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 SUBM
ITTED 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. Mee
rut 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 re
quirement for obtaining the degree of Master of Business Administration from Ut
tar 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. Meeru
t has under gone a research project on “Analytical Study Of Foreign Direct Inves
tment in India ”And submitted a report based on the same as a mandatory requirem
ent for obtaining the degree of Master of Business Administration from Uttar Pra
desh 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 gu
idance throughout. A special note of thanks also goes out to the people from var
ious 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 explanatio
n of FDI would be a direct investment by a corporation in a commercial venture i
n another country. A key to separating this action from involvement in other ven
tures in a foreign country is that the business enterprise operates completely o
utside the economy of the corporation’s home country. The investing corporation
must control 10 percent or more of the voting power of the new venture.
According to history the United States was the leader in the FDI activity dating
back as far as the end of World War II. Businesses from other nations have take
n 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 unio
ns. 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 Nixo
n administration, Congress and business interests rallied to make sure that this
attack on their expansion plans was not successful. One key to understanding FD
I is to get a mental picture of the global scale of corporations able to make su
ch investment. A carefully planned FDI can provide a huge new market for the com
pany, 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 profitab
le if construction costs and labor costs are less in the host country.
The definition of FDI originally meant that the investing corporation gained a s
ignificant number of shares (10 percent or more) of the new venture. In recent y
ears, however, companies have been able to make a foreign direct investment that
is actually long-term management control as opposed to direct investment in bui
ldings 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 tha
t lead the world’s economy have found fertile soil for FDI in nations where comm
ercial development was limited, if it existed at all. The dollars invested in su
ch developing-country projects increased 40 times over in less than 30 years. Th
e financial strength of the investing corporations has sometimes meant failure f
or 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 f
inancial 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 in
flows of foreign direct investment as a percentage of gross domestic product (GD
P). The largest flows of foreign investment occur between the industrialized cou
ntries (North America, Western Europe and Japan).But flows to non-industrialized
countries are increasing sharply. Foreign direct investment (FDI) refers to lon
g term participation by country A into country B.
It usually involves participation in management, joint-venture, transfer of tech
nology and expertise. There are two types of FDI: inward foreign direct investme
nt and outward foreign direct investment, resulting in a net FDI inflow (positiv
e 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 inves
tment enterprise’’).The lasting interest implies the existence of a long-term re
lationship between the direct investor and the enterprise and a significant degr
ee 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 a
nd unincorporated.
• Foreign Direct Investment – when a firm invests directly in production o
r other facilities, over which it has effective control, in a foreign country.
• Manufacturing FDI requires the establishment of production facilities.
• Service FDI requires building service facilities or an investment footho
ld 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 a

mounts of financial assets.
Product Life-Cycle Theory
• Ray Vernon asserted that product moves to lower income countries as prod
ucts move through their product life cycle.
• The FDI impact is similar: FDI flows to developed countries for innovati
on, and from developed countries as products evolve from being innovative to bei
ng mass-produced.

The Eclectic Paradigm

• Distinguishes between:
– Structural market failure – external condition that gives rise to monopo
ly advantages as a result of entry barriers
– Transactional market failure – failure of intermediate product markets t
o transact goods and services at a lower cost than internationalization

The Dynamic Capability Perspective

• A firm’s ability to diffuse, deploy, utilize and rebuild firm-specific r
esources for a competitive advantage.
• Ownership specific resources or knowledge are necessary but not sufficie
nt for international investment or production success.
• It is necessary to effectively use and build dynamic capabilities for qu
antity 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 oper
ate subsidiaries abroad more profitably than local competitors.
• Monopolistic Advantage comes from:
– Superior knowledge – production technologies, managerial skills, industr
ial 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, produc
tion, or distribution streams.
• Advantages
– Avoid search and negotiating costs
– Avoid costs of moral hazard (hidden detrimental action by external partn
ers)
– 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

Definition
Foreign direct investment is that investment, which is made to serve the busines
s interests of the investor in a company, which is in a different nation distinc
t from the investor s country of origin. A parent business enterprise and its fo
reign affiliate are the two sides of the FDI relationship. Together they compris
e an MNC.
The parent enterprise through its foreign direct investment effort seeks to exer
cise substantial control over the foreign affiliate company. Control as define
d 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 tha
n 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 fi
nancial 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 mo
re useful to a country than investments in the equity of its companies because e
quity 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 o
r badly.
FDI or Foreign Direct Investment is any form of investment that earns interest i
n enterprises which function outside of the domestic territory of the investor.
FDIs require a business relationship between a parent company and its foreign s
ubsidiary. Foreign direct business relationships give rise to multinational corp
orations. For an investment to be regarded as an FDI, the parent firm needs to h
ave 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 enterpri
se operating in a foreign country.
History
In the years after the Second World War global FDI was dominated by the United S
tates, as much of the world recovered from the destruction brought by the confli
ct. The US accounted for around three-quarters of new FDI (including reinvested
profits) between 1945 and 1960. Since that time FDI has spread to become a truly
global phenomenon, no longer the exclusive preserve of OECD countries.
FDI has grown in importance in the global economy with FDI stocks now constituti
ng over 20 percent of global GDP. Foreign direct investment (FDI) is a measure o
f foreign ownership of productive assets, such as factories, mines and land. Inc
reasing foreign investment can be used as one measure of growing economic global
ization. Figure below shows net inflows of foreign direct investment as a percen
tage of gross domestic product (GDP). The largest flows of foreign investment oc
cur between the industrialized countries (North America, Western Europe and Japa
n). But flows to non-industrialized countries are increasing sharply.
Foreign Direct investor
A foreign direct investor is an individual, an incorporated or unincorporated pu
blic or privateenterprise, a government, a group of related individuals, or a gr
oup 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 dir
ect
investor or investors.

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 vario
us prerequisites required for these investments.
Outward FDI: An outward-bound FDI is backed by the government against all type
s 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 industrie
s and subsidies granted to the local firms stand in the way of outward FDIs, whi
ch are also known as direct investments abroad.
Inward FDIs: Different economic factors encourage inward FDIs. These include int
erest loans, tax breaks, grants, subsidies, and the removal of restrictions and
limitations. Factors detrimental to the growth of FDIs include necessities of di
fferential performance and limitations related with ownership patterns.
Other categorizations of FDI
Other categorizations of FDI exist as well. Vertical Foreign Direct Investment t
akes place when a multinational corporation owns some shares of a foreign enterp
rise, which supplies input for it or uses the output produced by the MNC.
Horizontal foreign direct investments happen when a multinational company carrie
s out a similar business operation in different nations.
• Horizontal FDI – the MNE enters a foreign country to produce the same pr
oducts product at home.
• Conglomerate FDI – the MNE produces products not manufactured at home.
• Vertical FDI – the MNE produces intermediate goods either forward or bac
kward 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 en
terprise 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 enterp
rise
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)

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

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 nationa
l sales office.
4. Capability to increase total production capacity.
5.Opportunities for co-production, joint ventures with local partners, j
oint marketing arrangements, licensing, etc;
A more complete response might address the issue of global business partnering i
n very general terms. While it is nice that many business writers like the expr
ession, “think globally, act locally”, this often used cliché does not really me
an very much to the average business executive in a small and medium sized compa
ny. The phrase does have significant connotations for multinational corporatio
ns. But for executives in SME’s, it is still just another buzzword. The simple
explanation for this is the difference in perspective between executives of mul
tinational corporations and small and medium sized companies. Multinational cor
porations are almost always concerned with worldwide manufacturing capacity and
proximity to major markets. Small and medium sized companies tend to be more co
ncerned with selling their products in overseas markets. The advent of the Inte
rnet has ushered in a new and very different mindset that tends to focus more on
access issues. SME’s in particular are now focusing on access to markets, acce
ss to expertise and most of all access to technology.

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 usef
ul 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 countr
y’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
• Structural discrepancies are the differences in industry structure attri
butes 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 a
nd 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

The Impact of FDI on the Host Country

Employment
– Firms attempt to capitalize on abundant and inexpensive labor.
– Host countries seek to have firms develop labor skills and sophisticatio
n.
– Host countries often feel like “least desirable” jobs are transplanted f
rom 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 competi
tors.
– The result is uneven competition in the short run, and competency buildi
ng 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 the tenth largest in the world,
with a GDP of US $800.8 billion (2006). is the second fastest growing major econ
omy 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 o
f $3,300 at PPP and $714 at nominal.
The economy is diverse and encompasses agriculture, handicrafts, textile, manufa
cturing, and a multitude of services. Although two-thirds of the Indian workforc
e still earn their livelihood directly or indirectly through agriculture, servic
es 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 educ
ated populace fluent in English, is gradually transforming India as an important
back office destination for global companies for the outsourcing of their cus
tomer services and technical support.
India is a major exporter of highly-skilled workers in software and financial se
rvices, and software engineering. India followed a socialist-inspired approach f
or most of its independent history, with strict government control over private
sector participation, foreign trade, and foreign direct investment. However, sin
ce the early 1990s, India has gradually opened up its markets through economic r
eforms by reducing government controls on foreign trade and investment. The priv
atization 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 signific
antly since independence, mainly due to the green revolution and economic reform
s. 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 collabo
rator has a previous/existing venture/tie up in India
FDI in India includes, FDI inflows as well as FDI outflow from India. Also FDI f
oreign 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 out
flow from India. The FDI statistics and data are evident of the emergence of Ind
ia as both a potential investment market and investing country. FDI has helped
the Indian economy grow, and the government continues to encourage more investme
nts of this sort - but with $5.3 billion in FDI . India gets less than 10% of th
e 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 w
ays - enabled India to achieve a certain degree of financial stability, growth a
nd 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 ch
allenge the country. India has continually sought to attract FDI from the world
’s major investors.
In 1998 and 1999, the Indian national government announced a number of reforms d
esigned to encourage FDI and present a favorable scenario for investors. FDI inv
estments are permitted through financial collaborations, through private equity
or preferential allotments, by way of capital markets through Euro issues, and i
n joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lig
nite or mining industries. A number of projects have been announced in areas suc
h as electricity generation, distribution and transmission, as well as the devel
opment of roads and highways, with opportunities for foreign investors. The Indi
an 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, F
DI is allowed in financial services, including the growing credit card business.

These services include the non-banking financial services sector. Foreign invest
ors can buy up to 40% of the equity in private banks, although there is conditio
n that stipulates that these banks must be multilateral financial organizations.
Up to 45% of the shares of companies in the global mobile personal communicatio
n by satellite services (GMPCSS) sector can also be purchased. By 2004, India re
ceived $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 amount
s? Although the Chinese approval process is complex, it includes both national
and regional approval in the same process. Federal democracy is perversely an im
pediment 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 r
ed tape and bureaucracy. India actually receives less than half the FDI that the
federal government approves.

Investment Risks in India

Sovereign Risk
India is an effervescent parliamentary democracy since its political freedom fr
om British rule more than 50 years ago. The country does not face any real threa
t of a serious revolutionary movement which might lead to a collapse of state ma
chinery. Sovereign risk in India is hence nil for both "foreign direct investmen
t" and "foreign portfolio investment." Many Industrial and Business houses have
restrained themselves from investing in the North-Eastern part of the country du
e 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 nor
thern tip is a militancy affected area and hence investment in the state of Kash
mir are restricted by law
Political Risk
India has enjoyed successive years of elected representative government at the U
nion as well as federal level. India suffered political instability for a few ye
ars 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 co
alition governments emerging. Nonetheless, political instability did not change
India s bright economic course though it delayed certain decisions relating to t
he economy. Economic liberalization which mostly interested foreign investors ha
s been accepted as essential by all political parties including the Communist Pa
rty of India Though there are bleak chances of political instability in the fut
ure, even if such a situation arises the economic policy of India would hardly b
e affected.. Being a strong democratic nation the chances of an army coup or for
eign dictatorship are minimal. Hence, political risk in India is practically abs
ent.
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 befor
e 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 wh
ich could have a negative impact on investor confidence. Not only business envir
onment and return on investment, but also the overall security conditions in a n
ation have an effect on FDI s. Though some of the financial experts think otherw
ise. 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 t
he Indian economy that would decide the flow of Foreign investment and in this r
egard India would continue to be a favorable investment destination.

FDI Policy in India

Foreign Direct Investment Policy
FDI policy is reviewed on an ongoing basis and measures for its further liberali
zation 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 Dep
artment of Industrial Policy & Promotion. FDI Policy permits FDI up to 100 % fro
m foreign/NRI investor without prior approval in most of the sectors including t
he services sector under automatic route. FDI in sectors/activities under automa
tic route does not require any prior approval either by the Government or the RB
I. 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 fi
le 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 project
s excluding arms and ammunitions, atomic energy sector, railways system , extrac
tion of coal and lignite and mining industry is allowed upto 100% equity partici
pation with the capping amount as Rs. 1500 crores.
o FDI figures in equity contribution in the finance sector cannot exceed m
ore than 40% in banking services including credit card operations and in insuran
ce sector only in joint ventures with local insurance companies.
o FDI limit of maximum 49% in telecom industry especially in the GSM servi
ces
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 encou
rage 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 ope
rations in India has the following options:
• Investment under automatic route; and
• Investment through prior approval of Government.
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 o
nly required to notify the Regional office concerned of RBI within 30 days of re
ceipt of inward remittances and file the required documents with that office wit
hin 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 oth
er
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
Procedure under Government approval
FDI in activities not covered under the automatic route, requires prior Governme
nt 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 Econo
mic Affairs (DEA), Ministry of Finance. Application for NRI and 100% EOU cases s
hould 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 compa
ny without obtaining any prior permission of the FIPB subject to prescribed para
meters/ guidelines. If the acquisition of shares directly or indirectly results
in the acquisition of a company listed on the stock exchange, it would require t
he 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 fina
ncial) 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 re
quire any further clearance from RBI for receiving inward remittance and issue o
f shares to the foreign investors. The companies are required to notify the conc
erned 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, C
DC, DEG, etc., in domestic companies is permitted through automatic route, subje
ct 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 capit
al from any industrial undertaking, either foreign or domestic.
If the equity from another company (including foreign equity) exceeds 24 per cen
t, 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 industria
l 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 own
ership of assets for the purpose of controlling the production, distribution, an
d other activities of a firm in another country (the host country). The internat
ional monetary fund’s balance of payment manual defines FDI as an investment tha
t 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 effec
tive voice in the management of the enterprise’. The united nations 1999 world i
nvestment report defines FDI as ‘an investment involving a long term relationshi
p and reflecting a lasting interest and control of a resident entity in one econ
omy (foreign direct investor or parent enterprise) in an enterprise resident in
an economy other than that of the foreign direct investor ( FDI enterprise, affi
liate enterprise or foreign affiliate).
I. Foreign direct investment: Indian scenario
FDI is permitted as under the following forms of investments –
• Through financial collaborations.
• Through joint ventures and technical collaborations.
• Through capital markets via Euro issues.
• Through private placements or preferential allotments.
Sector Specific Foreign Direct Investment in India
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 t
ransport operating agencies, units providing facilities for cultural, adventure
and wild life experience to tourists, surface, air and water transport facilitie
s to tourists, leisure, entertainment, amusement, sports, and health units for t
ourists and Convention/Seminar units and organizations.
For foreign technology agreements, automatic approval is granted if
i. up to 3% of the capital cost of the project is proposed to be paid for t
echnical and consultancy services including fees for architects, design, supervi
sion, etc.
ii. up to 3% of net turnover is payable for franchising and marketing/publi
city support fee, and up to 10% of gross operating profit is payable for managem
ent 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 shal
l be as per levels indicated below:
i. Merchant banking
ii. Underwriting
iii. Portfolio Management Services
iv. Investment Advisory Services
v. Financial Consultancy
vi. Stock Broking
vii. Asset Management
viii. Venture Capital
ix. Custodial Services
x. Factoring
xi. Credit Reference Agencies
xii. Credit rating Agencies
xiii. Leasing & Finance
xiv. Housing Finance
xv. Foreign Exchange Brokering
xvi. Credit card business
xvii. Money changing Business
xviii. Micro Credit
xix. Rural Credit
b. Minimum Capitalization Norms for fund based NBFCs:
i) For FDI up to 51% - US$ 0.5 million to be brought upfront
ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront
iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 mi
llion 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 co
ndition 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 n
umber of operating subsidiaries without bringing in additional capital)
e. Joint Venture operating NBFC s that have 75% or less than 75% foreign in
vestment will also be allowed to set up subsidiaries for undertaking other NBFC
activities, subject to the subsidiaries also complying with the applicable minim
um capital inflow i.e. (b)(i) and (b)(ii) above.
f. FDI in the NBFC sector is put on automatic route subject to compliance w
ith guidelines of the Reserve Bank of India. RBI would issue appropriate guidel
ines 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 comm
unications by satellite, FDI is limited to 49% subject to licensing and securit
y requirements and adherence by the companies (who are investing and the compan
ies in which investment is being made) to the license conditions for foreign equ
ity cap and lock- in period for transfer and addition of equity and other licens
e provisions.
ii. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permit
ted 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 se
ctor :
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 w
ould divest 26% of their equity in favor of Indian public in 5 years, if these c
ompanies are listed in other parts of the world.
f. The above services would be subject to licensing and security requiremen
ts, wherever required.
Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis.

Trading:
FDI in Trading Companies in India
Trading is permitted under automatic route with FDI up to 51% provided it is pri
marily export activities, and the undertaking is an export house/trading house/s
uper trading house/star trading house. However, under the FIPB route:-
i. 100% FDI is permitted in case of trading companies for the following act
ivities:
• 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 procureme
nt 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 marke
t that item under its brand name.
g. Domestic sourcing of products for exports.
h. Test marketing of such items for which a company has approval for manufa
cture provided such test marketing facility will be for a period of two years, a
nd investment in setting up manufacturing facilities commences simultaneously wi
th 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 i
n five years, if these companies are listed in other parts of the world. Such co
mpanies would engage only in business to business (B2B) e-commerce and not in re
tail 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 i
s 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 i
nvolve use of recombinant DNA technology, and specific cell / tissue targeted fo
rmulations.
FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bu
lk drugs produced by recombinant DNA technology, and specific cell / tissue targ
eted formulations will require prior Government approval.
Roads, Highways, Ports and Harbors
FDI up to 100% under automatic route is permitted in projects for construction a
nd maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunn
els, ports and harbors.
Pollution Control and Management
FDI up to 100% in both manufacture of pollution control equipment and consultanc
y for integration of pollution control systems is permitted on the automatic rou
te.

Call Centers in India / Call Centre’s in India

FDI up to 100% is allowed subject to certain conditions.
Business Process Outsourcing BPO in India
FDI up to 100% is allowed subject to certain conditions.
Special Facilities and Rules for NRI s and OCB s
NRI s and OCB s are allowed the following special facilities:
1. Direct investment in industry, trade, infrastructure etc.
2. Up to 100% equity with full repatriation facility for capital and divide
nds in the following sectors
i. 34 High Priority Industry Groups
ii. Export Trading Companies
iii. Hotels and Tourism-related Projects
iv. Hospitals, Diagnostic Centers
v. Shipping
vi. Deep Sea Fishing
vii. Oil Exploration
viii. Power
ix. Housing and Real Estate Development
x. Highways, Bridges and Ports
xi. Sick Industrial Units
xii. Industries Requiring Compulsory Licensing
3. Up to 40% Equity with full repatriation: New Issues of Existing Companie
s 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 Partn
ership engaged in Industrial, Commercial or Trading Activity.
5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Valu
e of the equity Capital or Convertible Debentures of the Company by each NRI. In
vestment in Government Securities, Units of UTI, National Plan/Saving Certificat
es.
6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, t
hrough a General Body Resolution, up to 24% of the Paid Up Value of the Company.
7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising
from Shares or Debentures of an Indian

India Further Opens Up Key Sectors for Foreign Investment

India has liberalized foreign investment regulations in key sectors, opening up
commodity exchanges, credit information services and aircraft maintenance operat
ions. The foreign investment limit in Public Sector Units (PSU) refineries has b
een raised from 26% to 49%.
An additional sweetener is that the mandatory disinvestment clause within five y
ears has been done away with. FDI in Civil aviation up to 74% will now be allowe
d through the automatic route for non-scheduled and cargo airlines, as also for
ground handling activities. 100% FDI in aircraft maintenance and repair operatio
ns has also been allowed.
But the big one, allowing foreign airlines to pick up a stake in domestic carrie
rs has been given a miss again. India has decided to allow 26% FDI and 23% FII i
nvestments 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 r
eforms 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.

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

SECTOR
AMOUNT OF FDI INFLOWS
PERCENT OF TOTAL FDI INFLOWS (In terms of Rs)
In Rs Million 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 (Incl. Print media) 52115.90 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
Machine Tools 10955.32 247.88 0.31
Air Transport ( Incl. air freight) 10552.19 240.71 0.30
Ceramics 17462.43 409.92 0.50
Rubber Goods 11392.76 247.60 0.32
Agriculture Services 7937.13 188.39 0.23
Industrial Machinery 13748.27 316.97 0.39
Paper & Pulp 18612.76 429.06 0.53
Diamond & Gold Ornaments 11014.62 248.15 0.31
Agricultural Machinery 6649.12 148.37 0.19
Earth Moving Machinery 5749.34 134.22 0.16
Commercial, Office & Household Equipments 5798.71 132.74 0.16
Glass 5683.60 126.51 0.16
Printing of Books (Incl. Litho printing industry) 6066.23 135.80 0.17
Soaps, Cosmetics and Toilet Preparations 4984.88 114.54 0.14
Medical & Surgical Appliances 8087.87 177.42 0.23
Education 14374.11 309.09 0.41
Fertilizers 4282.17 96.59 0.12
Photographic raw Film & Paper 2580.20 63.90 0.07
Railway related components 3281.85 75.11 0.09
Vegetable oils and Vanaspati 3769.18 83.69 0.11
Sugar 1836.64 41.58 0.05
Tea & Coffee 3774.81 84.28 0.11
Leather, Leather goods & Piackers 1621.56 36.74 0.05
Non-conventional energy 3640.58 86.84 0.10
Industrial instruments 1368.36 29.47 0.04
Scientific instruments 511.44 11.64 0.01
Glue and Gelatine 385.80 8.44 0.01
Boilers & steam generating plants 238.67 5.40 0.01
Dye-Stuffs 406.48 9.52 0.01
Retail Trading (Single brand) 1074.67 25.18 0.03
Coal Production 614.10 15.42 0.02
Coir 50.17 1.12 0.00
Timber products 139.59 3.10 0.00
Prime Mover (Other than electrical generators 178.30 3.72 0.01
Defence Industries 6.87 0.15 0.00
Mathematical, Surveying & drawing instruments 50.35 1.27 0.00
Misc. industries 180561.54 4162.55 5.19

Sub Total 3517310.79 81010.63 100.00

Stock Swapped (from 2002 to 2008) 145466.35 3391.07 -
Advance of Inflows (from 2000 to 2004) 89622.22 1962.82 -
RBI s NRI Schemes 5330.60 121.33 -
Grand Total 3757729.96 86395.85 -
Sector wise FDI inflows
SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government of India

Forbidden Territories:
• Arms and ammunition
• Atomic Energy
• Coal and lignite
• Rail Transport
• Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, dia
monds, copper, zinc.
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 trea
ted 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 sh
ould have consistent track record for good performance (financial or otherwise)
for a minimum period of 3 years. This condition would be relaxed for infrastruct
ure 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 o
r a group of companies in the financial year. A company engaged in the manufactu
re of items covered under Annex-III of the New Industrial Policy whose direct fo
reign 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 F
IPB 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, capita
l expenditure including domestic purchase/installation of plant, equipment and b
uilding and investment in software development, prepayment or scheduled repaymen
t 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 –
The Reserve Bank of India accords automatic approval within a period of two week
s (subject to compliance of norms) to all proposals and permits foreign equity u
p to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industr
ies and the sectoral caps applicable. The lists are comprehensive and cover most
industries of interest to foreign companies. Investments in high priority indus
tries or for trading companies primarily engaged in exporting are given almost a
utomatic
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 case
s 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 propo
sals, 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 ent
ire 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. Analysis of sector specific policy for FDI
Sr. No. Sector/Activity FDI cap/Equity Entry/Route
1. Hotel & Tourism 100% Automatic
2. NBFC 49% Automatic
3. Insurance 26% Automatic
4. Telecommunication:
cellular, value added services
ISPs with gateways, radio-paging
Electronic Mail & Voice Mail
49%
74%
100% Automatic
Above 49% need Govt. licence
5. Trading companies:
primarily export activities
bulk imports, cash and carry wholesale trading
51%
100%
Automatic
Automatic
6. Power(other than atomic reactor power plants)
100%
Automatic
7. Drugs & Pharmaceuticals 100% Automatic
8. Roads, Highways, Ports and Harbors 100% Automatic
9. Pollution Control and Management 100% Automatic
10 Call Centers 100% Automatic
11. BPO 100% Automatic
12. 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
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
100%
Automatic

13. Airports:
Greenfield projects
Existing projects
100%
100%
Automatic
Beyond 74% FIPB
14 Assets reconstruction company 49% FIPB
15. Cigars and cigarettes 100% FIPB
16. Courier services 100% FIPB
17. Investing companies in infrastructure (other than telecom sector)
49% FIPB

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 ----
v. Analysis of share of top ten investing countries FDI equity in flows
From April 2000 to January 2010
(Amount in Millions)
Sr. No Country Amount of FDI Inflows % As To Total FDI Inflow
1. Mauritius 19,18,633.61 44.01
2. Singapore 3,80,142.56 8.72
3. U.S.A. 3,32,935.60 7.64
4. U.K. 2,40,974.98 5.53
5. Netherlands 1,78,047.76 4.08
6. Japan 1,50,129.05 3.44
7. Cyprus 1,32,448.04 3.04
8. Germany 1,12,242.06 2.57
9. France 61,686.39 1.42
10. U.A.E. 50,915.59 1.17

Mauritius
Mauritius invested Rs.19,18,633 million in India Up to the January 2010, equal t
o 44.01 percent of total FDI inflows. Many companies based outside of India uti
lize Mauritian holding companies to take advantage of the India- Mauritius Doubl
e Taxation Avoidance Agreement (DTAA). The DTAA allows foreign firms to bypass I
ndian 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. H
owever, the Indian government is concerned enough about this problem to have ask
ed the government of Mauritius to set up a joint monitoring mechanism to study t
hese investment flows. The potential loss of tax revenue is of particular concer
n to the Indian government. These are the sectors which attracting more FDI from
Mauritius Electrical equipment Gypsum and cement products Telecommunications Se
rvices sector that includes both non- financial and financial Fuels.
Singapore
Singapore continues to be the single largest investor in India amongst the Singa
pore with FDI inflows into Rs. 3,80,142 crores up to January 2010
Sector-wise distribution of FDI inflows received from Singapore the highest infl
ows have been in the services sector (financial and non financial), which accoun
ts for about 30% of FDI inflows from Singapore. Petroleum and natural gas occupi
es the second place followed by computer software and hardware, mining and const
ruction.
U.S.A.
The United States is the third largest source of FDI in India (7.64 % of the tot
al), 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, an
d 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 a
nd manufacturing

U.K.
The United Kingdom is the fourth largest source of FDI in India (5.53 % of the t
otal), 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 h
ave tied up with Ficci to identify joint venture and FDI possibilities in the ci
vil nuclear energy sector.
UK companies and policy makers the focus sectors for joint ventures, partnership
s, and trade are non-conventional energy, IT, precision engineering, medical equ
ipment, infrastructure equipment, and creative industries.
Netherlands
FDI from Netherlands to India has increased at a very fast pace over the last fe
w years. Netherlands ranks fifth among all the countries that make investments i
n India. The total flow of FDI from Netherlands to India came to Rs. 1, 78,047 c
rores between 1991 and 2002. The total percentage of FDI from Netherlands to Ind
ia stood at 4.08% out of the total foreign direct investment in the country up t
o August 2009.

Following Various industries attracting FDI from Netherlands to India are:

• Food processing industries
• Telecommunications that includes services of cellular mobile, basic tele
phone, 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 % As To Total FDI Inflow
1. Service Sector
(Financial & Non Financial) 9,65,210.77 22.14
2. Computer Software & Hardware 4,13,419.03 9.48
3. Telecommunication 3,68,899.62 8.46
4. Housing & Real Estate 3,25,021.36 7.46
5. Construction Activities 2,65,492.96 6.09
6. Automobile Industry 1,90,172.22 4.36
7. Power 1,79,849.92 4.13
8. Metallurgical Industries 1,25,785.57 2.89
9. Petroleum & Natural Gas 1,11,957.00 2.57
10. Chemical 1,01,680.18 2.33

The sectors receiving the largest shares of total FDI inflows up to arch 2010 we
re the service sector and computer software and hardware sector, each accounting
for 22.14 and 9.48 percent respectively. These were followed by the telecommuni
cations, real estate, construction and automobile sectors. The top sectors attra
cting FDI into India via M&A activity were manufacturing; information; and profe
ssional, scientific, and technical services. These sectors correspond closely wi
th the sectors identified by the Indian government as attracting the largest sha
res 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 comp
ared to 11.71 per cent during the last fiscal. The sector attracted USD 749 mill
ion 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 te
lecom sector registered a growth of 103 per cent during fiscal 2008-09 as compar
ed to previous fiscal. The sector attracted USD 2558 million FDI in FY ‘09 as co
mpared 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 in
vestment. 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 grow
th in highest FDI inflow during April – March 2009 were housing & real estate (2
8.55 per cent), computer software & hardware (18.94 per cent), construction acti
vities including road & highways (16.35 per cent) and power (1.86 per cent).

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 count
ry 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 note
s and extant foreign investment policy) on a regular basis. Currently proposals
for investment beyond 600 crores require the concurrence of the CCEA (Cabinet Co
mmittee 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 imp
lementation of the Government’s FDI policy. In circumstances where there is ambi
guity or a conflict of interpretation, the FIPB has stepped in to provide soluti
ons. 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 the
refore has a strong record of actively encouraging the flow of FDI into the coun
try. The FIPB is assisted in this task by a FIPB Secretariat. The launch of e- f
iling facility is an important initiative of the Secretariat to further the caus
e of enhanced accessibility and transparency .

Low Income Countries in Global FDI Race

The situation of foreign direct investment has been relatively good in the recen
t times with an increase of 38%. Normally, the foreign direct investment is made
mostly into the extractive industries. However, now the foreign direct investor
s are also looking to pump money into the manufacturing industry that has garner
ed 47% of the total foreign direct investment made in 1992. However, the situati
on 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 fo
reign direct investment. It has been observed that the various debt crises, as w
ell 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 late
r phases of the decade of 70s the Asian countries started encouraging foreign di
rect 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 inv
estment 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 c
ountries 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 inc
reased by seven times to become US$ 37.5 billion during 1995. A significant amou
nt of the foreign direct investment in China was provided in the industrial sect
or.
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 seco
nd best in terms of receiving foreign direct investment. In the recent times Ind
ia 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 initia
tion of the economic liberation.
There were more initiatives that enabled India to garner foreign direct investme
nts worth US$ 2.9 billion from 1991 to 1995. This was a significant increase fro
m the previous twenty years when the total foreign direct investment in India wa
s US$1 billion. Most of the foreign direct investment made in India has been in
the infrastructural areas like telecommunications and power. In the manufacturin
g industry the emphasis has been on petroleum refining, vehicles and petrochemic
als Vietnam is a low income country, which is supposed to have the same potentia
l as China to generate foreign direct investment.
The foreign direct investment laws were introduced in Vietnam in 1987-88. This l
ed to an increase in the foreign direct investment made in the country. The amou
nt stood at US$ 25 million in 1993 compared to US$ 8 million in 1993. This amoun
t 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 dire
ct 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 Banglade
sh 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 statist
ics 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 forei
gn 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 ave
rage, from 1993 to 1995. This improvement was brought about by the privatization
of the Ashanti Goldfields.

FOREIGN INSTITUTIONAL INVESTMENT

I. Introduction to FII
Since 1990-91, the Government of India embarked on liberalization and economic r
eforms with a view of bringing about rapid and substantial economic growth and m
ove towards globalization of the economy. As a part of the reforms process, the
Government under its New Industrial Policy revamped its foreign investment polic
y recognizing the growing importance of foreign direct investment as an instrume
nt of technology transfer, augmentation of foreign exchange reserves and globali
zation 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 reco
mmending their entry, the Committee, however did not elaborate on the objectives
of the suggested policy. The committee only suggested that the capital market s
hould be gradually opened up to foreign portfolio investments.
From September 14, 1992 with suitable restrictions, FIIs were permitted to inves
t in all the securities traded on the primary and secondary markets, including s
hares, 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 all
ow reputed foreign investors, such as Pension Funds etc., to invest in Indian ca
pital 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 Worki
ng Group for Streamlining of the Procedures relating to FIIs, constituted in Apr
il, 2003, inter alia, recommended streamlining of SEBI registration procedure, a
nd suggested that dual approval process of SEBI and RBI be changed to a single a
pproval 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 ma
nagement company, nominee company, bank, institutional portfolio manager, univer
sity funds, endowments, foundations, charitable trusts, charitable societies, a
trustee or power of attorney holder incorporated or established outside India pr
oposing 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 who
se behalf the FII invests. The following entities are eligible to be registered
as sub-accounts, viz. partnership firms, private company, public company, pensio
n 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 in
vestment in equity-related instruments and 30 % in non-equity instruments.
b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instrume
nts.
The Government guidelines for FII of 1992 allowed, inter-alia, entities such as
asset management companies, nominee companies and incorporated/institutional por
tfolio 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 appl
ication 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 i
nvestments in the names of such clients. Asset management companies/portfolio ma
nagers are basically in the business of managing funds and investing them on beh
alf 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 clien
ts . These clients later came to be known as sub-accounts. The broad strategy
consisted of having a wide variety of clients, including individuals, intermedia
ted through institutional investors, who would be registered as FIIs in India. F
IIs 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 Com
pany. They are also not allowed to invest in any company which is engaged or pro
poses 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 doe
s not include development of townships, construction of residential/commercial p
remises, 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 Receip
ts (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 i
n India. Thereafter, the Indian stock markets were opened up for direct particip
ation by FIIs. They were allowed to invest in all the securities traded on the p
rimary and the secondary market including the equity and other securities/instru
ments of companies listed/to be listed on stock exchanges in India. It can be ob
served from the table below that India is one of the preferred investment destin
ations for FIIs over the years. As of March 2009, there were 1609 FIIs registere
d with SEBI.

SEBI Registered FIIs in India

Year End of March
1992-93 0
1993-94 3
1994-95 156
1995-96 353
1996-97 439
1997-98 496
1998-99 450
1999-00 506
2000-01 527
2001-02 490
2002-03 502
2003-04 540
2004-05 685
2005-06 882
2006-07 996
2007-08 1279
2008-09 1609
2009-10 1805
v. FII trend in India
Year Gross Purchases
(a) (Rs. crore)
Gross Sales (b)
(Rs.crore)
Net Investment (a-b)
(Rs. crore) % increase in FII inflow
1992-93 17 4 13 -
1993-94 5593 466 5127 39338.46
1994-95 7631 2835 4796 -6.45
1995-96 9694 2752 6942 44.75
1996-97 15554 6979 8575 23.52
1997-98 18695 12737 5958 -30.52
1998-99 16115 17699 1584 126.59
1999-00 56856 46734 10122 739.02
2000-01 74051 64116 9935 -1.85
2001-02 49920 41165 8755 -11.88
2002-03 47061 44373 2688 69.30
2003-04 144858 99094 45764 1602.53
2004-05 16953 171072 45881 0.26
2005-06 346978 305512 41466 -9.62
2006-07 520508 489667 30841 -25.62
2007-08 896686 844504 52182 69.20
2008-09 548876 594608 -45732 187.64
2009-10 - - - -

2010 data was not available

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

vi. Co – relation with Indices

Indices Co-relation with FII
Sensex 0.80
Bankex 0.18
Power 0.33
IT 0.13
Capital Goods 0.44
From the above table we can say that FII has a positive impact on all the indice
s 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 inv
est in big and reputed companies which are included in Sensex.
Power and Capital Goods sector have more co-relation with FII investment which s
hows more interest of FIIs in those sectors.

Difference Between FDI and FII

FDI v/s FII
Both FDI and FII is related to investment in a foreign country. FDI or Foreign D
irect Investment is an investment that a parent company makes in a foreign count
ry. 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 ne
ed 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 i
t and take it back. But in Foreign Direct Investment, this is not possible. In s
imple words, FII can enter the stock market easily and also withdraw from it eas
ily. But FDI cannot enter and exit that easily. This difference is what makes na
tions to choose FDI’s more than then FIIs.
FDI is more preferred to the FII as they are considered to be the most beneficia
l kind of foreign investment for the whole economy. specific enterprise. It aims
to increase the enterprises capacity or productivity or change its management c
ontrol. 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 Fo
reign Institutional Investor. FDI not only brings in capital but also helps in g
ood governance practices and better management skills and even technology transf
er. Though the Foreign Institutional Investor helps in promoting good governance
and improving accounting, it does not come out with any other benefits of the F
DI. While the FDI flows into the primary market, the FII flows into secondary ma
rket. 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 th
e 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 c
apital availability in general.
4. The Foreign Direct Investment is considered to be more stable than Foreign In
stitutional Investor
Objective of the study

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 a
nd from different countries in India
To know in which sector we can get more foreign currency in terms of inv
estment 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.

Research methodology

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, Singapor
e, USA etc. and sectors e.g. service sector, computer hardware and software, te
lecommunications etc. which had attracted larger inflow of FDI from different co
untries.
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 Ca
pital Goods are related to the FII which may be positive relation, negative rela
tion 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 a
s dependent variable
• Hypothesis Test: If the hypothesis holds good then we can infer that FII
s have significant impact on the Indian capital market. This will help the inves
tors to decide on their investments in stocks and shares. If the hypothesis is r
ejected, or in other words if the null hypothesis is accepted, then FIIs will ha
ve no significant impact on the Indian bourses.

Conclusion

CONCLUSION
A large number of changes that were introduced in the country’s regulatory econo
mic policies heralded the liberalization era of the FDI policy regime in India a
nd 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 re
ceived 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 Mauri
tius were protected from taxation in India. Among the different sectors, the ser
vice 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 significa
nt 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 da
ta. The data was taken on monthly basis. The data on daily basis can give more p
ositive results (may be). Also FII is not the only factor affecting the stock in
dices. There are other major factors that influence the bourses in the stock mar
ket.

Recommendations & suggestions

Recommendations & suggestions

Limitations of research

Limitations of research
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Annexure