 NETHERLANDS 30,624.62 4%7 CYPRUS 26,831.30 4%8 GERMANY 19,688.78 3%9 FRANCE 12,301.17 2%

10 U.A.E. 9,544.71 1%11 Other 15%

Source: Government of India (GOI) (2009). FDI Statistics, Ministry of Commerce & Industry, Department ofIndustrial Policy and Promotion.

Page 44


Mauritius

Mauritius invested Rs 280,915.5 crore in India from April .00 - Dec.11, equal to 40

percent of total FDI inflows. Many companies based outside of India utilize Mauritian

holding companies to take advantage of the India- Mauritius Double Taxation Avoidance

Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains

taxes, and may allow some India-based firms to avoid paying certain taxes through a

process known as “round tripping.”

The extent of round tripping by Indian companies through Mauritius is unknown.

However, 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. The potential loss of tax revenue is of particular concern to the Indian

government. These are the sectors which attracting more FDI from Mauritius Electrical

equipment Gypsum and cement products ,Telecommunications ,Services sector that

includes both non- financial and financial.

Singapore

Singapore continues to be the single largest investor in India amongst the Singapore with

FDI inflows into Rs. 71312.78 crore April .00 - Dec.11.Sector-wise distribution of FDI

inflows received from Singapore the highest inflows have been in the services sector

(financial and non financial), which accounts for about 30% of FDI inflows from

Singapore. Petroleum and natural gas occupies the second place followed by computer

software and hardware, mining and construction.

Japan

Japan ranked third in terms of cumulative foreign direct investment (FDI) in India;

accounting for Rs 56431.86 crore came in the period April 2000-Dec 2011, according to

the latest data released by the Department of Policy and Promotion (DIPP).

Japanese firms increasingly prefer India as an investment destination over China. The

number of Japanese companies in India has grown three fold over the last three years

from approximately 100 companies in 2006-07 to 300 in 2009-10

Page 45


U.S.A.

The United States is the fourth largest source of FDI in India (7 % of the total), valued at

Rs 46731.47 crore in cumulative inflows from April.00 to Dec 11. According to the

Indian government, the top sectors attracting FDI from the United States to India are fuel,

telecommunications, electrical equipment, food processing, and services. According to

the available M&A data, the two top sectors attracting FDI inflows from the United

States are computer systems design and programming and manufacturing

U.K.

The United Kingdom is the fourth largest source of FDI in India (6 % of the total), valued

at Rs 41025.66 crore in cumulative inflows from April.00 to Dec 11.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.

UK companies and policy makers the focus sectors for joint ventures, partnerships, and

trade are non-conventional energy, IT, precision engineering, medical equipment,

infrastructure equipment, and creative industries.

Netherlands

FDI from Netherlands to India has increased at a very fast pace over the last few years.

Netherlands ranks fifth among all the countries that make investments in India. The total

flow of FDI from Netherlands to India came to Rs 30624.62 crore inflows from April.00

to Dec 11. The total percentage of FDI from Netherlands to India stood at 4% out of the

total foreign direct investment in the country up to August 2009.

Following Various industries attracting FDI from Netherlands to India are:

Food processing industries Telecommunications that includes services of cellular mobile,

basic telephone, and radio paging Horticulture Electrical equipment that includes

computer software and electronics, service sector that includes non- financial and

financial services.

Page 46


3.6.3 Table 5: SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS

S.NO Sector

Amount of FDI Inflows In Rs crore

% age to total

Inflows(In terms of

US$)

1SERVICES SECTOR (financial

& nonfinancial)

142,538.64

20%

2

TELECOMMUNICATIONS (radio paging, cellular mobile,

basic telephone services)

57,035.16

8%

3COMPUTER SOFTWARE &

HARDWARE

48,939.65

7%

4 HOUSING & REAL ESTATE

48,818.51

7%

5

CONSTRUCTION ACTIVITIES (including roads

& highways)

46,215.77

6%

6

DRUGS &

PHARMACEUTICALS 42,668.31 6%

7 POWER

32,175.63

4%

8 AUTOMOBILE INDUSTRY

29,223.99

4%

9METALLURGICAL

INDUSTRIES

25,468.79

4%

10PETROLEUM & NATURAL

GAS

14,581.14

2%

11 Others 32%

Source: FDI Statistics, Ministry of Commerce & Industry, Department of Industrial Policy and Promotion.

Chart 4

Page 47


The combined FDI share of financial and non-financial services, computer hardware and

software, telecommunications and housing and real estate is 41.9% of the cumulative FDI

equity inflows during the period April 2000-December 2011. With the inclusion of the

construction sector (6.5%), the share of services in FDI inflows increases to 48.4%.

The IT industry is one of the booming sectors in India. At present India is the leading

country pertaining to the IT industry in the Asia -Pacific region. With more international

companies entering the industry, the Foreign Direct Investments (FDI) has been

phenomenon over the year. The rapid development of the telecommunication sector was

due to the FDI inflows in form of international players entering the market and transfer of

advanced technologies. The telecom industry is one of the fastest growing industries in

Page 48


India. With a growth rate of 45%, Indian telecom industry has the highest growth rate in

the world.

The FDI in Automobile Industry has experienced huge growth in the past few years. The

increase in the demand for cars and other vehicles is powered by the increase in the levels

of disposable income in India. The options have increased with quality products from

foreign car manufacturers. The introduction of tailor made finance schemes, easy

repayment schemes has also helped the growth of the automobile sector. For the past few

years the Indian Pharmaceutical Industry is performing very well. The varied functions

such as contract research and manufacturing, clinical research, research and development

pertaining to vaccines are the strengths of the Pharma Industry in India. Multinational

pharmaceutical corporations outsource these activities and help the growth of the sector.

The Indian Pharmaceutical Industry has been experiencing a vast inflow of FDI.

The FDI inflow in the Cement Industry in India has increased with some of the Indian

cement giants merging with major cement manufacturers in the world such Holcim,

Heidelberg, Italcementi, Lafarge, etc. The FDI in Semiconductor sector in India were

crucial for the development of the IT and the ITES sector in India. Electronic hardware is

the major component of several industries such as information technology

Page 49


3.6.4 Key Statistics

FDI inflows rose by 36 per cent to US$ 23.69 billion during January-October

2011, while the cumulative amount of FDI equity inflows from April 2000 to

October 2011 stood at US$ 226.05 billion, according to the latest data released by

the Department of Industrial Policy and Promotion (DIPP).

The services (including financial and non-financial) sectors attracted highest FDI

equity inflows during April-October 2011-12 at US$ 3.43 billion. India received

maximum FDI from countries like Mauritius, Singapore, and the US at US$ 61.2

billion, US$ 15.2 billion and US$ 10 billion, respectively, during April 2000-

October 2011.

Global consultancy firm Ernst & Young (E&Y) has stated that the value of

mergers and acquisition (M&A) deals involving Indian companies aggregated to

US$ 34.4 billion in 2011 involving 806 transactions. There were 177 outbound

deals with an aggregate disclosed value of US$ 8.8 billion in 2011; forming 25.6

per cent of the total M&A pie. Adani Enterprises’ acquisition of Abbot Point Coal

Terminal in Australia (US$ 2 billion) and the GVK Group’s purchase of

Australia-based Hancock Coal’s Queensland coal assets (US$ 1.3 billion) were

among the biggest outbound deals recorded in 2011.

According to data released by auditing and consultancy firm KPMG, India Inc

witnessed a 31 per cent increment in private equity (PE) investment to US$ 7.89

billion during the first three quarters of 2011. PE firms like Blackstone India and

Kohlberg Kravis Roberts & Co (KKR & Co) are betting high on Indian markets.

The Blackstone India chief was reported to have said that he intends to close 5-6

deals a year in India whose financial valuations would revolve around roughly

US$ 100 million to US$ 120 million each.

Page 50


Important Developments

The government of India is continuously working towards increasing FDI flows into the

country. FDI rose by an impressive 56 per cent to US$ 2.53 billion in November 2011.

The cumulative flows of for April-November 2011 aggregated to US$ 22.83 billion,

exceeding the total FDI of US$ 19.43 billion for 2010-11 fiscal.

Recently, the Government has approved 20 FDI proposals worth Rs 1,935.24 crore (US$

384.5 million). The approved major investments, that were consulted with Foreign

Investment Promotion Board (FIPB) as well, are enlisted below:

Sterlite Grid had proposed to act as an investment company and invest Rs 1,150

crore (US$ 228.48 million) via FDI

Equitas Micro Finance would invest Rs 230.7 crore (US$ 45.83 million) for

demerging its microfinance business with its wholly-owned subsidiary

TV Vision proposed to induce Rs 200 crore (US$ 39.81 million) of foreign

investment through an issue of equity shares via an initial public offer (IPO). The

deal is to undertake the business of broadcasting a non-news and current affairs

TV channel

Page 51


CHAPTER 4:

FOREIGN INSTITUTIONAL INVESTMENT

(FII)

Page 52

FIIs

Who are they?

Institutions like pension funds ,mutual funds,investment trusts, asset managementcompanies, nominees companies and incorporated portfolio managers

An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing


The term FII is used most commonly in India to refer to outside companies investing in

the financial markets of India. International institutional investors must register with the

Securities and Exchange Board of India to participate in the market. One of the major

market regulations pertaining to FIIs involves placing limits on FII ownership in

Indian companies

Page 53

FIIs

Where they can invest?

Under securities such as shares, debentures and warrants issued by Indian companies which are

listed /to be listed on the Stock exchange in India

The schemes floated by domestic mutual funds, traded on the primary and secondary markets

In government securities including treasury bills and debt securities of Indian companies.


4.1 FOREIGN INSTITUTIONAL INVESTMENT IN INDIA

Since 1990-91, 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. As a part of the reforms process, 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,

augmentation of foreign exchange reserves and globalization of the Indian economy.

Simultaneously, the Government, for the first time, permitted portfolio investments from

abroad by foreign institutional investors in the Indian capital market. The entry of FIIs

seems to be a follow up of the recommendation of the Narsimhan Committee Report on

Financial System. While recommending their entry, the Committee, however did not

elaborate on the objectives of the suggested policy. The committee only suggested that

the capital market should be gradually opened up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all

the securities traded on the primary and secondary markets, including shares, debentures

and warrants issued by companies which were listed or were to be listed on the Stock

Exchanges in India. While presenting the Budget for 1992-93, the then Finance Minister

Dr. Manmohan Singh had announced a proposal to allow reputed foreign investors, such

as Pension Funds etc., to invest in Indian capital market.

Portfolio Investment

It refers to the purchase of stocks, bonds, debentures or other securities by an FII. FIIs

include pension funds, mutual funds, investment trusts, asset management companies,

nominee companies and incorporated/institutional portfolio managers.

In contrast to FDI, FIIs do not invest with the intention of gaining controlling interest in a

company. They typically make short-term investments. These investments are made-to-

book profits. Compared to FDI, a portfolio investor can enter and exit countries with

relative ease. This is a major contributing factor to the increasing volatility and instability

Page 54


of the global financial system. Because of the very nature of such investment, FII money

is also called ‘hot money’. The rapid outflow of ‘hot money’, in the recent past, has

created exchange-rate problems in Argentina and in Southeast Asia. Since FIIs are very

sensitive, a mere change in perception about an economy can prompt them to pull out

investments from a country.

The following factors contributed significantly to the FII flows to India -

• Regulation and Trading Efficiencies:

Indian stock markets have been well regulated by the stock exchanges, SEBI and RBI

leading to high levels of efficiency in trading, settlements and transparent dealings

enhancing the confidence level of FIIs in increasing allocations to India.

• F and O Segment:

The highly successful derivatives market in India has provided additional depth to the

markets with high traded volumes and multiple instruments by which investors can

participate in the Indian equity markets. In fact the Single Stock Futures (SSF) market in

India is one of the most successful SSF market in Asia after Korea.

• New Issuance:

We have witnessed extremely high quality issuance during the year from

companies such as NTPC, ONGC and TCS leading to strong FII participation with

successful new issuance of over $ nine billion, yet another record for the year.

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4.1.1 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. A Working Group for

Streamlining of the Procedures relating to FIIs, constituted in April, 2003, inter alia,

recommended streamlining of SEBI registration procedure, and suggested that dual

approval process of SEBI and RBI be changed to a single approval process of SEBI. This

recommendation was implemented in December 2003.

Currently, entities eligible to invest under the FII route are as follows:

I. As FII: Overseas pension funds, mutual funds, investment trust, asset

management company, nominee company, bank, institutional portfolio manager,

university funds, endowments, foundations, charitable trusts, charitable societies,

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.

II. As Sub-accounts: The sub account is generally the underlying fund on whose

behalf the FII invests. The following entities are eligible to be registered as sub-

accounts, viz. partnership firms, private company, public company, pension fund,

investment trust, and individuals.

Page 56


4.1.2 FIIS REGISTERED WITH SEBI FALL UNDER THE FOLLOWING

CATEGORIES:

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.

b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset

management companies, nominee companies and incorporated/institutional portfolio

managers or their power of attorney holders (providing discretionary and non-

discretionary portfolio management services) to be registered as FIIs. While the

guidelines did not have a specific provision regarding clients, in the application form the

details of clients on whose behalf investments were being made were sought.

While granting registration to the FII, permission was also granted for making

investments in the names of such clients. Asset management companies/portfolio

managers are basically in the business of managing funds and investing them on behalf of

their funds/clients. Hence, the intention of the guidelines was to allow these categories of

investors to invest funds in India on behalf of their 'clients'. These 'clients' later came to

be known as sub-accounts. The broad strategy consisted of having a wide variety of

clients, including individuals, intermediated through institutional investors, who would be

registered as FIIs in India. FIIs are eligible to purchase shares and convertible debentures

issued by Indian companies under the Portfolio Investment Scheme.

Page 57


4.2 PROHIBITIONS ON INVESTMENTS:

FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company.

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,

roads or bridges).

5) Trading in Transferable Development Rights (TDRs).

4.3 ACTS AND RULES

FII registration and investment are mainly governed by SEBI (FII) Regulations, 1995.

ELIGIBILITY FOR REGISTRATION AS FII: Following entities / funds are eligible to

get registered as FII:

1. Pension Funds

2. Mutual Funds

3. Insurance Companies

4. Investment Trusts

5. Banks

6. University Fund s

7. Endowments

8. Foundations

9. Charitable Trusts / Charitable Societies

Further, following entities proposing to invest on behalf of broad based funds (a fund

established or incorporated outside India, which has at least twenty investors with no

Page 58


single individual investor holding more than 10% shares or units of the fund), are also

eligible to be registered as FIIs:

1. Asset Management Companies

2. Institutional Portfolio Managers

3. Trustees

4. Power of Attorney Holder

4.4 REGISTRATION PROCESS OF FIIS

FIIs are required to obtain a certificate by SEBI for dealing in securities. SEBI grants the

certificate SEBI by taking into account the following criteria:

i) The applicant's track record, professional competence, financial soundness, experience,

general reputation of fairness and integrity.

ii) Whether the applicant is regulated by an appropriate foreign regulatory authority.

iii) Whether the applicant has been granted permission under the provisions of the

Foreign Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for

making investments in India as a Foreign Institutional Investor.

iv) Whether the applicant is a) an institution established or incorporated outside India as a

pension fund, mutual fund, investment trust, insurance company or reinsurance company.

b) An International or Multilateral Organization or an agency thereof or a Foreign

Governmental Agency or a Foreign Central Bank. c) an asset management company,

investment manager or advisor, nominee company, bank or institutional portfolio

manager, established or incorporated outside India and proposing to make investments in

India on behalf of broad based funds and its proprietary funds in if any or d) university

fund, endowments, foundations or charitable trusts or charitable societies.

v) Whether the grant of certificate to the applicant is in the interest of the development of

the securities market.

vi) Whether the applicant is a fit and proper person.

The SEBIs initial registration is valid for a period of three years from the date of its grant of renewal.

Page 59


4.5 INVESTMENT CONDITIONS AND RESTRICTIONS FOR FIIS:

1. A Foreign Institutional Investor may invest only in the following:-

(a) Securities in the primary and secondary markets including shares, debentures and

warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in

India.

(b) Units of schemes floated by domestic mutual funds including Unit Trust of India,

whether listed or not listed in a recognized stock exchange

(c) Dated Government securities.

(d) Derivatives traded on a recognized stock exchange.

(e) Commercial paper.

(f) Security receipts

2. The total investments in equity and equity related instruments (including fully

convertible debentures, convertible portion of partially convertible debentures and

tradable warrants) made by a Foreign Institutional Investor in India, whether on his own

account or on account of his sub- accounts, should not be less than seventy per cent of the

aggregate of all the investments of the Foreign Institutional Investor in India, made on his

own account and on account of his sub-accounts. However, this is not applicable to any

investment of the foreign institutional investor either on its own account or on behalf of

its sub-accounts in debt securities which are unlisted or listed or to be listed on any stock

exchange if the prior approval of the SEBI has been obtained for such investments.

Further, SEBI while granting approval for the investments may impose conditions as are

necessary with respect to the maximum amount which can be invested in the debt

securities by the foreign institutional investor on its own account or through its sub-

accounts. A foreign corporate or individual is not eligible to invest through the hundred

percent debt route.

Even investments made by FIIs in security receipts issued by securitization companies or

asset reconstruction companies under the Securitization and Reconstruction of Financial

Page 60


Assets and Enforcement of Security Interest Act, 2002 are not eligible for the investment

limits mentioned above. No foreign institutional investor should invest in security

receipts on behalf of its sub-account.

4.6 INCREASING TREND OF FIIS

Portfolio investments in India include investments in American Depository Receipts

(ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and

investments in offshore funds. Before 1992, only Non-Resident Indians (NRIs) and

Overseas Corporate Bodies were allowed to undertake portfolio investments in India.

Thereafter, the Indian stock markets were opened up for direct participation by FIIs. 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. As of March 2011,

there were 1,722 FIIs registered with SEBI

Table 6: SEBI Registered FIIs in India

Year End of March

1998-99 4501999-00 5062000-01 5272001-02 4902002-03 5022003-04 5402004-05 6852005-06 8822006-07 9962007-08 12792008-09 16092009-10 1,7132010-11 1,722

4.7 INVESTMENT OPPORTUNITIES FOR FIIs

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The following financial instruments are available for FII investments

a) Securities in primary and secondary markets including shares, debentures and warrants

of companies, unlisted, listed or to be listed on a recognized stock exchange in India;

b) Units of mutual funds;

c) Dated Government Securities;

d) Derivatives traded on a recognized stock exchange;

e) Commercial papers.

Investment limits on equity investments

a) FII, on its own behalf, shall not invest in equity more than 10% of total issued capital

of an Indian company.

b) Investment on behalf of each sub-account shall not exceed 10% of total issued capital

of an India company.

c) For the sub-account registered under Foreign Companies/Individual category, the

investment limit is fixed at 5% of issued capital.

These limits are within overall limit of 24% / 49 % / or the sectoral caps a prescribed by

Government of India / Reserve Bank of India.

4.7.1 Investment limits on debt investments

The FII investments in debt securities are governed by the policy if the Government of

India. Currently following limits are in effect:

For FII investments in Government debt, currently following limits are applicable:

For corporate debt the investment limit is fixed at US $ 500 million.

4.7.2 Taxation

The taxation norms available to a FII are shown in the table below.

Nature of Income Tax Rate

Long-term capital gains 10%

Short-term capital gains 30%

Dividend Income Nil

Page 62


Interest Income 20%

Long term capital gain: Capital gain on sale of securities held for a period of more than

one year.

Short term capital gain: Capital gain on sale of securities held for a period of less than

one year.

4.7.3 Milestones

India embarked on a programme of economic reforms in the early 1990s to tie over its

balance of payment crisis and also as a step towards globalization.

An important milestone in the history of Indian economic reforms happened on

September 14, 1992, when the FIIs (Foreign Institutional Investors) were allowed to

invest in all the securities traded on the primary and secondary markets, including shares,

debentures and warrants issued by companies which were listed or were to be listed the

stock exchanges in India and in the schemes floated by domestic mutual funds.

Initially, the holding of a single FII and of all FIIs, NRIs (Non-Resident Indians)

and OCBs (Overseas Corporate Bodies) in any company were subject to a limit of 5%

and 24% of the company's total issued capital respectively.

In order to broad base the FII investment and to ensure that such an investment would

not become a camouflage for individual investment in the nature of FDI (Foreign Direct

Investment, a condition was laid down that the funds invested by FIIs had to have at least

50 participants with no one holding more than 5%. Ever since this day, the regulations on

FII investment have gone through enormous changes and have become more liberal over

time.

From November 1996, FIIs were allowed to make 100% investment in debt securities

subject to specific approval from SEBI as a separate category of FIIs or sub-accounts as

100% debt funds. Such investments were, of course, subjected to the fund-specific ceiling

prescribed by SEBI and had to be within an overall ceiling of US $ 1.5 billion. The

investments were, however, restricted to the debt instruments of companies listed or to be

listed on the stock exchanges.

In 1997, the aggregate limit on investment by all FIIs was allowed to be raised from

24% to 30% by the Board of Directors of individual companies by passing a resolution in

Page 63


their meeting and by a special resolution to that effect in the company's General Body

meeting.

From the year 1998, the FII investments were also allowed in the dated government

securities, treasury bills and money market instruments.

In 2000, the foreign corporates and high net worth individuals were also allowed to

invest as sub-accounts of SEBI-registered FIIs. FIIs were also permitted to seek SEBI

registration in respect of sub-accounts. This was made more liberal to include the

domestic portfolio managers or domestic asset management companies.

40% became the ceiling on aggregate FII portfolio investment in March 2000.This was

subsequently raised to 49% on March 8, 2001 and to the specific sectoral cap in

September 2001.

As a move towards further liberalization a committee was set up on March 13, 2002 to

identify the sectors in which FIIs portfolio investments will not be subject to the sectoral

limits for FDI.

Later, on December 27, 2002 the committee was reconstituted and came out with

recommendations in June 2004. The committee had proposed that,Ingeneral, FII

investment ceilings, if any, may be reckoned over and above prescribed FDI sectoral

caps. The 24 per cent limit on FII investment imposed in 1992 when allowing FII inflows

was exclusive of the FDI limit. The suggested measure will be in conformity with this

original stipulation.' The committee also has recommended that the special procedure for

raising FII investments beyond 24 per cent up to the FDI limit in a company may be

dispensed with by amending the relevant regulations.

Meanwhile, the increase in investment ceiling for FIIs in debt funds from US $ 1

billion to US $ 1.75 billion has been notified in 2004. The SEBI also has reduced the

turnaround time for processing of FII applications for registrations from 13 working days

to 7 working days except in the case of banks and subsidiaries.

All these are indications for the country's continuous efforts to mobilize more foreign

investment through portfolio investment by FIIs. The FII portfolio flows have also been

on the rise since September 1992. Their investments have always been net positive, but

for 1998-99, when their sales were more than their purchase

Page 64


4.8 TRENDS IN FOREIGN INSTITUTIONAL INVESTMENT

Table 7 : FII Investment Details (Financial Year)

Financial Year Equity Debt Total

2000-01 10,206.7 -273.3 9,933.4

2001-02 8,072.2 690.4 8,762.6

2002-03 2,527.2 162.1 2,689.3

2003-04 39,959.7 5,805.0 45,764.7

2004-05 44,122.7 1,758.6 45,881.3

2005-06 48,800.5 -7,333.8 41,466.7

2006-07 25,235.7 5,604.7 30,840.4

2007-08 53,403.8 12,775.3 66,179.1

2008-09 -47,706.2 1,895.2 -45,811.0

2009-10 110,220.6 32,437.7 142,658.3

2010-11 110,120.8 36,317.3 146,438.1

2011-12 (till Aug31, 2011) 2,367.6 8,186.2 10,553.8

Source: SEBI Annual Report

Page 65


Chart 5

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12 (till Aug31

, 2011)

-60,000.00

-40,000.00

-20,000.00

0.00

20,000.00

40,000.00

60,000.00

80,000.00

100,000.00

120,000.00

FII INVESTMENT DETAILS (2000-2011)

EQUITY DEBT

INR

Cror

es

During 2010-11, FIIs invested Rs 1,10,121 crore in equity and Rs 36,317 crore in debt as

compared to an investment of Rs 1,10,220 crore in equity and Rs 32,438 crore in debt during

2009-10 respectively

Page 66


4.8.1 TRENDS IN FOREIGN INSTITUTIONAL INVESTMENT

Table 8 FOREIGN INSTITUTIONAL INVESTMENT

Year

Gross Purchase(

` crore)

Gross Sales(` crore)

Net Investment(

` crore)

Net Investment (US $ mn.)

Cumulative Investment (US $

mn.)1 2 3 4 5 6

1992-93 18 4 13 4 41993-94 5,593 467 5,127 1,634 1,6381994-95 7,631 2,835 4,796 1,528 3,1671995-96 9,694 2,752 6,942 2,036 5,2021996-97 15,554 6,980 8,575 2,432 7,6351997-98 18,695 12,737 5,958 1,650 9,2851998-99 16,116 17,699 -1,584 -386 8,8991999-00 56,857 46,735 10,122 2,474 11,3732000-01 74,051 64,118 9,933 2,160 13,5322001-02 50,071 41,308 8,763 1,839 15,3722002-03 47,062 44,372 2,689 566 15,9372003-04 1,44,855 99,091 45,764 10,005 25,943

2004-05 2,16,9511,71,07

1 45,880 10,352 36,294

2005-06 3,46,9763,05,50

9 41,467 9,363 45,657

2006-07 5,20,5064,89,66

5 30,841 6,821 52,478

2007-08 9,48,0188,81,83

9 66,179 16,442 68,919

2008-09 6,14,5766,60,38

6 -45,811 -9,837 59,082

2009-10 8,46,4387,03,78

0 1,42,658 30,253 89,335

2010-11 9,92,5998,46,16

1 1,46,438 32,226 1,21,561

Source: SEBI Annual Report

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CHART 6

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

0

20000

40000

60000

80000

100000

120000

140000

Trends in Foreign Institutional Investment

Net Investment(US $ mn.) CumulativeInvestment (US $ mn.)

The gross purchases of debt and equity by FIIs increased by 17.3 percent to Rs 9,92,599 crore

in 2010-11 from Rs 8,46,438 crore in 2009-10. The combined gross sales by FIIs also increased

by 20.2 percent to Rs 8,46,161 crore from Rs 7,03,780 crore during the same period in previous

year. The total net investment of FII was Rs 1,46,438 crore as compared to of Rs 1,42,658 crore

in 2009-10. This was the highest net FII investments into Indian securities market in financial

year so far.

Cumulative investment by FIIs at acquisition cost, which was US$ 89,335 million at the end of

March, 2010, increased to US$ 1, 21,561 million at the end of March, 2011.

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Indian industry coupled with easy entry requirements has given an impetus to the FIIs who show

an increasing trend. It was only in 2008 when the global recession broke out that the net

investments declined sharply due to heavy selling pressure from the FIIs i.e. they pulled out

virtually all the monies invested in the stock market thus causing a crash in the benchmark

indices of the country.

4.9 IMPACT OF FII’s ON INDIAN STOCK MARKETS

On the flip side the increase of foreign investors in particular brings a very welcome

inflow of foreign capital, but there are always some dangers if certain limits are

exceeded. Firstly, the foreign capital is free and unpredictable and is always on the look

out of profits. Flls frequently move investments, and those swings can be expected to

bring severe price fluctuations resulting in increasing volatility. Here we analyze the

comparative trend of sensex and FII, how it affected the market, Here the grey curve

shows sensex indeces and black curve shows the FII cash flow, Here we can see how FII

cash inflows increases the market indices and cash outflows decreases the Indian stock

market indices

FII's increased role had changed the face of Indian stock market. It had brought both

quantitative and qualitataive change. It had also increased the market depth and breadth.

The emphasize on fundamentals had caused efficient pricing of shares. Since there is no

condition on FIIs that they should disclose in which company they are investing, those

figures are not available.

Many qualitative tests like regression tests had proved that there is direct relation

between market movements and fund flows of FIIs. In this, we will analyze the

investments in different months and years, and tries to find the impact of FIIs in stock

market.

We often hear the terms "FIIs Fuel the Market Run". If we analyze the impacts, then the

major impacts are: -

They increased depth and breadth of the market.

Page 69


They played major role in expanding securities business.

Their policy on focusing on fundamentals of the shares had caused efficient

pricing of shares.

These impacts made the Indian stock market more attractive to FIIs and also domestic

investors, which involve the other major player MF (Mutual Funds). The impact of FIIs is

so high that whenever FIIs tend to withdraw the money from market, the domestic

investors become fearful and they also withdraw from market.

Table 9: Net FII Equity Investment and Monthly Average BSE

MonthFII NET EQUITY INVESTMENT NSE

Apr-2010 9,361 5295 May-2010 -9,437 5053 Jun-2010 10,508 5188 Jul-2010 16,617 5360

Aug-2010 11,688 5457 Sep-2010 24,979 5812 Oct-2010 28,563 6096 Nov-2010 18,293 6055 Dec-2010 2,050 5971 Jan-2011 -4,813 5782 Feb-2011 -4,586 5400 Mar-2011 6,898 5538

Chart 7: Net FII Equity Investment and Monthly Average NSE

Page 70


Apr-2010

May-2010

Jun-2010

Jul-2010

Aug-2010

Sep-2010

Oct-2010

Nov-2010

Dec-2010

Jan-2011

Feb-2011

Mar-2011

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

4000

4500

5000

5500

6000

6500

FII NET EQUITY INVESTMENT NSE

Table 10: Net FII Equity Investment and Monthly Average BSE

MonthFII NET EQUITY INVESTMENT BSE

Apr-2010 9,361 17679

May-2010 -9,437 16845

Jun-2010 10,508 17300

Jul-2010 16,617 17848

Aug-2010 11,688 18177

Sep-2010 24,979 19353

Oct-2010 28,563 20242

Nov-2010 18,293 20122

Dec-2010 2,050 19928

Jan-2011 -4,813 18328

Feb-2011 -4,586 17823

Mar-2011 6,898 19445

Chart 8: Net FII Equity Investment and Monthly Average BSE

Page 71


Apr-2010

May-2010

Jun-2010

Jul-2010

Aug-2010

Sep-2010

Oct-2010

Nov-2010

Dec-2010

Jan-2011

Feb-2011

Mar-2011

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

16000

16500

17000

17500

18000

18500

19000

19500

20000

20500

FII NET EQUITY INVESTMENT BSE

From the above graph it is evident that FII’s have direct impact on the two important

indices sensex and nifty.

A more investments by FIIs indicate that they are confident in Indian market. Usually, the

mode of operations of FIIs is taking loans from countries where interest is low (like

Japan) and invests in booming markets like India

Page 72


CHAPTER: 5

FDI v/s FII

A COMPARATIVE ANALYSIS

Both FDI and FII are related to investment in a foreign country. FDI or Foreign Direct

Investment is an investment that a parent company makes in a foreign country. On the

contrary, FII or Foreign Institutional Investor is an investment made by an investor in the

markets of a foreign nation. In FII, the companies only need to get registered in the stock

exchange to make investments. But FDI is quite different from it as they invest in a

foreign nation. The Foreign Institutional Investor is also known as hot money as the

investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this

is not possible. In simple words, FII can enter the stock market easily and also withdraw

Page 73


from it easily. But FDI cannot enter and exit that easily. This difference is what makes

nations to choose FDI’s more than then FIIs.

FDI is more preferred to the FII as they are considered to be the most beneficial kind of

foreign investment for the whole economy. Specific enterprise. It aims to increase the

enterprises capacity or productivity or change its management control. In an FDI, the

capital inflow is translated into additional production. The FII investment flows only into

the secondary market. It helps in increasing capital availability in general rather than

enhancing the capital of a specific enterprise. The Foreign Direct Investment is

considered to be more stable than Foreign Institutional Investor. FDI not only brings in

capital but also helps in good governance practices and better management skills and

even technology transfer. Though the Foreign Institutional Investor helps in promoting

good governance and improving accounting, it does not come out with any other benefits

of the FDI. While the FDI flows into the primary market, the FII flows into secondary

market.

While FIIs are short-term investments, the FDI’s are long term.

1. FDI is an investment that a parent company makes in a foreign country. On the

contrary, FII is an investment made by an investor in the markets of a foreign nation.

2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot

enter and exit easily.

3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital

availability in general.

4. The Foreign Direct Investment is considered to be more stable than Foreign

Institutional Investor

Table 11 : FDI & FII Inflows in the last 11 Years - A Comparison

Financial Year

(April-March) Total FDI Flows(US$ MN)

Net Investment by FII

(US$ MN)

Page 74


2000-01 4,029 2160

2001-02 6,130 1839

2002-03 5,035 566

2003-04 4,322 10005

2004-05 6,051 10352

2005-06 8,961 9363

2006-07 22,826 6821

2007-08 34,835 16442

2008-09 41,874 -9837

2009-10 37,745 30253

2010-11 32,901 32226

Source: Department of Industrial Policy & Promotion (www.dipp.nic.in)

Chart 9: FDI & FII Inflows in the last 11 Years - A Comparison

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

FDI AND FII's INFLOW

TotalFDIFlows(US$ MN)

Net Investment by FII(US$ MN)

Page 75


This presents an important picture from where a number of things can be gathered. The

first three years i.e. from 2000-01 to 2002-03 the FDI was higher than FII but in the next

three years the opposite case happened where the FII was greater than FDI from 2003-04

to 2005-06. But the difference between the FDI and FII was not much during the first

three years but in the next three years when the FII went past FDI the difference between

them were huge as can be seen from the blue and red bars in the chart. Now from the year

2006-07 to 2008-09 again FDI was greater than FII and this time by big margins. Also

during the year 2008-09 net foreign institutional investment was in the negative

indicating heavy selling and virtually no buying but the foreign direct investment on the

other hand rose by 25% from the previous year. This is significant because as it proves

that the effects of recession apparently did not affect the inflow of FDI at all whereas it

totally sent the FII out of the country. But it can also be said that the policies governing

the entry of FII were relaxed and made less complex which made investment via the FII

route attractive for the foreign investors.

Table 12: A Comparison between the Net FII, FDI & the Sensex

Financial Year Sensex CloseTotal FDI Flows(US$ MN)

Net Investment by FII (US$ MN)

2000-01 3262 4,029 21602001-02 3377 6,130 18392002-03 5839 5,035 5662003-04 6603 4,322 100052004-05 9398 6,051 103522005-06 13787 8,961 93632006-07 20287 22,826 68212007-08 9647 34,835 164422008-09 17465 41,874 -98372009-10 20509 37,745 302532010-11 15,455 32,901 32226

Source: www.bseindia.com

The Sensex has increased by 10525 points between 2000-01 and 2005-06, an increase of

more than 320%. In the corresponding period net FII has increased by more than 315%

Page 76

http://www.bseindia.com/


and the FDI has gone up by 94%. From 2005-06 to 2009-10 the Sensex gained 6722

points, an increase of 49% and in the corresponding period the net FII went up by 244%

and the FDI inflows went up by 401%. The Sensex fell down by 10640 points in early

2008 i.e. by 52% due to heavy selling by the FIIs who pulled out their money from the

stock market due to the sub-prime crisis, credit crunch, bankruptcy, speculation etc. This

turned the FIIs into net sellers and hence during 2008-09 the net FII figure is in negative.

The FDI on the other hand surged ahead at 41,874 mn $, an increase of nearly 25%. This

implies that FDI inflow did not get affected by the recession worldwide and even if it was

it is not possible to pull out money invested through the FDI route as easily as it could be

done in the case of FII.

Chart 10: Diagram showing comparison between FDI Inflow & Sensex

Page 77


2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

0

5000

10000

15000

20000

25000

Total FDI Flows(US$ MN) Sensex Close

US $

MN

The blue and red line depicting Sensex and FDI respectively have been tracked for the

last 10 years and it can be seen that the Sensex peaked during 2006-07 whereas the FDI

line has peaked during 2008-09 almost at the same time when the Sensex crashed as the

blue line can be seen falling sharply going down and even below the 10,000 level which

is the time when the recessionary effects took place. The blue line or the Sensex has a

rapid rise from the years 2000-01 to 2006-07 after which it goes down in early 2008 i.e.

in 2007-08 but recovers from 2008-09 and goes past the 15000 mark in 2008-09 and

finally breaches the 20000 mark again in 2009-10.

The red line or the FDI from 2000-01 to 2004-05 shows an even path with a slight

decline but has taken off 2004-05 itself and shown a rapidly increasing trend as the red

line can be seen rising sharply.

Chart 11: Diagram showing comparison between net FII & Sensex

Page 78


2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

0

5000

10000

15000

20000

25000

Net Investment by FII (US$ MN) Sensex Close

The red line denoting the net FII can be called a volatile line from the chart as there are

sudden sharp drops and sharp rises. It has no fixed pattern. The net FII started declining

from 2007-08 till the middle of 2008-09 which caused a sharp fall in Sensex also which

went below the 10000 level in 2007-08 falling by almost 52% as compared to the

previous year. But the FIIs started pouring in again from the end of 2009 after the

governments abroad started providing bail-out packages, sops and various other

incentives to the ailing companies. The Sensex also rises sharply from 2008-09 after the

FIIs turned into net buyers and hence a similar pattern can be found between these two.

Table 13: A Comparison between the GDP, Net FII & FDI of the last 11 Years

Page 79


Financial Year

GDP (at factor cost)

Total FDI Flows(US$ MN)


2000-01 4.4 4,029 21602001-02 5.8 6,130 18392002-03 3.8 5,035 5662003-04 8.5 4,322 100052004-05 7.5 6,051 103522005-06 9.5 8,961 93632006-07 9.7 22,826 68212007-08 9.2 34,835 164422008-09 6.7 41,874 -98372009-10 7.4 37,745 302532010-11 6.9 32,901 32226

The GDP has increased from 4.4% to 7.4% from 2000-01 to 2009-10, peaking in 2006-07

at 9.7% when the net FII declined from US$ 9363 MN to US$ 6821 MN a fall of almost

26%., whereas the FDI grew by 187% and stood at US 22,826 $ MN. The GDP fell from

9.2% in 2007-08 to 6.7% in 2008-09 which can be attributed to very slow industrial

growth specially the manufacturing sector, the exports dried up, inflationary pressure etc.

India felt just the tip of the iceberg of the destructive economic recession, as it can be

seen how the net FII turned into negative figures, which hit the western countries hard.

The GDP remained above the 9% mark for three years from 2005-06 to 2007-08. In the

corresponding period the FDI increased by 300% and the net FII increased by 60%.

From the year 2008-09 the GDP has started declining due to global crisis however

economy is recovering from the crisis and building confidence among the foreign

markets which is leading to increase in FII.

Chart 12: Diagram showing comparison between GDP & FDI

Page 80


2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

0

2

4

6

8

10

12

Total FDI Flows(US$ MN) GDP (at factor cost)

The GDP growth rate was around the reasonably healthy levels of 4.4 and 5.8 percent

during 2000-01 and 2001-02 but it declined to 3.8 percent in 2002-03 which happened

due to the massive drought caused by the monsoon failure resulting in low production of

agricultural products. Also in the industrial sectors barring the sub-sector of electricity,

gas and water supply, growth in all industrial and service sub-sectors slowed in the third

quarter of 2002-03 compared to what was recorded in the second quarter of the year. In

some sectors (manufacturing is one) the slowdown was marginal; in others (financial

services, for example), the deceleration was substantial. In the same year the FDI can be

seen falling by 23%. After 2002-03 the GDP has shown an increasing trend as well as the

FDI as can be seen from the blue and red lines in the chart

Chart 13: Diagram showing comparison between GDP & Net FII

Page 81


2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

0

2

4

6

8

10

12

Net Investment by FII (US$ MN) GDP (at factor cost)

The FII curve (red line) is one with many sharp fluctuations and presents at first an

increasing trend from 2000-01 to 2003-04 and then becomes stable but has a very gradual

declining slope from 2003-04 to 2006-07 going down from Rs. 45764 Crs to Rs. 30841

Crs, a decrease of 33% whereas in the corresponding the GDP increases from 8.5% to

9.7%. Both the net FII and GDP showed sharp declines in the year 2008-09 owing to

various factors like the global recession, sluggish manufacturing industry, inflation, low

demand for Indian goods abroad hurting exports, rising interest rates etc. in 2009-10 the

FII shows again a very steep rise breaching the Rs. 1 lakh Crore mark. Similarly the GDP

has also recovered but gradually from 6.7% to 7.4%.

Table 14: Foreign Exchange Rate, Net FII & FDI Inflow of last 10 Years

Page 82


Financial Year

USD in terms of Indian Rupee

Total FDI Flows(US$ MN)


2000-01 47.22

4,0292160

2001-02 48.63

6,1301839

2002-03 46.59

5,035566

2003-04 45.26

4,32210005

2004-05 44

6,05110352

2005-06 45.19

8,9619363

2006-07 41.18

22,8266821

2007-08 43.39

34,83516442

2008-09 48.33

41,874-9837

2009-1045.65

37,74530253

2010-11 44.96

32,90132226

Source: www.ratesfx.com

In the ten years from 2000-01 to 2009-10 the net effect has been a decline of Rs 1.57 or

3.3%. During the year 2008-09 the FIIs turned sellers and hence net FII went into

negative figures while the FDI increased by 25%. The foreign exchange rate became the

lowest in 2006-07 at Rs. 41.18.

Chart 14: Graphical representation of Net FII & the Foreign Exchange Rate

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http://www.ratesfx.com/


2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

36

38

40

42

44

46

48

50

Net Investment by FII (US$ MN) USD in terms of Indian Rupee

The above diagram brings to light a very important occurrence regarding Net FII and the

Foreign Exchange Rate. It can be seen that whenever the red line (foreign exchange rate)

goes up the green line (Net FII) goes down. The exchange rate has steadily declined from

Rs. 48.63 in 2001-02 to Rs. 41.18 in 2006-07 and correspondingly the Net FII has

increased from 2160 mn $ in 2001-02 to 32226 mn $ in 2006-07. In 2008-09 when the

Net FII has crashed and went into negative figures the exchange rate went from Rs.43.39

in 2007-08 to Rs. 48.33 in 2008-09.

Chart 15: Graphical representation of FDI & the Foreign Exchange Rate

Page 84


Not much relationship can be gathered between these two variables from the chart. The

green line denoting FDI has an overall increasing trend after being stable and rather

gradually declining during the period 2000-01 to 2004-05. The foreign exchange rate

sharply declines from around Rs. 45 to Rs.41 from 2005-06 to 2006-07 due to

unrestricted inflow of dollars thus increasing its supply thereby reducing the exchange

rate but in the same period the FDI has increased from 8,961 mn $ to 22,826 mn $. The

exchange rate again recovers from 2006-07 and rises again till 2008-09 after which we

can again see a sharp decline in 2009-10 but the FDI line remains stable.

CHAPTER 6

FINDINGS

Page 85

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

36

38

40

42

44

46

48

50

Total FDI Flows(US$ MN) USD in terms of Indian Rupee


After the analysis following are the findings of the study:

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

It 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.

FIIs inflows are determined by stock market characteristics regarding risk-return,

market capitalization, stock market turnover, macroeconomic factors like

economic growth, interest rate, inflation and liberalization policies

FIIs are directly proportional to foreign exchange rate, any inflow or outflow of

FII has direct impact on foreign exchange. However FDI is not much affected by

any change in rupee.

CHAPTER 7

CONCLUSION

Page 86


According to Data analysis and findings, it can be concluded that Mauritius contributes

about 40% of FDI inflow in the country. Such a high level of FDI contributed by a low

tax country like Mauritius indicates that all is not well.

Mauritius has agreement with India on avoidance of double taxation. There are likely

chances that many MNCs may be first dummy companies in Mauritius before investing

in India. This is not good for financial stability of the country and is also a reason for loss

to state exchequers.

FDI usually is associated with export growth. It comes only when all the criteria to set up

an export industry are met. That includes, reduced taxes, favorable labor law, freedom to

move money in and out of country, government assistance to acquire land, full grown

infrastructure, reduced bureaucratic involvement etc. IT, BPO, Auto Parts,

Pharmaceuticals, unexplored service sectors including accounting; drug testing, medical

care etc are key sectors for foreign investment. Manufacturing is a brick and mortar

investment. It is permanent and stays in the country for a very long time. Huge

investments are needed to set this industry. It provides employment potential to semi

skilled and skilled labor. On the other hand the service sector requires fewer but highly

skilled workers. Both are needed in India. If India plays its cards right India may be the

hub for the service sector. Still high end manufacturing in auto parts and pharmaceuticals

should be India’s target.

FDI is what the government really needs to attract in various sectors like infrastructure,

education etc. it is much more stable than the foreign institutional investment which

comes via the stock market route, and has more accountability and brings fundamental

and tangible benefits to the economy

The FII (Foreign Institutional Investor) is monies, which chases the stocks in the market

place. It is not exactly brick and mortar money, but in the long run it may translate into

brick and mortar. Sudden influx of this drives the stock market up as too much money

chases too little stock. Where FDI is a bit of a permanent nature, the FII flies away at the

shortest political or economical disturbance. The Global Recession of 2008 is a key

Page 87


example of the latter. Once this money leaves, it leaves ruined economy and ruined lives

behind. Hence FII is to be welcomed with strict political and economical discipline.

The global recession in 2008 proved how volatile the money pumped in by the FIIs into

the secondary segment of the financial market is, leading to huge losses for the domestic

investors who had to bear the brunt even though the economy as such was insulated from

the adverse effects of the recession. Whereas the sectors where there was FDI didn’t

experience such knee-jerk reactions.

China receives mainly the FDI. They do not have instruments to receive the FII i.e. laws,

institutions and political and judicial framework. On the contrary, India should welcome

both and work hard to retain both.

CHAPTER 8

RECOMMENDATIONAfter the analysis of the project study, following recommendations can be made:

Page 88


I. FDI

FDI can be instrumental in developing rural economy. There is immense scope

in Greenfield Projects. But the issue of land acquisition and steps taken to protect

local interests by the various state governments are not encouraging. MoU

Arecelor-Mittal controversy is one of the best examples of such disputes.

In order to improve technological competitiveness of India, FDI into R&D should

be promoted. Various issues pending relating to Intellectual Property Rights,

Copy Rights and Patents need to be addressed on priority. Special policy

amendments can be also instrumental in mobilizing FDI in R&D.

Indian economy is largely agriculture based. There is plenty of scope in food

processing, agriculture services and agriculture machinery. FDI in this sector

should be encouraged.

Develop a strategic vision for FDI with focus on exports, technology, geographic

specialization, and employment creation.

Reduction in transaction costs, improvement of infrastructure and enabling trade

facilitation

The entire process of administration should be Decentralized

FDI policy environment still remains in centered around Delhi and not the state

capitals where they should be given the diversity of India’s economic geography.

The overly bureaucratic FDI facilities needs to be drastically reduce.

There needs to be a real ‘single window’ that draws from the sectoral expertise of

the different ministries, and more importantly the private sector.

Page 89


Government should facilitate FDI entry through B2B interventions by creating

platform for the same.

Globally the service sector received 43 per cent of total investment in emerging

markets As this is a State subject, the States have to take the lead in simplifying

and modernizing the policy and rules relating to this sector.

II. FII

Simplifying procedures and relaxing entry barriers for business activities and

providing investor friendly laws and tax system for foreign investors.

Allowing foreign investment in more areas. In different industries indices the FIIs

should be encouraged through different patterns like futures, options, etc.

Somewhere, a restriction related to the track record of Sub- Accounts is also to be

made on the investors who withdraw money out of the Indian stock market who

have invested with the help of participatory notes.

We have to modernize and also have to save our culture. Similarly the laws

should be such that it protects domestic investors and also promote trade in

country through FIIs.

Encourage industries to grow to make FIIs an attractive junction to invest.

Page 90

Documents

Modified FDI & FII in India _A Comparative Analysis