RESEARCH PROJECT

REPORT ON
Analytical Study Of Foreign Direct Investment in India
Project Report Submitted towards
Partial fulfillment of requirements for obtaining the degree of
Master of Business Administration
Session 2009-10

SUBMITTED BY

SUBMITTED TO:

Deepak kumar Gautam

Miss GarimaChaudhary

0826370012

Faculty Guide

V.S.B

VIDYA SCHOOL OF BUSINESS

MEERUT

CERTIFICATE
This is to certify that Deepak Kumar Gautam student of M.B.A IV SEM V.S.B. Meerut has under gone
a research project on Analytical Study Of Foreign Direct Investment in India And submitted a report
based on the same as a mandatory requirement for obtaining the degree of Master of Business
Administration from Uttar Pradesh Technical University, Lucknow.

Date:
Director of V.S.B.
Dr . J.R Bhatti
Meerut

CERTIFICATE

This is to certify that Deepak Kumar Gautam student of M.B.A IVsem, V.S.B. Meerut has under gone a
research project on Analytical Study Of Foreign Direct Investment in India And submitted a report
based on the same as a mandatory requirement for obtaining the degree of Master of Business
Administration from Uttar Pradesh Technical University, Lucknow

Miss Garima Chaudhray

Faculty guide
Meerut
Date:

ACNOWLEDGEMENT

ACKNOWLEDGEMENT

I extend my sincere thanks to all those who helped me in the completion of this project. Without their
undying help and guidance, this project would not be what it is. I specially extend my heartfelt thanks to
my Faculty guide Miss Garima Chaudhray

for helping me at every step, and guiding me in every way

possible. This project would not have been successful without her

help and continuous guidance

throughout. A special note of thanks also goes out to the people from various fields for giving me their
precious time and helping me with this project. I also extend my appreciation towards my family who
encouraged me and were by my side whenever I needed them.

Deepak Kumar Gautam

INDEX

INDEX
TOPIC

PAGE NO.

Introduction
Meaning
Definition
History

Objective of the study

Research methodology
Conclusion
Recommendations & suggestions
Limitations of research
Bibliography
Annexure

Introduction

Introduction and overview

What is Foreign Direct Investment ?
Meaning:
These three letters stand for foreign direct investment. The simplest explanation of FDI would be a direct
investment by a corporation in a commercial venture in another country. A key to separating this action
from involvement in other ventures in a foreign country is that the business enterprise operates completely
outside the economy of the corporations home country. The investing corporation must control 10 percent
or more of the voting power of the new venture.
According to history the United States was the leader in the FDI activity dating back as far as the end of
World War II. Businesses from other nations have taken up the flag of FDI, including many who were not
in a financial position to do so just a few years ago.
The practice has grown significantly in the last couple of decades, to the point that FDI has generated
quite a bit of opposition from groups such as labor unions. These organizations have expressed concern
that investing at such a level in another country eliminates jobs. Legislation was introduced in the early
1970s that would have put an end to the tax incentives of FDI. But members of the Nixon administration,
Congress and business interests rallied to make sure that this attack on their expansion plans was not
successful. One key to understanding FDI is to get a mental picture of the global scale of corporations able
to make such investment. A carefully planned FDI can provide a huge new market for the company,
perhaps introducing products and services to an area where they have never been available. Not only that,
but such an investment may also be more profitable if construction costs and labor costs are less in the
host country.
The definition of FDI originally meant that the investing corporation gained a significant number of shares
(10 percent or more) of the new venture. In recent years, however, companies have been able to make a
foreign direct investment that is actually long-term management control as opposed to direct investment in
buildings and equipment.
FDI growth has been a key factor in the international nature of business that many are familiar with in
the 21st century. This growth has been facilitated by changes in regulations both in the originating country
and in the country where the new installation is to be built. Corporations from some of the countries that

lead the worlds economy have found fertile soil for FDI in nations where commercial development was
limited, if it existed at all. The dollars invested in such developing-country projects increased 40 times
over in less than 30 years. The financial strength of the investing corporations has sometimes meant
failure for smaller competitors in the target country. One of the reasons is that foreign direct investment in
buildings and equipment still accounts for a vast majority of FDI activity. Corporations from the
originating country gain a significant financial foothold in the host country. Even with this factor, host
countries may welcome FDI because of the positive impact it has on the smaller economy.
Foreign direct investment (FDI) is a measure of foreign ownership of productive
assets, such as factories, mines and land. Increasing foreign investment can be used
as one measure of growing economic globalization. Figure below shows net inflows
of foreign direct investment as a percentage of gross domestic product (GDP). The
largest flows of foreign investment occur between the industrialized countries (North
America, Western Europe and Japan).But flows to non-industrialized countries are
increasing sharply. Foreign direct investment (FDI) refers to long term participation
by country A into country B.
It

usually

involves

participation

technology and expertise.

direct investment and

There

outward

are

in management, joint-venture, transfer

two

foreign

types
direct

of

FDI:

inward

investment,

of

foreign

resulting

in

a net FDI inflow (positive or negative) .Foreign direct investment reflects the
objective of obtaining a lasting interest by a resident entity in one economy (direct
investor) in an entity resident in an economy other than that of the investor
(direct investment enterprise).The lasting interest implies the existence of a longterm relationship between the direct investor and the enterprise and a significant
degree of influence on the management of the enterprise. Direct investment
involves both the initial transaction between the two entities and all subsequent
capital

transactions

between

them

and

among

affiliated

enterprises,

both

incorporated and unincorporated.

Foreign Direct Investment when a firm invests directly in production or other facilities, over
which it has effective control, in a foreign country.

Manufacturing FDI requires the establishment of production facilities.

10

Service FDI requires building service facilities or an investment foothold via capital contributions
or building office facilities.

Foreign subsidiaries overseas units or entities.

Host country the country in which a foreign subsidiary operates.

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

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

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

Foreign Portfolio Investment the investment by individuals, firms, or public bodies in foreign
financial instruments.

Stocks, bonds, other forms of debt.

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

Portfolio theory the behavior of individuals or firms administering large amounts of financial assets.
Product Life-Cycle Theory

Ray Vernon asserted that product moves to lower income countries as products move through their
product life cycle.

The FDI impact is similar: FDI flows to developed countries for innovation, and from developed
countries as products evolve from being innovative to being mass-produced.

The Eclectic Paradigm

Distinguishes between:

Structural market failure external condition that gives rise to monopoly advantages as a
result of entry barriers

Transactional market failure failure of intermediate product markets to transact goods

and services at a lower cost than internationalization

11

The Dynamic Capability Perspective

A firms ability to diffuse, deploy, utilize and rebuild firm-specific resources for a competitive
advantage.

Ownership specific resources or knowledge are necessary but not sufficient for international
investment or production success.

It is necessary to effectively use and build dynamic capabilities for quantity and/or quality based
deployment that is transferable to the multinational environment.

Firms develop centers of excellence to concentrate core competencies to the host environment.

Monopolistic Advantage Theory

An MNE has and/or creates monopolistic advantages that enable it to operate subsidiaries abroad
more profitably than local competitors.

Monopolistic Advantage comes from:

Superior knowledge production technologies, managerial skills, industrial organization,

knowledge of product.

Economies of scale through horizontal or vertical FDI

Internationalization Theory

When external markets for supplies, production, or distribution fails to provide efficiency,
companies can invest FDI to create their own supply, production, or distribution streams.

Advantages

Avoid search and negotiating costs

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

Avoid cost of violated contracts and litigation

Capture economies of interdependent activities

Avoid government intervention

Control supplies

Control market outlets

Better apply cross-subsidization, predatory pricing and transfer pricing

12

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

History
In the years after the Second World War global FDI was dominated by the United States, as much of the
world recovered from the destruction brought by the conflict. The US accounted for around three-quarters
13

of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to
become a truly global phenomenon, no longer the exclusive preserve of OECD countries.
FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of
global GDP. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such
as factories, mines and land. Increasing foreign investment can be used as one measure of growing
economic globalization. Figure below shows net inflows of foreign direct investment as a percentage of
gross domestic product (GDP). The largest flows of foreign investment occur between the industrialized
countries (North America, Western Europe and Japan). But flows to non-industrialized countries are
increasing sharply.

Foreign Direct investor

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

14

Types of Foreign Direct Investment: An Overview

FDIs can be broadly classified into two types:
1 Outward FDIs
2 Inward FDIs
This classification is based on the types of restrictions imposed, and the various prerequisites required for
these investments.
Outward FDI: An outward-bound FDI is backed by the government against all types of associated risks.
This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage

15

provided to the domestic industries and subsidies granted to the local firms stand in the way of outward
FDIs, which are also known as 'direct investments abroad.'
Inward FDIs: Different economic factors encourage inward FDIs. These include interest
loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to
the growth of FDIs include necessities of differential performance and limitations related with ownership
patterns.
Other categorizations of FDI
Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a
multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the
output produced by the MNC.
Horizontal foreign direct investments happen when a multinational company carries out a similar business
operation in different nations.
Horizontal FDI the MNE enters a foreign country to produce the same products product at home.
Conglomerate FDI the MNE produces products not manufactured at home.
Vertical FDI the MNE produces intermediate goods either forward or backward in the supply

stream.
Liability of foreignness the costs of doing business abroad resulting in a competitive
disadvantage.

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

16

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)

17

Entry Mode

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

International franchising

Branches

Contractual alliances

Equity joint ventures

Wholly foreign-owned subsidiaries

Investment approaches:

Greenfield investment (building a new facility)

Cross-border mergers

Cross-border acquisitions

Sharing existing facilities

18

Why is FDI important for any consideration of going global ?

The simple answer is that making a direct foreign investment allows

companies to accomplish several

tasks:
1 .Avoiding foreign government pressure for local production.
2. Circumventing trade barriers, hidden and otherwise.
3. Making the move from domestic export sales to a locally-based national sales office.
4. Capability to increase total production capacity.
5.Opportunities for co-production, joint ventures with local partners, joint marketing arrangements,
licensing, etc;
A more complete response might address the issue of global business partnering in very general
terms. While it is nice that many business writers like the expression, think globally, act locally, this
often used clich does not really mean very much to the average business executive in a small and
medium sized company.

The phrase does have significant connotations for multinational

corporations. But for executives in SMEs, it is still just another buzzword. The simple explanation for
this is the difference in perspective between executives of multinational corporations and small and
medium sized companies. Multinational corporations are almost always concerned with worldwide
manufacturing capacity and proximity to major markets. Small and medium sized companies tend to be
more concerned with selling their products in overseas markets. The advent of the Internet has ushered in
a new and very different mindset that tends to focus more on access issues. SMEs in particular are now
focusing on access to markets, access to expertise and most of all access to technology.

19

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 countrys 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

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.
20

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

The Impact of FDI on the Host Country

Employment
21

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.

Foreign Direct Investment in India

The economy of India is the third largest in the world as measured by purchasing power parity (PPP), with
a gross domestic product (GDP) of US $3.611 trillion. When measured in USD exchange-rate terms, it is
22

the tenth largest in the world, with a GDP of US $800.8 billion (2006). is the second fastest growing major
economy in the world, with a GDP growth rate of 8.9% at the end of the first quarter of 2006-2007.
However, India's huge population results in a per capita income of $3,300 at PPP and $714 at nominal.
The economy is diverse and encompasses agriculture, handicrafts, textile, manufacturing, and a multitude
of services. Although two-thirds of the Indian workforce still earn their livelihood directly or indirectly
through agriculture, services are a growing sector and are playing an increasingly important role of India's
economy. The advent of the digital age, and the large number of young and educated populace fluent in
English, is gradually transforming India as an important 'back office' destination for global companies for
the outsourcing of their customer services and technical support.
India is a major exporter of highly-skilled workers in software and financial services, and software
engineering. India followed a socialist-inspired approach for most of its independent history, with strict
government control over private sector participation, foreign trade, and foreign direct investment.
However, since the early 1990s, India has gradually opened up its markets through economic reforms by
reducing government controls on foreign trade and investment. The privatization of publicly owned
industries and the opening up of certain sectors to private and foreign interests has proceeded slowly amid
political debate. India faces a burgeoning population and the challenge of reducing economic and social
inequality. Poverty remains a serious problem, although it has declined significantly since independence,
mainly due to the green revolution and economic reforms. FDI up to 100% is allowed under the automatic
route in all activities/sectors except the following which will require approval of the Government:
Activities/items that require an Industrial License; Proposals in which the foreign collaborator has a
previous/existing venture/tie up in India
FDI in India includes, FDI inflows as well as FDI outflow from India. Also FDI foreign direct investment
and FII foreign institutional investors are a separate case study while preparing a report on FDI and
economic growth in India. FDI and FII in India have registered growth in terms of both FDI flows in India
and outflow from India. The FDI statistics and data are evident of the emergence of India as both a
potential investment market and investing country. FDI has helped the Indian economy grow, and the
government continues to encourage more investments of this sort - but with $5.3 billion in FDI . India gets
less than 10% of the FDI of China. Foreign direct investment (FDI) in India has played an important role
in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a
certain degree of financial stability, growth and development. This money has allowed India to focus on

23

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 worlds major investors.
In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage
FDI and present a favorable scenario for investors. FDI investments are permitted through financial
collaborations, through private equity or preferential allotments, by way of capital markets through Euro
issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining
industries. A number of projects have been announced in areas such as electricity generation, distribution
and transmission, as well as the development of roads and highways, with opportunities for foreign
investors. The Indian national government also provided permission to FDIs to provide up to 100% of the
financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR
1,500 crores, approximately $352.5m. Currently, FDI is allowed in financial services, including the
growing credit card business.
These services include the non-banking financial services sector. Foreign investors can buy up to 40% of
the equity in private banks, although there is condition that stipulates that these banks must be multilateral
financial organizations. Up to 45% of the shares of companies in the global mobile personal
communication by satellite services (GMPCSS) sector can also be purchased. By 2004, India received
$5.3 billion in FDI, big growth compared to previous years, but less than 10% of the $60.6 billion that
flowed into China. Why does India, with a stable democracy and a smoother approval process, lag so far
behind China in FDI amounts? Although the Chinese approval process is complex, it includes both
national and regional approval in the same process. Federal democracy is perversely an impediment for
India. Local authorities are not part of the approvals process and have their own rights, and this often leads
to projects getting bogged down in red tape and bureaucracy. India actually receives less than half the FDI
that the federal government approves.

Investment Risks in India

24

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.
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.

25

FDI Policy in India

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:

o 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
26

industry is allowed upto 100% equity participation with the capping amount as Rs. 1500 crores.
o 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.
o FDI limit of maximum 49% in telecom industry especially in the GSM services

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.

27

Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval
either by the Government or RBI. The investors are only required to notify the Regional office concerned
of RBI within 30 days of receipt of inward remittances and file the required documents with that office
within 30 days of issue of shares to foreign investors.
List of activities or items for which automatic route for foreign investment is not available, include the
following:

Banking

NBFC's Activities in Financial Services Sector

Civil Aviation

Petroleum Including Exploration/Refinery/Marketing

Housing & Real Estate Development Sector for Investment from Persons other
than NRIs/OCBs.

Venture Capital Fund and Venture Capital Company

Investing Companies in Infrastructure & Service Sector

Atomic Energy & Related Projects

Defense and Strategic Industries

Agriculture (Including Plantation)

Print Media

Broadcasting

Postal Services
28

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.

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
29

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.
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

About foreign direct investment In India.

Is the process whereby residents of one country (the source country) acquire ownership of assets for the
purpose of controlling the production, distribution, and other activities of a firm in another country (the
host country). The international monetary funds 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).
I.

Foreign direct investment: Indian scenario

30

FDI is permitted as under the following forms of investments

Through financial collaborations.
Through joint ventures and technical collaborations.
Through capital markets via Euro issues.
Through private placements or preferential allotments.

Sector Specific Foreign Direct Investment in India

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

100% FDI is permissible in the sector on the automatic route,
The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation
and/or catering and food facilities to tourists. Tourism related industry include travel agencies, tour
operating agencies and tourist transport operating agencies, units providing facilities for cultural,
adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure,
entertainment, amusement, sports, and health units for tourists and Convention/Seminar units and
organizations.

31

For foreign technology agreements, automatic approval is granted if

i.

up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy
services including fees for architects, design, supervision, etc.

ii.

up to 3% of net turnover is payable for franchising and marketing/publicity support fee, and up to
10% of gross operating profit is payable for management fee, including incentive fee.

Private Sector Banking:

Non-Banking Financial Companies (NBFC)
49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from
time to time.
a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels
indicated below:
i.

Merchant banking

ii.

Underwriting

iii.

Portfolio Management Services

32

iv.

Investment Advisory Services

v.

Financial Consultancy

vi.

Stock Broking

vii.

Asset Management

viii.

Venture Capital

ix.

Custodial Services

x.

Factoring

xi.

Credit Reference Agencies

xii.

Credit rating Agencies

xiii.

Leasing & Finance

xiv.

Housing Finance

xv.

Foreign Exchange Brokering

xvi.

Credit card business

xvii.

Money changing Business

xviii.

Micro Credit

xix.

Rural Credit

b. Minimum Capitalization Norms for fund based NBFCs:

i) For FDI up to 51% - US$ 0.5 million to be brought upfront
ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront
33

iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to be
brought up front and the balance in 24 months
c. Minimum capitalization norms for non-fund based activities:
Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted non-fund based
NBFCs with foreign investment.
d. Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a
minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50 million as at b) (iii) above
(without any restriction on number of operating subsidiaries without bringing in additional capital)
e. Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be
allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also
complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above.
f. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the
Reserve Bank of India. RBI would issue appropriate guidelines in this regard.

Insurance Sector: FDI in Insurance sector in India

FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from
Insurance Regulatory & Development Authority (IRDA)

Telecommunication:
FDI in Telecommunication sector
i.

In basic, cellular, value added services and global mobile personal communications by satellite,
FDI is limited to 49% subject to licensing and security requirements and adherence by the
companies (who are investing and the companies in which investment is being made) to the
license conditions for foreign equity cap and lock- in period for transfer and addition of equity and
other license provisions.
34

ii.

ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with
FDI, beyond 49% requiring Government approval. These services would be subject to licensing
and security requirements.

iii.

No equity cap is applicable to manufacturing activities.

iv.

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

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

b.

Infrastructure Providers providing dark fiber (IP Category 1);

c.

Electronic Mail; and

d.

Voice Mail
The above would be subject to the following conditions:

e.

FDI up to 100% is allowed subject to the condition that such companies would divest 26%
of their equity in favor of Indian public in 5 years, if these companies are listed in other
parts of the world.

f.

The above services would be subject to licensing and security requirements, wherever
required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

Trading:
FDI in Trading Companies in India

35

Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities,
and the undertaking is an export house/trading house/super trading house/star trading house. However,
under the FIPB route:i. 100% FDI is permitted in case of trading companies for the following activities:

exports;

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

cash and carry wholesale trading;

other import of goods or services provided at least 75% is for procurement and sale of goods and
services among the companies of the same group and not for third party use or onward
transfer/distribution/sales.

ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy:
a. Companies for providing after sales services (that is not trading per se)
b. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies
who wish to market manufactured products on behalf of their joint ventures in which they have
equity participation in India.
c. Trading of hi-tech items/items requiring specialized after sales service
d. Trading of items for social sector
e. Trading of hi-tech, medical and diagnostic items.
f. Trading of items sourced from the small scale sector under which, based on technology provided
and laid down quality specifications, a company can market that item under its brand name.
g. Domestic sourcing of products for exports.

36

h. Test marketing of such items for which a company has approval for manufacture provided such
test marketing facility will be for a period of two years, and investment in setting up manufacturing
facilities commences simultaneously with test marketing

FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would
divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other
parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not
in retail trading.
Power:
FDI In Power Sector in India
Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and
distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of
foreign direct investment.
Drugs & Pharmaceuticals
FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical,
provided the activity does not attract compulsory licensing or involve use of recombinant DNA
technology, and specific cell / tissue targeted formulations.
FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by
recombinant DNA technology, and specific cell / tissue targeted formulations will require prior
Government approval.
Roads, Highways, Ports and Harbors
FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads,
highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors.
Pollution Control and Management
FDI up to 100% in both manufacture of pollution control equipment and consultancy for integration of
pollution control systems is permitted on the automatic route.

37

Call Centers in India / Call Centres in India

FDI up to 100% is allowed subject to certain conditions.
Business Process Outsourcing BPO in India
FDI up to 100% is allowed subject to certain conditions.
Special Facilities and Rules for NRI's and OCB's
NRI's and OCB's are allowed the following special facilities:
1. Direct investment in industry, trade, infrastructure etc.
2. Up to 100% equity with full repatriation facility for capital and dividends in the following sectors

i.

34 High Priority Industry Groups

ii.

Export Trading Companies

iii.

Hotels and Tourism-related Projects

iv.

Hospitals, Diagnostic Centers

v.

Shipping

vi.

Deep Sea Fishing

vii.

Oil Exploration

viii.

Power

ix.

Housing and Real Estate Development

x.

Highways, Bridges and Ports

38

xi.

Sick Industrial Units

xii.

Industries Requiring Compulsory Licensing

3. Up to 40% Equity with full repatriation: New Issues of Existing Companies raising Capital
through Public Issue up to 40% of the new Capital Issue.
4. On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership engaged in
Industrial, Commercial or Trading Activity.
5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the equity Capital or
Convertible Debentures of the Company by each NRI. Investment in Government Securities, Units
of UTI, National Plan/Saving Certificates.
6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through a General Body
Resolution, up to 24% of the Paid Up Value of the Company.
7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from Shares or Debentures
of an Indian

39

India Further Opens Up Key Sectors for Foreign Investment

India has liberalized foreign investment regulations in key sectors, opening up commodity exchanges,
credit information services and aircraft maintenance operations. The foreign investment limit in Public
Sector Units (PSU) refineries has been raised from 26% to 49%.
An additional sweetener is that the mandatory disinvestment clause within five years has been done away
with. FDI in Civil aviation up to 74% will now be allowed through the automatic route for non-scheduled
and cargo airlines, as also for ground handling activities. 100% FDI in aircraft maintenance and repair
operations has also been allowed.
But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been given a miss
again. India has decided to allow 26% FDI and 23% FII investments in commodity exchanges, subject to
the proviso that no single entity will hold more than 5% of the stake.
Sectors like credit information companies, industrial parks and construction and development projects
have also been opened up to more foreign investment. Also keeping India's civilian nuclear ambitions in
mind, India has also allowed 100% FDI in mining of titanium, a mineral which is abundant in India.
Sources say the government wants to send out a signal that it is not done with reforms yet. At the same
time, critics say contentious issues like FDI and multi-brand retail are out of the policy radar because of
political compulsions.

40

Sector-wise FDI Inflows ( From April 2000 to January 2010)

SECTOR

AMOUNT OF FDI INFLOWS

In Rs Million

PERCENT OF TOTAL FDI

INFLOWS (In terms of Rs)

In US$
Million

Services Sector

787420.81

18118.40

22.39

Computer Software &

hardware

391109.74

8876.43

11.12

Telecommunications

275441.38

6215.55

7.83

Construction Activities

213595.12

5029.01

6.07

Automobile

146799.41

3310.23

4.17

Housing & Real estate

217936.02

5118.85

6.20

Power

137089.37

3129.66

3.90

Chemicals (Other than

Fertilizers)

87008.07

1964.06

2.47

Ports

63290.50

1551.88

1.80

Metallurgical industries

109563.20

2612.85

3.11

Electrical Equipments

57379.63

1324.92

1.63

Cement & Gypsum Products 70781.19

1621.03

2.01

Petroleum & Natural Gas

94417.17

2244.17

2.68

Trading

62416.85

1480.94

1.77

Consultancy Services

48647.43

1112.92

1.38

Hotel and Tourism

52500.05

1217.50

1.49

Food Processing Industries

34362.49

760.32

0.98

Electronics

33914.75

748.57

0.96

Misc. Mechanical &

Engineering industries

28310.13

648.86

0.80

Information & Broadcasting

52115.90
(Incl. Print media)

1194.20

1.48

Mining

21204.94

522.86

0.60

Textiles (Incl. Dyed, Printed) 26736.94

611.03

0.76

Sea Transport

17653.81

402.59

0.50

Hospital & Diagnostic

Centers

27241.42

644.73

0.77

Fermentation Industries

27743.46

658.04

0.79

41

Forbidden Territories:

Arms and ammunition

Atomic Energy

Coal and lignite

Rail Transport

Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper, zinc.

42

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.

Foreign direct investments in India are approved through two routes

1. Automatic approval by RBI

43

The Reserve Bank of India accords automatic approval within a period of two weeks (subject to
compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is
allowed depending on the category of industries and the sectoral caps applicable. The lists are
comprehensive and cover most industries of interest to foreign companies. Investments in high priority
industries or for trading companies primarily engaged in exporting are given almost automatic
approval by the RBI.
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.

iii.
Sr. No.
1.
2.
3.
4.

Analysis of sector specific policy for FDI

Sector/Activity
Hotel & Tourism
NBFC
Insurance
Telecommunication:

FDI cap/Equity
100%
49%
26%

cellular, value added services

49%

ISPs

with

gateways,

radio-

Entry/Route
Automatic
Automatic
Automatic
Automatic
Above 49% need Govt. licence
44

5.

paging

74%

Electronic Mail & Voice Mail

Trading companies:

100%

primarily export activities

51%

Automatic

bulk imports, cash and carry

6.

wholesale trading
100%
Power(other than atomic reactor

Automatic

power plants)

100%
100%

Automatic
Automatic

100%

Automatic

100%

Automatic

100%
100%

Automatic
Automatic

100%

Automatic

7.
Drugs & Pharmaceuticals
8.
Roads, Highways, Ports and
Harbors
9.
Pollution
10
11.
12.

Control

and

Management
Call Centers
BPO
For NRI's and OCB's:
i.

34 High Priority
Industry Groups

ii.

Export

Trading

Companies
iii.

Hotels

and

Tourism-related Projects
iv.

Hospitals,
Diagnostic Centers

v.

Shipping

vi.

Deep Sea Fishing

vii.

Oil Exploration

45

viii.

Power

ix.

Housing and Real

Estate Development

x.

Highways,
Bridges and Ports

xi.

Sick

Industrial

Units
xii.

Industries
Requiring

Compulsory

Licensing
xiii.

Industries
Reserved for Small Scale
Sector

13.

14
15.
16.
17.

Airports:
Greenfield projects

100%

Automatic

Existing projects
Assets reconstruction company
Cigars and cigarettes
Courier services
Investing
companies
in

100%
49%
100%
100%
49%

Beyond 74% FIPB

FIPB
FIPB
FIPB
FIPB

infrastructure

(other

than

telecom sector)

46

iv.

Analysis of FDI inflow in India

From April 2000 to August 2009-10
(Amount US$ in Millions)

S.No

Financial Year

Total FDI Inflows

% Growth Over Previous Year

1.

2000-01

4,029

----

2.

2001-02

6,130

(+) 52

3.

2002-03

5,035

(-) 18

4.

2003-04

4,322

(-) 14

5.

2004-05

6,051

(+) 40

6.

2005-06

8,961

(+) 48

7.

2006-07

22,826

(+) 146

8.

2007-08

34,362

(+) 51

9.

2008-09

35,168

(+) 02

10.

2009-10

16,232

----

47

TOTAL FDI INFLOWS IN INDIA

40,000
35,168
34,362

35,000
30,000
25,000

22,826
TOTAL FDI INFLOWS

20,000
16,232

15,000
10,000
5,000

8,961
6,130
4,029

5,035 4,322

6,051

v.

Analysis of share of top ten investing countries FDI equity in flows

48

From April 2000 to January 2010

(Amount in Millions)
Sr. No

Country

Amount of FDI Inflows

As

Total
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Mauritius
Singapore
U.S.A.
U.K.
Netherlands
Japan
Cyprus
Germany
France
U.A.E.

19,18,633.61
3,80,142.56
3,32,935.60
2,40,974.98
1,78,047.76
1,50,129.05
1,32,448.04
1,12,242.06
61,686.39
50,915.59

To
FDI

Inflow
44.01
8.72
7.64
5.53
4.08
3.44
3.04
2.57
1.42
1.17

49

Mauritius
Mauritius invested Rs.19,18,633 million in India Up to the January 2010, equal to 44.01 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

50

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 Fuels.
Singapore
Singapore continues to be the single largest investor in India amongst the Singapore with FDI inflows into
Rs. 3,80,142 crores up to January 2010
Sector-wise distribution of FDI inflows received from Singapore the highest inflows have been in the
services sector (financial and non financial), 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.
U.S.A.
The United States is the third largest source of FDI in India (7.64 % of the total), valued at 732335 crore
in cumulative inflows up to January 2010. 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 (5.53 % of the total), valued at 2,40,974
crores in cumulative inflows up to January 2010
Over 17 UK companies under the aegis of the Nuclear Industry Association of UK have tied up with Ficci
to identify joint venture and FDI possibilities in the civil nuclear energy sector.
51

UK companies and policy makers the focus sectors for joint ventures, partnerships, and trade are nonconventional 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. 1, 78,047 crores between 1991 and 2002. The total percentage of FDI from Netherlands
to India stood at 4.08% 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

52

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

vi.

Analysis of sectors attracting highest FDI equity inflows

From April 2000 to March 2010
(Amount in Millions)

Sr. No

Country

Amount

of

FDI %

Inflows

Total

As

1.

Service Sector

9,65,210.77

Inflow
22.14

2.
3.
4.
5.
6.
7.
8.
9.
10.

(Financial & Non Financial)

Computer Software & Hardware
Telecommunication
Housing & Real Estate
Construction Activities
Automobile Industry
Power
Metallurgical Industries
Petroleum & Natural Gas
Chemical

4,13,419.03
3,68,899.62
3,25,021.36
2,65,492.96
1,90,172.22
1,79,849.92
1,25,785.57
1,11,957.00
1,01,680.18

9.48
8.46
7.46
6.09
4.36
4.13
2.89
2.57
2.33

To
FDI

The sectors receiving the largest shares of total FDI inflows up to arch 2010 were the service
sector and computer software and hardware sector, each accounting for 22.14 and 9.48 percent
respectively. These were followed by the telecommunications, real estate, construction and
automobile sectors. The top sectors attracting FDI into India via M&A activity were
manufacturing; information; and professional, scientific, and technical services. These sectors

53

correspond closely with the sectors identified by the Indian government as attracting the largest
shares of FDI inflows overall.
The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers) registered maximum
growth of 227 per cent during April 2008 March 2009 as compared to 11.71 per cent during the last
fiscal. The sector attracted USD 749 million FDI in FY 09 as compared to USD 229 million in FY 08.
During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent to 74 per,
which has contributed to the robust growth of FDI. The telecom sector registered a growth of 103 per cent
during fiscal 2008-09 as compared to previous fiscal. The sector attracted USD 2558 million FDI in FY
09 as compared to the USD 1261 million in FY 08, acquired 9.37 per cent share in total FDI inflow.
India automobile sector has been able to record 70 per cent growth in foreign investment. The FDI inflow
in automobile sector has increased from USD 675 million to 1,152 million in FY 09 over FY 08. The
other sectors which registered growth in highest FDI inflow during April March 2009 were housing &
real estate (28.55 per cent), computer software & hardware (18.94 per cent), construction activities
including road & highways (16.35 per cent) and power (1.86 per cent).

Foreign Investment Promotion Board

54

The FIPB (Foreign Investment Promotion Board) is a government body that offers a single window
clearance for proposals on foreign direct investment in the country that are not allowed access through the
automatic route. Consisting of Senior Secretaries drawn from different ministries with Secretary
,Economic Affairs in the chair, this high powered body discusses and examines proposals for foreign
investment in the country for restricted sectors ( as laid out in the Press notes and extant foreign
investment policy) on a regular basis. Currently proposals for investment beyond 600 crores require the
concurrence of the CCEA (Cabinet Committee on Economic Affairs). The threshold limit is likely to be
raised to 1200 crore soon.The Board thus plays an important role in the administration and
implementation of the Governments 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
55

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 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

56

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 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.

FOREIGN INSTITUTIONAL INVESTMENT

57

I.

Introduction to FII

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.
II.

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

58

incorporated or established outside India proposing to make proprietary investments or with no

ii)

single investor holding more than 10 per cent of the shares or units of the fund.
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.

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.
iii.

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
59

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).
iv.

Trends of Foreign Institutional Investments in India.

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 2009, there were 1609 FIIs registered with SEBI.

SEBI Registered FIIs in India

Year
1992-93
1993-94
1994-95

End of March
0
3
156
60

v.
Year

1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00

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

353
439
496
450
506
527
490
502
540
685
882
996
1279
1609

2009-10

1805

FII trend in India

Gross

Gross Sales (b)

Net

Purchases

(Rs.crore)

Investment (a- FII inflow

(a) (Rs. crore)

b)

17
5593
7631
9694
15554
18695
16115
56856

(Rs. crore)
13
5127
4796
6942
8575
5958
1584
10122

4
466
2835
2752
6979
12737
17699
46734

% increase in

39338.46
-6.45
44.75
23.52
-30.52
126.59
739.02
61

2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10

74051
49920
47061
144858
16953
346978
520508
896686
548876
-

64116
41165
44373
99094
171072
305512
489667
844504
594608
-

9935
8755
2688
45764
45881
41466
30841
52182
-45732
-

-1.85
-11.88
69.30
1602.53
0.26
-9.62
-25.62
69.20
187.64
-

2010 data was not available

FII INFLOW
1000000
800000

Gross Purchases (a) (Rs.crore)

Gross Sales (b) (Rs.crore)

600000
400000
200000
0

Net Investment (a-b) (Rs.crore)

-200000

62

There may be many other factors on which a stock index may depend i.e. Government policies, budgets,
bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar exchange rate
etc. But for my study I have selected only one independent variable i.e. FII and dependent variable is
indices of nifty.

vi.

Co relation with Indices

Indices
Sensex
Bankex
Power
IT
Capital Goods

Co-relation with FII

0.80
0.18
0.33
0.13
0.44

From the above table we can say that FII has a positive impact on all the indices which means that if FIIs
come in India then it is goods for the Indian economy. FIIs have more co-relation with Sensex so we can
say that they are mostly invest in big and reputed companies which are included in Sensex.
Power and Capital Goods sector have more co-relation with FII investment which shows more interest of
FIIs in those sectors.

63

Difference Between FDI and FII

FDI v/s FII
Both FDI and FII is 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 from it easily. But FDI cannot
enter and exit that easily. This difference is what makes nations to choose FDIs 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
64

market, the FII flows into secondary market. While FIIs are short-term investments, the FDIs 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

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

Objective of the study:

To know the flow of investment in India

To know how can India Grow by Investment .
To Examine the trends and patterns in the FDI across different sectors and from different countries

in India
To know in which sector we can get more foreign currency in terms of investment in India
To know which country s safe to invest .
To know how much to invest in a developed country or in a developing.
To know Which sector is good for investment .
To know which country in investing in which country
To know the reason for investment in India
Influence of FII on movement of Indian stock exchange
To understand the FII & FDI policy in India.

65

Research methodology
In order to accomplish this project successfully we will take following steps.
Data collection:
Secondary Data:
Internet, Books , newspapers, journals and books, other reports and projects, literatures
FDI:
The study is limited to a sample of investing countries e.g. Mauritius, Singapore, USA etc. and sectors
e.g. service sector, computer hardware and software, telecommunications etc. which had attracted larger
inflow of FDI from different countries.
FII:

Correlation: We have used the Correlation tool to determine whether two ranges of data move
together that is, how the Sensex, Bankex, IT, Power and Capital Goods are related to the FII
which may be positive relation, negative relation or no relation.
We will use this model for understanding the relationship between FII and stock indices returns.
FII is taken as independent variable. Stock indices are taken as dependent variable

Hypothesis Test: If the hypothesis holds good then we can infer that FIIs have significant impact
on the Indian capital market. This will help the investors to decide on their investments in stocks
and shares. If the hypothesis is rejected, or in other words if the null hypothesis is accepted, then
FIIs will have no significant impact on the Indian bourses.

66

CONCLUSION
A large number of changes that were introduced in the countrys regulatory economic policies heralded the
liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the
volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend during the study
period. It might be of interest to note that more than 50% of the total FDI inflows received by India , came
from Mauritius, Singapore and the USA.
The main reason for higher levels of investment from Mauritius was that the fact that India entered into a
double taxation avoidance agreement (DTAA) with Mauritius were protected from taxation in India.
Among the different sectors, the service sector had received the larger proportion followed by computer
software and hardware sector and telecommunication sector.
According to findings and results, we have concluded that FII did have significant impact on Sensex but
there is less co-relation with Bankex and IT. One of the reasons for high degree of any linear relation can
also be due to the sample data. The data was taken on monthly basis. The data on daily basis can give
more positive results (may be). Also FII is not the only factor affecting the stock indices. There are other
major factors that influence the bourses in the stock market.

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