INTRODUCTION

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: 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, India’s 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 FDI and foreign institutional investment (FII). Until
recently, however, India has attracted only a small share of global FDI and 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 FDI and foreign institutional
investment (FII)) has played an important role in the process of development of many
economies. Further many developing countries consider FDI and FII as an important
element in their development strategy among the various forms of foreign assistance.

The FDI and 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 FDI and FII would also facilitate international
trade and transfer of knowledge, skills and technology.

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 government of India (GOI) has also recognized the key role of the FDI and FII in its
process of economic development, not only as an addition to its own domestic capital but
also as an important source of technology and other global trade practices. In order to
attract the required amount of FDI and FII it has bought about a number of changes in its
economic policies and has put in its practice a liberal and more transparent FDI and FII
policy with a view to attract more FDI and FII inflows into its economy. These changes
have heralded the liberalization era of the FDI and FII policy regime into India and have
brought about a structural breakthrough in the volume of FDI and FII inflows in the
economy. In this context, this report is going to analyze the trends and patterns of FDI
and FII flows into India during the post liberalization period that is 2006 to 2009 year.
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 fund’s balance of
payment manual defines FDI as an investment that is made to acquire a lasting interest in
an enterprise operating in an economy other than that of the investor. The investors’
purpose being to have an effective voice in the management of the enterprise’. The united
nations 1999 world investment report defines FDI as ‘an investment involving a long
term relationship and reflecting a lasting interest and control of a resident entity in one
economy (foreign direct investor or parent enterprise) in an enterprise resident in an
economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise
or foreign affiliate).

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.

Forbidden Territories:

• Arms and ammunition

• Atomic Energy
• Coal and lignite
• Rail Transport
• Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds,
copper, zinc.

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.

II. 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 high priority industries or for trading companies
primarily engaged in exporting are given almost automatic
approval by the RBI.

2. The FIPB Route – Processing of non-automatic approval cases –

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

CCFI ROUTE
• Investment proposals falling outside the automatic route.
And
• Having a project cost of Rs. 6,000 million or more would require prior approval
of Cabinet Committee of Foreign Investment (“CCFI”).
• Decision of CCFI usually conveyed in 8-10 weeks. Thereafter, filings have to be
made by the Indian company with the RBI.

Benefits of Foreign Direct Investment

Attracting foreign direct investment has become an integral part of the economic
development strategies for India. FDI ensures a huge amount of domestic capital,
production level, and employment opportunities in the developing countries,
which is a major step towards the economic growth of the country. FDI has been a
booming factor that has bolstered the economic life of India, but on the other hand
it is also being blamed for ousting domestic inflows. FDI is also claimed to have
lowered few regulatory standards in terms of investment patterns. The effects of
FDI are by and large transformative. The incorporation of a range of well-
composed and relevant policies will boost up the profit ratio from Foreign Direct
Investment higher. Some of the biggest advantages of FDI enjoyed by India have
been listed as under:

Economic growth- This is one of the major sectors, which is enormously

benefited from foreign direct investment. A remarkable inflow of FDI in various
industrial units in India has boosted the economic life of country

Trade- Foreign Direct Investments have opened a wide spectrum of opportunities

in the trading of goods and services in India both in terms of import and export
production. Products of superior quality are manufactured by various industries in
India due to greater amount of FDI inflows in the country.

Employment and skill levels- FDI has also ensured a number of employment
opportunities by aiding the setting up of industrial units in various corners of
India.

Technology diffusion and knowledge transfer- FDI apparently helps in the

outsourcing of knowledge from India especially in the Information Technology
sector. It helps in developing the know-how process in India in terms of enhancing
the technological advancement in India.

Linkages and spillover to domestic firms- Various foreign firms are now
occupying a position in the Indian market through Joint Ventures and
collaboration concerns. The maximum amount of the profits gained by the foreign
firms through these joint ventures is spent on the Indian market.

iii. Analysis of share of top ten investing countries FDI equity in

flows
From April 2000 to August 2010
(Amount in
Millions)
S.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
The DTAA allows foreign firms to bypass Indian capital gains taxes, and may allow
some India-based firms to avoid paying certain taxes through a process known as “round
tripping.”
The extent of round tripping by Indian companies through Mauritius is unknown. These
are the sectors which attracting more FDI from Mauritius Electrical equipment Gypsum
and cement products Telecommunications Services sector that includes both non-
financial and financial Fuels.

Singapore
Sector-wise distribution of FDI inflows received from Singapore the highest inflows have
been in the services sector (financial and non financial), which accounts for about 30% of
FDI inflows from Singapore.

FDI from the United States to India are fuel, telecommunications, electrical equipment,
food processing, and services.

U.K.
Over 17 UK companies under the aegis of the Nuclear Industry Association of UK have
tied up with Ficci to identify joint venture and FDI possibilities in the civil nuclear
energy sector.
UK companies and policy makers the focus sectors for joint ventures, partnerships, and
trade are non-conventional energy, IT, precision engineering, medical equipment,
infrastructure equipment, and creative industries.

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

Food processing industries

• Telecommunications that includes services of cellular mobile, basic telephone,

and radio paging
• Horticulture
• Electrical equipment that includes computer software and electronics
• Service sector that includes non- financial and financial services

Analysis of sectors attracting highest FDI equity inflows

From April 2000 to August 2009
(Amount in
Millions)
S.No Country Amount Of FDI % As To
Inflows Total FDI
Inflow
1. Service Sector 9,65,210.77 22.14
 (Financial & Non Financial)
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 August 2009 were the
service sector and computer software and hardware sector, each accounting for 122.14
and 9.48 percent respectively. These were followed by the telecommunications, real
estate, construction and automobile sectors. The top sectors attracting FDI into India via
M&A activity were manufacturing; information; and professional, scientific, and
technical services. These sectors correspond closely with the sectors identified by the
Indian government as attracting the largest shares of FDI inflows overall.

The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers)
registered maximum growth of 227 per cent during April 2008 – March 2009 as
compared to 11.71 per cent during the last fiscal. The sector attracted USD 749 million
FDI in FY ‘09 as compared to USD 229 million in FY ’08,
During the year 2009 government had raised the FDI limit in telecom sector from 49 per
cent to 74 per, which has contributed to the robust growth of FDI. The telecom sector
registered a growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal.
The sector attracted USD 2558 million FDI in FY ‘09 as compared to the USD 1261
million in FY ’08, acquired 9.37 per cent share in total FDI inflow.

India automobile sector has been able to record 70 per cent growth in foreign investment.
The FDI inflow in automobile sector has increased from USD 675 million to 1,152
million in FY ’09 over FY ’08.
The other sectors which registered growth in highest FDI inflow during April – March
2009 were housing & real estate (28.55 per cent), computer software & hardware (18.94
per cent), construction activities including road & highways (16.35 per cent) and power
(1.86 per cent).

FII
Objective 2: Influence of FII on movement of Indian stock exchange
during the post liberalization period that is September 2006 to
September 2009.
 I. Introduction to FII
Since 1990-91, the Government of India embarked on liberalization and economic
reforms with a view of bringing about rapid and substantial economic growth and move
towards globalization of the economy. As a part of the reforms process, the Government
under its New Industrial Policy revamped its foreign investment policy recognizing the
growing importance of foreign direct investment as an instrument of technology transfer,
augmentation of foreign exchange reserves and globalization of the Indian economy.
Simultaneously, the Government, for the first time, permitted portfolio investments from
abroad by foreign institutional investors in the Indian capital market. The entry of FIIs
seems to be a follow up of the recommendation of the Narsimhan Committee Report on
Financial System. While recommending their entry, the Committee, however did not
elaborate on the objectives of the suggested policy. The committee only suggested that
the capital market should be gradually opened up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all
the securities traded on the primary and secondary markets, including shares, debentures
and warrants issued by companies which were listed or were to be listed on the Stock
Exchanges in India. While presenting the Budget for 1992-93, the then Finance Minister
Dr. Manmohan Singh had announced a proposal to allow reputed foreign investors, such
as Pension Funds etc., to invest in Indian capital market.

II. Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside
India which proposes to make investment in India in securities. A Working Group for
Streamlining of the Procedures relating to FIIs, constituted in April, 2003, inter alia,
recommended streamlining of SEBI registration procedure, and suggested that dual
approval process of SEBI and RBI be changed to a single approval process of SEBI. This
recommendation was implemented in December 2003.

Currently, entities eligible to invest under the FII route are as follows:
 i) As FII: Overseas pension funds, mutual funds, investment trust, asset
management company, nominee company, bank, institutional portfolio
manager, university funds, endowments, foundations, charitable trusts,
charitable societies, a trustee or power of attorney holder incorporated or
established outside India proposing to make proprietary investments or with
no single investor holding more than 10 per cent of the shares or units of the
fund.
ii) As Sub-accounts: The sub account is generally the underlying fund on whose
behalf the FII invests. The following entities are eligible to be registered as
sub-accounts, viz. partnership firms, private company, public company,
pension fund, investment trust, and individuals.

FIIs registered with SEBI fall under the following categories:

a) Regular FIIs- those who are required to invest not less than 70 % of their investment in
equity-related instruments and 30 % in non-equity instruments.

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

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset
management companies, nominee companies and incorporated/institutional portfolio
managers or their power of attorney holders (providing discretionary and non-
discretionary portfolio management services) to be registered as FIIs. While the
guidelines did not have a specific provision regarding clients, in the application form the
details of clients on whose behalf investments were being made were sought.

While granting registration to the FII, permission was also granted for making
investments in the names of such clients. Asset management companies/portfolio
managers are basically in the business of managing funds and investing them on behalf of
their funds/clients. Hence, the intention of the guidelines was to allow these categories of
investors to invest funds in India on behalf of their 'clients'. These 'clients' later came to
be known as sub-accounts. The broad strategy consisted of having a wide variety of
clients, including individuals, intermediated through institutional investors, who would be
registered as FIIs in India. FIIs are eligible to purchase shares and convertible debentures
issued by Indian companies under the Portfolio Investment Scheme.

iii. Prohibitions on Investments:

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

1) Business of chit fund

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

iv. Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository Receipts

(ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and
investments in offshore funds. Before 1992, only Non-Resident Indians (NRIs) and
Overseas Corporate Bodies were allowed to undertake portfolio investments in India.
Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They
were allowed to invest in all the securities traded on the primary and the secondary
market including the equity and other securities/instruments of companies listed/to be
listed on stock exchanges in India. It can be observed from the table below that India is
one of the preferred investment destinations for FIIs over the years. As of March 2009,
there were 1609 FIIs registered with SEBI.
SEBI Registered FIIs in India
Year 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
 v. FII trend in India
Year Gross Gross Sales (b) Net % increase
Purchases (Rs.crore) Investment (a-
(a) (Rs.crore) b)
(Rs.crore)
1992-93 17 4 3 -
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
 CONCLUSION

Objective 1:

A large number of changes that were introduced in the country’s regulatory economic
policies heralded the liberalization era of the FDI policy regime in India 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 2000 - 2009 came from Mauritius, Singapore and the USA. The main reason
for higher levels of investment from Mauritius was that the fact that India entered into a
double taxation avoidance agreement (DTAA) with Mauritius were protected from
taxation in India. Among the different sectors, the service sector had received the larger
proportion followed by computer software and hardware sector and telecommunication
sector.

Objective 2:
According to findings and results, we have concluded that FII did have significant impact
on Sensex but there is less co-relation with Bankex and IT.

One of the reasons for high degree of any linear relation can also be due to the sample
data. The data was taken on monthly basis. The data on daily basis can give more positive
results (may be). Also FII is not the only factor affecting the stock indices. There are
other major factors that influence the bourses in the stock market.

Bibliography
Sites
http://dipp.nic.in
www.bseindia.com
www.financeexpress.com
www.tradechakra.com
www.madaan.com
www.indianembassy.com
www.sebi.gov.in