A PROJECT REPORT

ON
“Foreign direct investment (FDI) and foreign institutional
investors (FII) in India -
A critical analysis”

MEDICAPS INSTITUTE OF TECN OLOGY &

MANAGMENT
A.B. Road, Pigdamber, Indore – 453331
Ph.: 0731–4020492 0731–4020492 , 2856294, Fax : 2856263
E-mail : info@medicaps-institute.ac.in

PROJECT GUIDE :
RASHMI SOMANI (READER)

SUBMITTED BY :
NIKHIL KABRA
MBA-IV SEM 2008-10 BATCH
FINANCE+ MARKETING
“Foreign direct investment (FDI) and foreign institutional investors (FII) in India -

A critical analysis”

INTRODUCTION
The FDI and FII is the process by which the resident of one country (the source
Country) acquire the ownership of assets for the purpose of controlling the production,
distribution and other productive activities of a firm in another country (the host country).
According to the international monetary fund (IMF), FDI and FII is defined as “an
investment that is made to acquire a lasting interest in an enterprise operating in an
economy other than that of investor”. The effect of foreign investment, however, varies
from country to country. It can affect the factor productivity of the recipient country and
can also affect the balance of payments. Foreign investment provides a channel through
which countries can gain access to foreign capital. It can come in two forms: FDI and
foreign institutional investment (FII). Foreign direct investment involves in direct
production activities and is also of a medium- to long-term nature. But foreign
institutional investment is a short-term investment, mostly in the financial markets. FII,
given its short-term nature, can have bidirectional causation with the returns of other
domestic financial markets such as money markets, stock markets, and foreign exchange
markets. Hence, understanding the determinants of FII is very important for any
emerging economy as FII exerts a larger impact on the domestic financial markets in the
short run and a real impact in the long run. India, being a capital scarce country, has taken
many measures to attract foreign investment since the beginning of reforms in 1991.

FOREIGN DIRECT INVESTMENT (FDI): 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. Net
foreign direct investment (FDI) flows into India reached 131237 crore (27098mn in
US$ ) in India’s 2009–10 fiscal year, means increase of 433% of the 24613 crore
recorded during 2005–06 but decrease of 06% from 139747 crore recorded in 2008-09,
with the largest share of FDI flows from Mauritius 44%, followed by the Singapore 9%,
United States of Ameica 8% and the United Kingdom 5%. This study examines FDI in
India, in the context of the Indian economic and regulatory environment. This study
present FDI trends in India, by country and by sectors during the post liberalization
period that is 1991 to 2009 year, using official government data from Indian official
government internet site like that of RBI, SEBI. To illustrate the driving forces behind
these trends, the study also discusses the investment climate in India, Indian government
incentives to foreign investors, the Indian regulatory environment as it affects investment,
and the effect of India’s global, regional, and bilateral trade agreements on investment
from top 10 FDI investing countries. Finally, the study examines global FDI in India’s in
top 10 sectors of industry.
FOREIGN INSTITUTIONAL INVESTORS (FII’S): Foreign Institutional Investor
(FII) is used to denote an investor - mostly of the form of an institution or entity, which
invests money in the financial markets of a country different from the one where in the
institution or entity was originally incorporated.

FII investment is frequently referred to as hot money for the reason that it can leave the
country at the same speed at which it comes in.In countries like India, statutory agencies
like SEBI have prescribed norms to register FIIs and also to regulate such investments
flowing in through FIIs.

Overseas investors have infused US$ 816.69 million into the stock market in the first
trading week of 2010, reflecting a positive start for the year after record inflows in the
last year. Foreign institutional investors (FIIs) were gross buyers of shares worth US$
3.03 billion, and sold equities valued worth US$ 2.2 billion, resulting in a net investment
of US$ 823.74 million, according to the capital market regulator, Securities and
Exchange Board of India (SEBI). FIIs were net investors of US$ 973.22 million in debt
instruments in the first trading week of the year, according to data released by SEBI.

According to SEBI, FIIs transferred a record US$ 17.46 billion in domestic equities
during the calendar year 2009. This FII investment in 2009 proved to be the highest ever
inflow in the country in rupee terms in a single year, breaking the previous high of US$
14.96 billion parked by foreign fund houses in domestic equities in 2007. FIIs infused a
net US$ 1.05 billion in debt instruments during the said period.
 REVIEW OF RELATED LITERATURE :

A project on FDI and FII in India has been already done by Nitin Kansal in the year 07-
08 and submitted to Dr. Jyotirmayee Kar and posted it on www.scribd.com. The key
findings of that project were-

For objective 1

a) Net FDI in India was valued at $4.7 billion in the 2005–06 Indian fiscal year, and
more than tripled, to $15.7 billion, in the 2006–07 fiscal year. Almost one-half of
all FDI is invested in the Mumbai and New Delhi regions.

b) By country, the largest investors in India are Mauritius, the United States, and the
United Kingdom. Investors based in many countries have taken advantage of the
India-Mauritius bilateral tax treaty to set up holding companies in Mauritius
which subsequently invest in India, thus reducing their tax obligations.

c) By industry, the largest destinations for FDI are electrical equipment (including
computer software and electronics), services, telecommunications, and
transportation.

For objective 2

Table no. 7: correlation and regression matrix

Correlation with FII Multiple R R2 Standard Error observation
S&P CNX NIFTY 0.651 0.651 0.423 575.658 180
BANK NIFTY 0.634 0.634 0.402 1229.644 87
CNX 100 -0.159 0.159 0.025 898.820 51
CNX IT -0.191 0.191 0.036 12896.703 135
CNX NIFTY JUNIOR 0.656 0.656 0.431 1319.629 138
S&P CNX 500 0.540 0.540 0.292 670.583 94

1. Impact of FII on S&P CNX Nifty: The effect of FII on Nifty is positive and the co-
efficient of correlation is high so the effect is also high. The standard error comes out to
be 575.658 which are high. This does not mean the relation is false but we can say that
the error in linear relation is high.
2. Impact of FII on Bank Nifty: The effect of FII on Bank Nifty is positive. So, FII is
directly related to Bank Nifty. But the co-efficient of correlation is high so the effect is
also high. The standard error comes out to be 1229.644 which are very high. This means
that the deviation from the mean value is high. This does not mean the relation is false
but we can say that the error in linear relation is high. The value of multiple-R is also
high. We can say that FII have significant impact on Bank Nifty during the period of 31-
January-2000- 30-March-07.

3. Impact of FII on CNX 100: CNX 100 is inversely related to FII for the period of 31-
January-03- 30-March-2007. But the extent of impact is low as co-efficient of correlation
is -0.159.

4. Impact of FII on CNX IT: FII has inversely little significant relation with CNX IT, as
the value of correlation is -0.191. This does not mean that there is no relation at all
between them. It shows the absence of linear relation between the two variables but not a
lack of relationship altogether.

5. Impact of FII on CNX NIFTY JUNIOR: CNX NIFTY JUNIOR directly related to
FII for the period of 31-Oct-1995- 30-March-2007. But the value of R is high so the
degree of relation is also high low. Standard error in this case is 1319.6 which is high
compared to other standard errors between FII and other stock indices.

6. Impact of FII on S&P CNX 500: S&P CNX 500 is also highly correlated with FII. In
this case again the degree of relation is high.

RATIONALE

To find out the area where more FDI is needed to build our infrastructure and to check
control over FII through various regulatory agencies. It also help Government of India to
force foreign investor to invest their money in the sector which government want to raise
and also help to check which sector help us in economic growth and which one not.
 OBJECTIVE
Objective 1: pertaining to FDI: examines the trends and patterns in the foreign direct
investment (FDI) across different sectors and from different countries in India during
1991-2009 period means during post liberalization period.

Objective 2: pertaining to FII: influence of FII on movement of Indian stock exchange

during the post liberalization period that is 1991 to 2009.

Objective 3: To understand the FII & FDI policy in India.

HYPOTHESIS
Null Hypothesis (Ho): The various NSE indices do not rise with the increase in FIIs
investment means FIIs have no influence on Indian stock exchange.
Alternate Hypothesis (H1): The various NSE indices rise with the increase in FIIs
investment means FIIs have influence on Indian stock exchange.

The data regarding indices of NSE was taken from the site of NSE (the data for monthly
closing value is given in appendice 1). I got the data on FIIs investment from
“HANDBOOK OF STATISTICS ON THE INDIAN SECURITIES MARKET 2009”.
 METHODOLGY
The lifeblood of business and commerce in the modern world is information. The ability
to gather, analyze, evaluate, present and utilize information is therefore is a vital skill for
the manager of today.

In order to accomplish this project successfully I will take following steps.

1) Sampling- The study is limited to a sample of top 10 investing countries e.g.

Mauritius, USA etc. and top 10 sectors e.g. electrical instruments,
telecommunications etc. which had attracted larger inflow of FDI and data of
NSE stock exchange will be taken to know the impact of FII.

2) Data Collection:

 The research will be done with the help Secondary data (from internet
site and journals).

 The data is collected mainly from websites, annual reports, World Bank
reports, research reports, already conducted survey analysis, database
available etc.

3) Analysis:

Appropriate Statistical tools like correlation and regression will be used to

analyze the data like to analyze the growth and patterns of the FDI and FII flows
in India during the post liberalization period, the liner trend model will be used.
Further the percentage analysis will be used to measure the share of each
investing countries and the share of each sectors in the overall flow of FDI and
FII into India.
 BIBLIOGRAPHY

A number of websites, newspaper article annual reports of RBI, magazines etc.

7.1 Internet sites:

a) www.rbi.org.in/home.aspx
b) www.google.com
c) www.fdimagazine.com
d) http://dipp.nic.in/fdi_statistics/india_fdi_index.htm
e) www.nseindia.com
f) www.sebi.gov.in
g) www.scribd.com

7.2 Journals:

a) ICFAI Journal: E.g. the ICFAI journal of public finance, issue- February, vol.
VI.
b) Handbook of statistics on the Indian securities market 2009.

7.3 Books:

a) Foreign direct investment in India by Lata Chakravarthy.

b) FDI (issues in emerging economies) by K. Seethe Pathi.
c) Foreign institutional investors by G Gopal Krishna Murthy.