Table of contents

Abstract
.....02
1. Introduction
......03
1.1 Objective of
project.
03
1.2 Methodology.
..04
1.3
Limitation
05
2. Main text (FDI)

05
2.1
About foreign direct
investment .06
2.2
FDI Indian
scenario
.06
2.3
FDI in India approval
route07
2.4
Analysis of sector
specific policy of FDI08
3. Main text (FII)

..12
3.1
FII..
.12

Introduction to

3.2
Market design in India
for FIIs...13

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3.3
Registration process of
FIIs...14
3.4
Prohibition on
investment.1
5
3.5
Trends of FIIs in
India.1
6
3.6
Framing of
hypothesis
..17
3.7
Recording of
observation..
.17
4. Conclusion ..
.18
5. Reference
...19
5.1
Internet
sites.
..19
5.2
Books.
...
19

ABSTRACT
The report of the project Foreign direct investment (FDI) and foreign institutional investors (FII)
in India mainly focused on the following areas:

A) FOREIGN DIRECT INVESTMENT (FDI)

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Net foreign direct investment (FDI) flows into India reached 70630 crore in Indias 200607 fiscal
year, means increase of 187% of the 24613 crore recorded during 200506, with the largest share of
FDI flows from Mauritius, followed by the United States and the United Kingdom. This study
examines FDI in India, in the context of the Indian economic and regulatory environment. This study
present FDI trends in India, by country and by sectors during the post liberalization period that is 1991
to 2007 year, using official government data from Indian official government internet site like that of
RBI, SEBI. To illustrate the driving forces behind these trends, the study also discusses the investment
climate in India, Indian government incentives to foreign investors, the Indian regulatory environment
as it affects investment, and the effect of Indias global, regional, and bilateral trade agreements on
investment from top 10 FDI investing countries. Finally, the study examines global FDI in Indias in
top 10 sectors of industry.

B) FOREIGN INSTITUTIONAL INVESTORS (FII)

Institutional Investor is any investor or investment fund that is from or registered in a country outside
of the one in which it is currently investing. Institutional investors include hedge funds, insurance
companies, pension funds and mutual funds. The growing Indian market had attracted the foreign
investors, which are called Foreign Institutional Investors (FII) to Indian equity market, and this study
present try to explain the impact and extent of foreign institutional investors in Indian stock market
and examining whether market movement can be explained by these investors. It is often hear that
whenever there is a rise in market, it is explained that it is due to foreign investors' money and a
decline in market is termed as withdrawal of money from FIIs. This study tries to examine the
influence of FII on movement of Indian stock exchange during the post liberalization period that is
1991 to 2007.

1. INTRODUCTION

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Foreign investment refers to investments made by the residents of a country in the financial assets and
production processes of another country. 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: foreign direct investment (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.
India is the second largest country in the world, with a population of over 1 billion people. As a
developing country, Indias economy is characterized by wage rates that are significantly lower than
those in most developed countries. These two traits combine to make India a natural destination for
foreign direct investment (FDI) and foreign institutional investment (FII). Until recently, however,
India has attracted only a small share of global foreign direct investment (FDI) and foreign
institutional investment (FII), primarily due to government restrictions on foreign involvement in the
economy. But beginning in 1991 and accelerating rapidly since 2000, India has liberalized its
investment regulations and actively encouraged new foreign investment, a sharp reversal from decades
of discouraging economic integration with the global economy.
The world is increasingly becoming interdependent. Goods and services followed by the financial
transaction are moving across the borders. In fact, the world has become a borderless world. With the
globalization of the various markets, international financial flows have so far been in excess for the
goods and services among the trading countries of the world. Of the different types of financial
inflows, the foreign direct investment (FDI) and foreign institutional investment (FII)) has played an
important role in the process of development of many economies. Further many developing countries
consider foreign direct investment (FDI) and foreign institutional investment (FII) as an important
element in their development strategy among the various forms of foreign assistance.
The Foreign direct investment (FDI) and foreign institutional investment (FII) flows are usually
preferred over the other form of external finance, because they are not debt creating, nonvolatile in
nature and their returns depend upon the projects financed by the investor. The Foreign direct
investment (FDI) and foreign institutional investment (FII) would also facilitate international trade and
transfer of knowledge, skills and technology.
The Foreign direct investment (FDI) and foreign institutional investment (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).

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According to the international monetary fund (IMF), foreign direct investment (FDI) and foreign
institutional investment (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 government of India(GOI) has also recognized the key role of the foreign direct investment (FDI)
and foreign institutional investment (FII) in its process of economic development, not only as an
addition to its own domestic capital but also as an important source of technology and other global
trade practices. In order to attract the required amount of foreign direct investment (FDI) and foreign
institutional investment (FII), it has bought about a number of changes in its economic policies and
has put in its practice a liberal and more transparent foreign direct investment (FDI) and foreign
institutional investment (FII) policy with a view to attract more foreign direct investment (FDI) and
foreign institutional investment (FII) inflows into its economy. These changes have heralded the
liberalization era of the foreign direct investment (FDI) and foreign institutional investment (FII)
policy regime into India and have brought about a structural breakthrough in the volume of foreign
direct investment (FDI) and foreign institutional investment (FII) inflows in the economy. In this
context, this report is going to analyze the trends and patterns of foreign direct investment (FDI) and
foreign institutional investment (FII) flows into India during the post liberalization period that is 1991
to 2007 year.

1.1 Objective of the project:

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 1991-2007 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 2007.

1.2 Methodology
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.
5|Page

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.

1.3 Limitations of the study:

A) The study has limited itself to a sample of top ten investing countries and top ten level sectors
which have attracted higher inflow of FDI.
B) The data for analysis of impact of FII on stock exchange is limited to National stock exchange
(NSE) only.

2. MAIN TEXT (FDI)

In this section I am going to discuss or describe the main business of the report i.e. analysis of
secondary data. It includes data in an organized form, discussion on its significance and analyzing the
results. For this I had divided this section in further two subsections i.e. the first subsection fulfill the
requirement of first objective which is pertaining to FDI. The objective for FDI is to examine the
trends and patterns in the foreign direct investment (FDI) across different sectors and from different
countries in India during 1991-2007 period means during post liberalization period. And the second
subsection fulfills the analysis of second objective which is pertaining to FII. The objective for FII is
to examine the influence of FII on movement of Indian stock exchange during the post liberalization
period that is 1991 to 2007.

Subsection I: objective 1: Examine the trends and patterns in the foreign direct
investment (FDI) across different sectors and from different countries in India
during 1991-2007 period means during post liberalization period.

6|Page

2.1 About foreign direct investment.

Is the process whereby residents of one country (the source country) acquire ownership of assets for
the purpose of controlling the production, distribution, and other activities of a firm in another country
(the host country). The international monetary funds balance of payment manual defines FDI as an
investment that is made to acquire a lasting interest in an enterprise operating in an economy other
than that of the investor. The investors purpose being to have an effective voice in the management of
the enterprise. The united nations 1999 world investment report defines FDI as an investment
involving a long term relationship and reflecting a lasting interest and control of a resident entity in
one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy
other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign affiliate).

2.2 Foreign direct investment: Indian scenario

Foreign Direct Investment (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.

Forbidden Territories
FDI is not permitted in the following industrial sectors:
Arms and ammunition.
Atomic Energy.
Railway Transport.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
Retail Trading (except single brand product retailing).
Lottery Business
Gambling and Betting
Business of chit fund
Nidhi Company
7|Page

Trading in Transferable Development Rights (TDRs).

Activity/sector not opened to private sector investment.
Foreign Investment through GDRs (Euro Issues)
Indian companies are allowed to raise equity capital in the international market through the issue of
Global Depository Receipt (GDRs). GDR investments are treated as FDI and are designated in dollars
and are not subject to any ceilings on investment. An applicant company seeking Government's
approval in this regard should have consistent track record for good performance (financial or
otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure
projects such as power generation, telecommunication, petroleum exploration and refining, ports,
airports and roads.
1. Clearance from FIPB
There is no restriction on the number of Euro-issue to be floated by a company or a group of
companies in the financial year. A company engaged in the manufacture of items covered under
Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is
likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to
obtain prior FIPB clearance before seeking final approval from Ministry of Finance.
2. Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure
including domestic purchase/installation of plant, equipment and building and investment in software
development, prepayment or scheduled repayment of earlier external borrowings, and equity
investment in JV/WOSs in India.
3. Restrictions
However, investment in stock markets and real estate will not be permitted. Companies may retain the
proceeds abroad or may remit funds into India in anticipation of the use of funds for approved end
uses. Any investment from a foreign firm into India requires the prior approval of the Government of
India.

2.3 Foreign direct investments in India are approved through two routes
1. Automatic approval by RBI
The Reserve Bank of India accords automatic approval within a period of two weeks (subject to
compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and
100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are
comprehensive and cover most industries of interest to foreign companies. Investments in highpriority industries or for trading companies primarily engaged in exporting are given almost automatic
approval by the RBI.
2. The FIPB Route Processing of non-automatic approval cases

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FIPB stands for Foreign Investment Promotion Board which approves all other cases where the
parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is
liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign
investors to have a local partner, even when the foreign investor wishes to hold less than the entire
equity of the company. The portion of the equity not proposed to be held by the foreign investor can be
offered to the public.

2.4 Analysis of sector specific policy for FDI

Table no. 1: Sector-specific policy for FDI: (source of following table is
http://dipp.nic.in/fdi_statistics/india_fdi_index.htm)
Sector-specific policy for FDI:
Sr.
No.
A)

Sector/Activity

FDI Cap /Equity

Entry/Route

1.

Floriculture, Horticulture, Development

of Seeds, Animal Husbandry,
Pisciculture, Aqua-culture and
Cultivation of Vegetables & Mushrooms
under controlled conditions and services
related to agro and allied sectors.

100%

Automatic

2.

Tea Sector, including tea plantation

100%

FIPB

B)
B) 1
3.

INDUSTRY
MINING
Mining covering exploration and mining
of diamonds & precious stones; gold,
silver and minerals.
Coal & Lignite mining for captive
consumption by power projects, and
iron & steel, cement production and
other eligible activities permitted under
the Coal Mines (Nationalization)
Mining and mineral separation of
titanium bearing minerals and ores, its
value addition and integrated
activities
MANUFACTURING
Alcohol- Distillation & Brewing

100%

Automatic

100%

Automatic

100%

FIPB

100%

Automatic

4.

5.

B) 2.
6.

AGRICULTURE

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7.

Cigars & Cigarettes- Manufacture

100%

FIPB

8.

Coffee& Rubber processing &

warehousing

100%

Automatic

9.

Defense production

26%

FIPB

10.

Hazardous chemicals, viz.,

hydrocyanic acid and its derivatives;
phosgene and its
derivatives; and isocyanates and
diisocyantes of hydrocarbon.
Industrial explosives - Manufacture

100%

Automatic

100%

Automatic

12.

Drugs & Pharmaceuticals including

those involving use of recombinant
DNA technology

100%

Automatic

B) 3.

POWER

13.

100%

Automatic

C)

Power including generation

(Except Atomic energy); transmission,
distribution and Power Trading.
SERVICES

14.

CIVIL AVIATION SECTOR

i.

Airports-

a.

Greenfield projects

100%

Automatic

b.

Existing projects

100%

FIPB

11.

Beyond 74%
ii.

Air Transport Services including Domestic Scheduled Passenger Airlines; Non-Schedules

Airlines; Chartered Airlines; Cargo Airlines; Helicopter and Seaplane Services

c.

Scheduled Air Transport Services/

Domestic Scheduled Passenger Airline

49%- FDI; 100%- for

NRI investment

Automatic

d.

Non-Scheduled Air Transport Service/

Non-Scheduled airlines, Chartered
airlines, and Cargo airlines

74%- FDI 100%- for

NRIs investment

Automatic

e.

Helicopter Services/Seaplane services

requiring DGCA approval

100%

Automatic

iii.

Other services under Civil Aviation Sector

f.

Ground Handling Services

74%- FDI, 100%- for

NRIs investment

Automatic

g.

Maintenance and Repair

organizations; flying training

100%

Automatic

10 | P a g e

institutes; and technical training

institutions

15.

Asset Reconstruction Companies

49% (only FDI)

FIPB

16.

Banking - Private sector

74% (FDI+FII)

Automatic

17.

Broadcasting

a.

FM Radio

FDI +FII investment

up to 20%

FIPB

b.

Cable network

49% (FDI+FII)

FIPB

c.

Direct-To-Home

49% (FDI+FII). Within

this limit, FDI
component not to exceed

FIPB

20%
d.

Setting up hardware facilities such as uplinking, HUB, etc

49% (FDI+FII)

FIPB

e.

Up-linking a News & Current Affairs

26% FDI+FII

FIPB

TV Channel
f.

Up-linking a Non- news & Current

Affairs TV Channel

100%

FIPB

18.

Commodity Exchanges

49% (FDI+FII)

FIPB

Investment by
Registered FII under
PIS will be limited to
23% and Investment
under FDI Scheme
limited to 26%.
19.

Construction Development projects,

including housing, commercial premises,
resorts, educational institutions,
recreational facilities, city and regional
level infrastructure, townships.

100%

Automatic

20.

Courier services for carrying

packages, parcels and other items
which do not come within the ambit
of the Indian Post Office Act, 1898.

100%

FIPB

21.

Credit Information Companies

49 % (FDI+FII)

FIPB

Investment by
Registered FII under
PIS will be limited to
24% only in the CICs
listed at the Stock
Exchanges within the
overall limit of 49%
foreign investment.
100%

Automatic

22.

Industrial Parks both setting up and

in established Industrial Parks

11 | P a g e

23.

Insurance

26%

Automatic

24.

Investing companies in
infrastructure / services sector (except
telecom sector)
Non Banking Finance Companies

100%

FIPB

i) Merchant Banking
ii)Underwriting Portfolio Management
Services
iii)Investment Advisory Services
iv) Financial Consultancy
v) Stock Broking
vi) Asset Management
vii) Venture Capital
viii) Custodial Services
ix) Factoring
x) Credit Rating Agencies
xi) Leasing & Finance
xii) Finance
xiii) Housing Finance
xiv) Forex Broking
xv) Credit card Business
xvi) Money changing business
xvii) Micro credit

100%

Automatic

49% in case of PSUs

100% in case of Private

Automatic (in case of

private companies)

companies

FIPB (in case of

PSUs

100%

Automatic

26%

FIPB

100%

FIPB

74% (Including FDI,

FII, NRI, FCCBs,
ADRs, GDRs,
convertible preference

Automatic up to 49%.

25.

xviii) Rural credit

26.

Petroleum & Natural Gas sector

a.

Refining

b.

Other than Refining and including

market
study and formulation; investment/
financing; setting up infrastructure
for marketing in Petroleum & Natural
Gas

sector.
27.

Print Media

a.

Publishing of newspaper and

periodicals dealing with news and
current affairs
Publishing of scientific magazines/
specialty journals/ periodicals

b.
28.

Telecommunications

a.

Basic and cellular, Unified Access

Services, National/ International Long
Distance, V-Sat, Public Mobile Radio
Trunked Services (PMRTS), Global

FIPB beyond 49%.

12 | P a g e

b.

Mobile Personal Communications

Services (GMPCS) and other value
added telecom services

shares, and proportionate foreign equity in

Indian promoters/
Investing Company)

ISP with gateways, radio- paging, endto-

74%

Automatic up to 49%.
FIPB beyond 49%.

a) ISP without gateway,

(b) infrastructure provider providing
dark
fibre, right of way,duct space,tower
(Category I);
(c) electronic mail and voice mail
Manufacture of telecom equipments
Trading

100%

Automatic up to 49%.
FIPB beyond 49%.

100%

Automatic

i) Wholesale/cash & carry trading

ii) Trading for exports
iii) Trading of items sourced from small
scale sector
iv) Test marketing of such items for
which a company has approval for
manufacture
v)Single Brand product retailing
Satellites - Establishment and
operation

100%

Automatic

74%

FIPB

Special Economic Zones and Free

Trade Warehousing Zones covering
setting up of these Zones and setting up
units in the Zones

100%

Automatic

end bandwidth.
c.

d.
29.

30.
31.

3. MAIN TEXT (FIIS)

Subsection II: objective 2: Pertaining to FII: influence of FII on
movement of Indian stock exchange during the post liberalization period
that is 1991 to 2007.
3.1 Introduction to FII
Since 1990-91, the Government of India embarked on liberalization and economic reforms with a
view of bringing about rapid and substantial economic growth and move towards globalization of the
economy. As a part of the reforms process, the Government under its New Industrial Policy revamped
its foreign investment policy recognizing the growing importance of foreign direct investment as an
instrument of technology transfer, augmentation of foreign exchange reserves and globalization of the
Indian economy. Simultaneously, the Government, for the first time, permitted portfolio investments
13 | P a g e

from abroad by foreign institutional investors in the Indian capital market. The entry of FIIs seems to
be a follow up of the recommendation of the Narsimhan Committee Report on Financial System.
While recommending their entry, the Committee, however did not elaborate on the objectives of the
suggested policy. The committee only suggested that the capital market should be gradually opened up
to foreign portfolio investments.
From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all the securities
traded on the primary and secondary markets, including shares, debentures and warrants issued by
companies which were listed or were to be listed on the Stock Exchanges in India. While presenting
the Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh had announced a proposal to
allow reputed foreign investors, such as Pension Funds etc., to invest in Indian capital market. To
operationalise this policy announcement, it had become necessary to evolve guidelines for such
investments by Foreign Institutional Investors (FIIs).
The policy framework for permitting FII investment was provided under the Government of
India guidelines vide Press Note date September 14, 1992. The guidelines formulated in this
regard were as follows:
1) Foreign Institutional Investors (FIIs) including institutions such as Pension Funds, Mutual
Funds, Investment Trusts, Asset Management Companies, Nominee Companies and
Incorporated/Institutional Portfolio Managers or their power of attorney holders (providing
discretionary and non-discretionary portfolio management services) would be welcome to
make investments under these guidelines.
2) FIIs would be welcome to invest in all the securities traded on the Primary and Secondary
markets, including the equity and other securities/instruments of companies which are listed/to
be listed on the Stock Exchanges in India including the OTC Exchange of India. These would
include shares, debentures, warrants, and the schemes floated by domestic Mutual Funds.
Government would even like to add further categories of securities later from time to time.
3) FIIs would be required to obtain an initial registration with Securities and Exchange Board of
India (SEBI), the nodal regulatory agency for securities markets, before any investment is
made by them in the Securities of companies listed on the Stock Exchanges in India, in
accordance with these guidelines. Nominee companies, affiliates and subsidiary companies of
a FII would be treated as separate FIIs for registration, and may seek separate registration with
SEBI.
4) Since there were foreign exchange controls in force, for various permissions under exchange
control, along with their application for initial registration, FIIs were also supposed to file with
SEBI another application addressed to RBI for seeking various permissions under FERA, in a
format that would be specified by RBI for the purpose. RBI's general permission would be
obtained by SEBI before granting initial registration and RBI's FERA permission together by
SEBI, under a single window approach.
5) For granting registration to the FII, SEBI should take into account the track record of the FII,
its professional competence, financial soundness, experience and such other criteria that may
14 | P a g e

be considered by SEBI to be relevant. Besides, FII seeking initial registration with SEBI were
be required to hold a registration from the Securities Commission, or the regulatory
organization for the stock market in the country of domicile/incorporation of the FII.
6) SEBI's initial registration would be valid for five years. RBI's general permission under FERA
to the FII would also hold good for five years. Both would be renewable for similar five year
periods later on.
7) RBI's general permission under FERA would enable the registered FII to buy, sell and realize
capital gains on investments made through initial corpus remitted to India, subscribe/renounce
rights offerings of shares, invest on all recognized stock exchanges through a designated bank
branch, and to appoint a domestic Custodian for custody of investments held.
8) This General Permission from RBI would also enable the FII to:
a. Open foreign currency denominated accounts in a designated bank. (There could even be
more than one account in the same bank branch each designated in different foreign currencies,
if it is so required by FII for its operational purposes);
b. Open a special non-resident rupee account to which could be credited all receipts from the
capital inflows, sale proceeds of shares, dividends and interests;
c. Transfer sums from the foreign currency accounts to the rupee account and vice versa, at the
market rate of exchange;
d. Make investments in the securities in India out of the balances in the rupee account;
e. Transfer repairable (after tax) proceeds from the rupee account to the foreign currency
account(s);
f. Repatriate the capital, capital gains, dividends, incomes received by way of interest, etc. and
any compensation received towards sale/renouncement of rights offerings of shares subject to
the designated branch of a bank/the custodian being authorized to deduct withholding tax on
capital gains and arranging to pay such tax and remitting the net proceeds at market rates of
exchange;
g. Register FII's holdings without any further clearance under FERA.

3.2 Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India which
proposes to make investment in India in securities. A Working Group for Streamlining of the
Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended streamlining of SEBI
registration procedure, and suggested that dual approval process of SEBI and RBI be changed to a
single approval process of SEBI. This recommendation was implemented in December 2003.
Currently, entities eligible to invest under the FII route are as follows:
i) As FII: Overseas pension funds, mutual funds, investment trust, asset management company,
nominee company, bank, institutional portfolio manager, university funds, endowments, foundations,
charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established

15 | P a g e

outside India proposing to make proprietary investments or with no single investor holding more than
10 per cent of the shares or units of the fund).
(ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FII
invests. The following entities are eligible to be registered as sub-accounts, viz. partnership firms,
private company, public company, pension fund, investment trust, and individuals.
FIIs registered with SEBI fall under the following categories:
a) Regular FIIs- those who are required to invest not less than 70 % of their investment in
equity-related instruments and 30 % in non-equity instruments.
b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.
The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset management
companies, nominee companies and incorporated/institutional portfolio managers or their power of
attorney holders (providing discretionary and non-discretionary portfolio management services) to be
registered as FIIs. While the guidelines did not have a specific provision regarding clients, in the
application form the details of clients on whose behalf investments were being made were sought.
While granting registration to the FII, permission was also granted for making investments in the
names of such clients. Asset management companies/portfolio managers are basically in the business
of managing funds and investing them on behalf of their funds/clients. Hence, the intention of the
guidelines was to allow these categories of investors to invest funds in India on behalf of their 'clients'.
These 'clients' later came to be known as sub-accounts. The broad strategy consisted of having a wide
variety of clients, including individuals, intermediated through institutional investors, who would be
registered as FIIs in India. FIIs are eligible to purchase shares and convertible debentures issued by
Indian companies under the Portfolio Investment Scheme.

3.3 Registration Process of FIIs

A FII is required to obtain a certificate by SEBI for dealing in securities. SEBI grants the certificate
SEBI by taking into account the following criteria:
i)

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

general reputation of fairness and integrity.

ii)

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

iii)

Whether the applicant has been granted permission under the provisions of the Foreign
Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for making
investments in India as a Foreign Institutional Investor.

iv)

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

pension fund, mutual fund, investment trust, insurance company or reinsurance
company. b) an International or Multilateral Organization or an agency thereof or a
Foreign Governmental Agency or a Foreign Central Bank. c) an asset management
company, investment manager or advisor, nominee company, bank or institutional

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portfolio manager, established or incorporated outside India and proposing to make

investments in India on behalf of broad based funds and its proprietary funds in if any
or d) university fund, endowments, foundations or charitable trusts or charitable
societies.
v)

Whether the grant of certificate to the applicant is in the interest of the development of
the securities market.

vi)

Whether the applicant is a fit and proper person.

The SEBIs initial registration is valid for a period of three years from the date of its grant of renewal.
Investment Conditions and Restrictions for FIIs:
A Foreign Institutional Investor may invest only in the following:(a) Securities in the primary and secondary markets including shares, debentures and warrants of
companies, unlisted, listed or to be listed on a recognized stock exchange in India.
(b) units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed
or not listed on a recognised stock exchange.
(c) Dated Government securities.
(d) Derivatives traded on a recognised stock exchange.
(e) Commercial paper.
(f) Security receipts.
The total investments in equity and equity related instruments (including fully convertible debentures,
convertible portion of partially convertible debentures and tradable warrants) made by a Foreign
Institutional Investor in India, whether on his own account or on account of his sub- accounts, should
not be less than seventy per cent of the aggregate of all the investments of the Foreign Institutional
Investor in India, made on his own account and on account of his sub-accounts. However, this is not
applicable to any investment of the foreign institutional investor either on its own account or on behalf
of its sub-accounts in debt securities which are unlisted or listed or to be listed on any stock exchange
if the prior approval of the SEBI has been obtained for such investments. Further, SEBI while granting
approval for the investments may impose conditions as are necessary with respect to the maximum
amount which can be invested in the debt securities by the foreign institutional investor on its own
account or through its sub-accounts. A foreign corporate or individual is not eligible to invest through
the hundred percent debt route.
Even investments made by FIIs in security receipts issued by securitization companies or asset
reconstruction companies under the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 are not eligible for the investment limits mentioned above.
No foreign institutional should invest in security receipts on behalf of its sub-account.

3.4 Prohibitions on Investments:

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FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also
not allowed to invest in any company which is engaged or proposes to engage in the following
activities:
1)
2)
3)
4)

Business of chit fund

Nidhi Company
Agricultural or plantation activities
Real estate business or construction of farm houses (real estate business does not include
development of townships, construction of residential/commercial premises, roads or
bridges.
5) Trading in Transferable Development Rights (TDRs).

3.5 Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global
Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds.
Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to
undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for
direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and
the secondary market including the equity and other securities/instruments of companies listed/to be
listed on stock exchanges in India. It can be observed from the table below that India is one of the
preferred investment destinations for FIIs over the years. As of March 2007, there were 996 FIIs
registered with SEBI.

3.6 Framing of 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 2008.

3.7 Recording of observation:

I have taken the monthly closing index of all the indices. For FIIs I have recorded monthly average of
the net investments made by them in the Indian capital market.
Net Investments = gross purchases gross sales (fig. is in Rs crore)
Use of Model: A simple linear relationship has been shown between two variables using correlation
and regression as the data analysis tools. One variable is dependent and the other is independent. I
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have taken FII as the independent variable while the stock index has been taken as dependent variable.
The impact of FII has been separately analyzed with each of the index. So, correlation and regression
has been separately run between FII and six indices taking one index at a time with help of Microsoft
excel.
Inference: If the hypothesis holds good then we can infer that FIIs have significant impact on the
Indian capital market. This will help the investors to decide on their investments in stocks and shares.
If the hypothesis is rejected, or in other words if the null hypothesis is accepted, then FIIs will have no
significant impact on the Indian bourses.
Regression Analysis: This analysis tool performs linear regression analysis by using the "least
squares" method to fit a line through a set of observations. I can analyze how a single dependent
variable is affected by the values of one or more independent variables for example, how an
athlete's performance is affected by such factors as age, height, and weight.
Correlation: This analysis tool and its formulas measure the relationship between two data sets
that are scaled to be independent of the unit of measurement. The population correlation calculation
returns the covariance of two data sets divided by the product of their standard deviations. I can use
the Correlation tool to determine whether two ranges of data move together that is, whether large
values of one set are associated with large values of the other (positive correlation), whether small
values of one set are associated with large values of the other (negative correlation), or whether values
in both sets are unrelated (correlation near zero).

4. CONCLUSION:
For objective 1:
The process of economic reforms which was initiated in July 1991 to liberalize and globalize the
economy had gradually opened up many sectors of its economy for the foreign investors. A large
number of changes that were introduced in the countrys regulatory economic policies heralded the
liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the
volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend during the
study period. It might be of interest to note that more than 50% of the total FDI inflows received by
India during the period from 1991-2007 came from Mauritius and the USA. The main reason for
higher levels of investment from Mauritius was that the fact that India entered into a double taxation
avoidance agreement (DTAA) with Mauritius were protected from taxation in India. Among the
different sectors, the electrical and equipment had received the larger proportion followed by service
sector and telecommunication sector.

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For objective 2:
According to findings and results, I concluded that FII did have high significant impact on the Indian
capital market. Therefore, the alternate hypothesis is accepted. S&P CNX NIFTY, BANK NIFTY,
CNX NIFTY JUNIOR, S&P CNX 500 showed positive correlation but CNX 100, CNX IT showed
negative correlation with FII. Also the degree of relation was high in all the case. It shows high degree
of linear relation between FII and stock index. This shows that there is relationship between them.
One of the reasons for high degree of any linear relation can also be due to the sample data. The data
was taken on monthly basis. The data on daily basis can give more positive results (may be). Also FII
is not the only factor affecting the stock indices. There are other major factors that influence the
bourses in the stock market. I also analyzed that FII had significant impact on the stock index for the
period starting from January 1991 to March 2007. The sample data available for other indices like
BANK NIFTY, CNX 100, S&P CNX 500 was low with just 51, 87 and 94 respectively observations
that have also hampered the results.

5. REFERENCES
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) www.members.aol.com/RTMadaan1/sectors
e) http://dipp.nic.in/fdi_statistics/india_fdi_index.htm
f) www.nseindia.com
g) www.sebi.gov.in

7.2 Books:
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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.

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