Foreign Institutional Investor

Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets. Types of typical investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment.
An 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 term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies.
One who propose to invest their proprietary funds or on behalf of "broad based" funds or of foreign corporates and individuals and belong to any of the undergiven categories can be registered for FII.

Pension Funds Mutual Funds Investment Trust Insurance or reinsurance companies Endowment Funds University Funds Foundations or Charitable Trusts or Charitable Societies who propose to invest on their own behalf, and Asset Management Companies Nominee Companies Institutional Portfolio Managers Trustees Power of Attorney Holders Bank

An application for registration has to be made in Form A, the format of which is provided in the SEBI(FII) Regulations, 1995 and submitted with under mentioned documents in duplicate addressed to SEBI as well as to Reserve Bank of India (RBI) and sent to the following address within 10 to 12 days of receipt of application.

Address for application The Division Chief FII Division Securities and Exchange Board of India, 224, Mittal Court, 'B' Wing, 1st Floor, Nariman Point, Mumbai - 400 021. INDIA. Supporting documents required are

Application in Form A duly signed by the authorised signatory of the applicant. Certified copy of the relevant clauses or articles of the Memorandum and Articles of Association or the agreement authorizing the applicant to invest on behalf of its clients Audited financial statements and annual reports for the last one year , provided that the period covered shall not be less than twelve months. A declaration by the applicant with registration number and other particulars in support of its registration or regulation by a Securities Commission or Self Regulatory Organisation or any other appropriate regulatory authority with whom the applicant is registered in its home country. A declaration by the applicant that it has entered into a custodian agreement with a domestic custodian together with particulatrs of the domestic custodian. A signed declaration statement that appears at the end of the Form. Declaration regarding fit & proper entity.

The eligibility criteria for applicant seeking FII registration As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to fulfill the following conditions to qualify for grant of registration:

Applicant should have track record, professional competence, financial soundness, experience, general reputation of fairness and integrity; The applicant should be regulated by an appropriate foreign regulatory authority in the same capacity/category where registration is sought from SEBI. Registration with authorities, which are responsible for incorporation, is not adequate to qualify as Foreign Institutional Investor. The applicant is required to have the permission under the provisions of the Foreign Exchange Management Act, 1999 from the Reserve Bank of India. Applicant must be legally permitted to invest in securities outside the country or its incorporation / establishment. The applicant must be a "fit and proper" person. The applicant has to appoint a local custodian and enter into an agreement with the custodian. Besides it also has to appoint a designated bank to route its transactions. Payment of registration fee of US $ 5,000.00

What is the procedure for registration of sub-account? Annexure B of the Regulations duly filled and signed by the FII and Sub-Account has to be submitted by FII on behalf of the proposed sub-account. With if DD of US$ 1000 favouring "Securities and Exchange Board of India" as fees is to be submitted payable at New York. Is it that all sub-accounts need to be broad-based? No. Proprietary, Foreign corporates and foreign individuals need not be broad-based. What is the duration required to register sub-accounts? For registered Foreign Institutional Investor, it takes 3 working days from the date of receipt of complete application and fees. In which name should the securities be registered? The Foreign Institutional Investor has the choice to register the securities in the following names:

In the name of the Foreign Institutional Investor if the FII is investing on its own behalf. In the name of the sub-account if the FII is investing on behalf of the sub-account In the name of the Foreign Institutional Investor a/c sub-account if the FII is investing on behalf of the sub-account

What is the procedure if the Foreign Institutional Investor/ sub account changes its name? For registered Foreign Institutional Investor, it has to inform SEBI promptly with the relevant documents supporting the name change. The relevant documents are :

Request for change in name by the Foreign Institutional Investor mentioning reasons for name change of the FII and/or sub account. Certificate from the Registrar of Companies, and/or approval from home regulator. Original Registration Certificate issued by SEBI to the Foreign Institutional Investor.

SEBI will issue a no-objection letter in this regard after recording the request of name change. The information regarding name change should be submitted immediately after the change has taken place in the home country and the requisite approval from the home regulator (if needed) has to been taken. What is the procedure for transferring a sub-account from one registered Foreign Institutional Investor to another? If a registered sub-account wishes to transfer from one registered Foreign Institutional Investor to another, then the FII to whom it is proposed to be transferred has to request SEBI with the following documentation.

A declaration that it is authorised to invest on behalf of the sub-account. A no-objection letter for the transfer of the sub-account from the transferor FII.

What is the procedure for change of local custodian? In case of change of the local custodian of the FII / sub-account, the change should be intimated to SEBI by the FII. On receipt of no objection from the existing custodian and acceptance from the proposed custodian, the change of custodian would be approved - by SEBI. What is the procedure for registration as FII/sub account under 100% debt route? The procedure for registration of FII/sub account under 100% debt route is similar to that of normal funds besides a clear statement by the applicant that it wishes to be registered as FII/sub account under 100% debt route. However, Government of India allocates the overall investment limit for 100% debt funds annually. The grant of investment limit for individual 100% debt funds is within this overall limit. The funds have to seek further investment limit in case the limit allotted to them is exhausted and they wish to invest further. Can a Foreign Institutional Investor having an existing account with one custodian open an account with other custodian for its sub- accounts? Yes. A Foreign Institutional Investor having an account with one custodian can open accounts with different custodians for its different sub-accounts. However, one sub-account cannot be custodied with more than one custodian. What is the procedure if an existing sub-account wants to get registered as a Foreign Institutional Investor? In case if a registered sub-account wishes to get itself registered as a Foreign Institutional Investor, then it will have to apply in Form A to SEBI for the same and has to satisfy all the eligibility criteria norms mentioned in SEBI (Foreign Institutional Investor) Regulations, 1995. It should also submit a letter from the old FII indicating its 'No-objection' to such registration. In case of merger or takeover, in case if the registered Foreign Institutional Investor loses its existence, then can the SEBI FII registration be transferred to the surviving entity? No. SEBI FII Registration is not transferable. The surviving entity has to obtain fresh registration as an FII from SEBI. What are the investment limits for FII/ sub-accounts? The sub-account which is not a foreign individual/ corporate can individually invest upto 10%. The limit for each foreign corporate/ individual is 5%. These limits are within the overall limit of 24% / 49% or the sectoral caps as the case may be. Who all are included under the definition of foreign individual? Foreign individuals mean all foreign residents other than NRI and Overseas Corporate Bodies.

On what basis is the FII investment limit calculated? Investment limit by all registered FIIs or sub accounts in primary or secondary markets under Portfolio Investment Scheme is subject to a ceiling of 24% of issued share capital of a company. The limit can be extended upto 49% per sectoral cap if the general body of the company approves it. What is the validity period of sub-account registration? The registration of the sub-account is concurrent with its registered FII and the registration of the sub-account expires with the expiry of registration of the FII. Moreover, if the registration of the FII is suspended/cancelled, the registration of its sub-account is also suspended/ cancelled as the case may be. Can an FII/sub-account trade after its registration has expired? No. if it is not interested in renewal but has certain residual assets, it should apply for disinvestment in terms of Circular No. FITTC/CUST/12/2001 dated June 04, 2001 and abide by the guidelines specified in this regard.

Can protected cell companies/cells incorporated in Mauritius be registered as FIIs/subaccounts? No. Can FII/sub-accounts trade in derivatives ? Yes subject to operational guidelines as specified by SEBI/RBI/various regulatory authorities from time to time. What is the procedure for renewal of FII/sub-account registration ? They has to apply before 3 months of the expiry of registration in Form A. Circular No FITTC/CUST/09/2000 dated September 21, 2000 may be referred

Investment in Indian Companies by FIIs/NRIs/PIOs Regulations Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per centfor NRIs/PIOs. The limit is 20 per cent of the paid up capital in the case of public sector banks, including the State Bank of India. The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. And the ceiling of 10 per cent for NRIs/PIOs can be raised to 24 per cent subject to the approval of the general body of the company passing a resolution to that effect. The ceiling for FIIs is independent of the ceiling of 10/24 per cent for NRIs/PIOs. The equity shares and convertible debentures of the companies within the prescribed ceilings are available for purchase under PIS subject to: - the total purchase of all NRIs/PIOs both, on repatriation and nonrepatriation basis, being within an overall ceiling limit of (a) 24 per cent of the company's total paid up equity capital and (b) 24 per cent of the total paid up value of each series of convertible debenture; and - the investment made on repatriation basis by any single NRI/PIO in the equity shares and convertible debentures not exceeding five per cent of the paid up equity capital of the company or five per cent of the total paid up value of each series of convertible debentures issued by the company. Monitoring Foreign Investments The Reserve Bank of India monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed cut-off points that are two percentage points lower than the actual ceilings. The cut-off point, for instance, is fixed at 8 per cent for companies in which NRIs/ PIOs can invest up to 10 per cent of the company's paid up capital. The cut-off limit for companies with 24 per cent ceiling is 22 per cent and for companies with 30 per cent ceiling, is 28 per cent and so on. Similarly, the cut-off limit for public sector banks (including State Bank of India) is 18 per cent. Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reach the cut-off point, which is 2% below the overall limit,

the Reserve Bank cautions all designated bank branches so as not to purchase any more equity shares of the respective company on behalf of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link offices are then required to intimate the Reserve Bank about the total number and value of equity shares/convertible debentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs. On receipt of such proposals, the Reserve Bank gives clearances on a first-come-first served basis till such investments in companies reach 10 / 24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory ceilings as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all designated bank branches to stop purchases on behalf of their FIIs/NRIs/PIOs clients. The Reserve Bank also informs the general public about the `caution and the `stop purchase in these companies through a press release. The current list of companies allowed to attract investments from FIIs/NRIs/PIOs with their respective ceilings is: List of companies List of companies which have raised the ceiling from 10% in respect of NRIs investments under PIS (w.e.f. November 29, 2010) Upto 24% 1 2 3 4 5 6 7 8 9 Alembic Chemical Works Co. Ltd. Amar Investments Ltd., Calcutta. Anglo- India Jute Mills Co. Ltd. Arvind Mills, Ahmedabad. Ashima Syntex Ltd, Ahmedabad. Ashoka Viniyoga Ltd. Bharat Nidhi Ltd. BLB Shares & Financial Services Ltd BPL Ltd.

10 Burr Brown (India) Ltd 11 Camac Commercial Company Ltd. 12 Ceenik Exports (India) Ltd. 13 Cifco Finance Ltd., Mumbai. 14 Classic Financial Services & Enterprises Ltd, Calcutta. 15 CPPL Ltd, (Reliance Ind. Infrastructure Ltd) Mumbai. 16 Crest Communication Ltd. 17 CRISIL 18 DCM Ltd. 19 DCM Shriram Consolidated Ltd. 20 Dharani Sugars & Chemicals Ltd 21 Dolphin Offshore Enterprises ( I ) Ltd. 22 Emco Ltd.

23 Essar Oil Ltd. 24 Essar Shipping Ltd., Blore 25 Essar Steel Ltd. 26 Eveready Industries India Ltd. 27 Fabworth (I) Ltd. 28 Federal Bank Ltd. 29 Ferro Alloys Corporation Ltd., Tumsar. 30 Gammon India Ltd 31 Grasim Industries Ltd. 32 GTL Ltd.(formerly Global Tele-Systems Ltd.) 33 GTL Infrastructure Ltd 34 Hamco Mining & Smelting Ltd. 35 HCL Infosystems Ltd. 36 HEG Ltd 37 Hindustan Development Corp. Ltd, Calcutta. 38 Hindustan Nitroproducts (Gujarat) Ltd. 39 Hindustan Transmission Products Ltd., Mumbai 40 HMG Industries Ltd., Mumbai. 41 Housing Development and Infrastructure Limited 42 Indiabulls Real Estate Ltd. 43 India bulls Securities Ltd. 44 Indiabulls Financial Services Ltd 45 Indiabulls Power Limited (formerly Sophia Power Company Limited) 46 Igarashi Motors India Ltd 47 IVP Ltd 48 Jagatjit Industries Ltd, 49 Jai Parabolic Springs Ltd. 50 Jaysynth Dyechem Ltd. 51 Jindal Strips Ltd. 52 Jindal Iron & Steel Co. Ltd. 53 Jindal Saw Limited (formerly Saw Pipes Limited) 54 JJ Spectrum Silk Ltd. 55 Kartjikeya Paper & Boards Ltd. 56 K Sera Sera Productions Ltd 57 Lakhani India Ltd. 58 M.P. Agro Fertilisers Ltd., Bhopal. 59 Macleod Russel (I) Ltd. 60 Matsushita Television and Audio India Ltd. 61 Max India Ltd 62 Mazda Enterprises Ltd., Mumbai.

63 Media Video Ltd. 64 Monnet Ispat & Energy Limited 65 Multimetals Ltd., Mumbai 66 Neha International Limited. 67 National Steel Industries Ltd. 68 Nicholas Laboratories India Ltd., Mumbai. 69 Networth Stock Broking Limited 70 Nava Bharat Ventures Limited 71 O.P. Electronics Ltd., Mumbai. 72 Oriental Housing Development Finance Corp. Ltd. 73 Pabacea Biotec Ltd. 74 Padmini Technologies Ltd. 75 Pearl Polymers Ltd., New Delhi. 76 Piramal Healthcare Ltd. 77 PNB Finance & Industries Ltd 78 Rajath Leasing & Finance Ltd. 79 Rajesh Exports Limited 80 Rama Petrochemicals Ltd. 81 Rama Phosphates Ltd. 82 Reliance Industries Ltd., Mumbai. 83 Rishra Investment Ltd., Calcutta 84 Rossell Industries Ltd., Calcutta. 85 Sahu Properties Ltd 86 Sanghvi Movers Ltd 87 Saurashtra Paper & Board Mills Ltd. 88 Sayaji Hotel Ltd. 89 SB & T International Ltd 90 Sharyans Resources Ltd. 91 Shanti Gears Ltd. 92 Shibir India Ltd., Calcutta 93 Shrenuj & Company Ltd. 94 Shriram Industries Enterprises Ltd., N. Delhi. 95 Silverline Industries Ltd. 96 Sonata Software Ltd. 97 SRF Ltd. 98 Sterling Lease Finance Ltd., Mumbai. 99 Sujana Metal Products Ltd 100 Svam Software Ltd. 101 Synthetics and Chemicals Ltd., Mumbai. 102 Shrenuj & Company Limited

103 The Champdany Industries Ltd., Calcutta. 104 The Dhanalakshmi Bank Limited 105 The Dharamsi Morarji Chemical Co. Ltd . 106 The Investment Trust of India Ltd. 107 The Morarjee Goculdas Spinning & Weaving Co Ltd, Mumbai. 108 Tolani Bulk Carrier Ltd. 109 Unitech Limited. 110 Uniworth International Ltd. 111 Vaibhav Gems Ltd. 112 Valecha Engineering Ltd. 113 VisualSoft Technologies Ltd. 114 Weltermann International Ltd. 115 Woolworth (India) Ltd. 116 Yes Bank Ltd. 117 Zora Pharma Ltd. 118 M/s. Redington(India) Ltd.(w.e.f. 29.11.2010) 119 M/s. Compuage Infocom Limited (w.e.f. 4.3.2011) 120 M/s. Kitex Garments Limited (w.e.f. 8.7.2011) 121 M/s Indiabulls Wholesale Services Ltd (w.e.f. 26.08.2011) Upto 17% 1 Garware Shipping Corporation Ltd.

LIST OF COMPANIES IN WHICH FII INVESTMENT IS ALLOWED UPTO 30% OF THEIR PAID UP CAPITAL UNDER PIS 1 2 3 4 5 6 7 8 9 Asian Paints (India) Ltd Capital Trust Ltd Container Corporation of India Divis Laboratories Ltd Ferro Alloys Corporation Ltd Garware Polyester Ltd GIVO Ltd (formerly KB & T Ltd) Mahindra Gesco Developers Ltd Orchid Chemicals and Pharmaceuticals Ltd

10 Penta Soft Tec(Pentafour Communications Ltd) 11 Polyplex Corporation Ltd 12 Ranbaxy Laboratories Ltd 13 Shasun Chemicals Ltd 14 Sonata Software Ltd

15 The Paper Products Ltd 16 Vikas WSP Ltd 17 Apollo Tyres Ltd.(w.e.f. June 22, 2010) LIST OF COMPANIES IN WHICH FII INVESTMENT IS ALLOWED UPTO 40% OF THEIR Paid Up Capital 1 Adlabs Films Ltd. 2 Aftek Infosys Ltd. 3 Balaji Telefilms Ltd. 4 Bharat Forge Ltd 5 Burr Brown (India )Ltd 6 Cipla Ltd. 7 Elbee Services Ltd 8 Glenmark Pharmaceuticals Ltd 9 Gujarat Ambuja Cements Ltd 10 HEG Ltd 11 Hero Honda Motors Ltd 12 Jindal Steel & Power Ltd 13 Jyoti Structures Ltd 14 Maars Software International Ltd 15 Mount Everest Mineral Water Ltd 16 Padmini Technologies Ltd. 17 Rajasthan Spinning & Weaving Mills Ltd 18 Rico Auto Industries Ltd. 19 Shanti Gears Ltd. 20 Silverline Technologies Ltd. 21 Suven Life Sciences Ltd. 22 The India Cements Ltd. 23 The Indian Hotels Company Ltd 24 Thiru Arooran Sugars Ltd. 25 UTV Software Communications Ltd 26 Visual Soft Technologies Ltd. 27 Ways India Ltd. LIST OF COMPANIES IN WHICH FII INVESTMENT IS ALLOWED UPTO 49% OF THEIR Paid Up Capital 1 2 3 4 Alok Industries Auribindo Pharma Ltd. Arvind Mills Ltd Balakrishna Industries Ltd

5 6 7 8 9

Blue Dart Express Ltd CRISIL Digital GlobalSoft Ltd. Dr. Reddys Laboratories Ltd. D. S. Kulkarni Developers Ltd.

10 Federal Bank Ltd. 11 Financial Technologies (I) Ltd 12 HDFC Bank Ltd 13 Himachal Futuristic Communications Ltd. 14 Hindustan Lever Ltd. 15 Hughes Software Ltd. 16 ICICI Bank Ltd. 17 Ind-Swift Laboratories Ltd. 18 Jain Irrigation Systems Ltd. 19 Karnataka Bank Ltd. 20 LIC Housing Finance Ltd. 21 Marksans Pharma Ltd. 22 Mahindra & Mahindra Ltd. 23 Mastek Ltd 24 Max India Ltd 25 McDowell & Co Ltd 26 NIIT Ltd. 27 NIIT Technologies Ltd. 28 Panacea Biotec Ltd. 29 Reliance Capital Ltd. 30 Reliance Energy Ltd. 31 Reliance Industries Ltd. 32 Reliance Petroleum Ltd. 33 SB & T International Ltd. 34 Sadbhav Engineering Limited 35 S. Kumars Nationwide Ltd 36 Soffia Software Ltd 37 Strides Arcolabs Ltd 38 Sun Pharmaceutical Industries Ltd. 39 Swaraj Mazda Ltd 40 The South Indian Bank Ltd 41 The Dhanalakshmi Bank Limited 42 SPANCO Limited 43 United Breweries Ltd 44 United Phosphorus Ltd

45 UTI Bank Ltd. 46 Vimta Labs Ltd. 47 Wockhardt Ltd. 48 Yes Bank Ltd. 49 Zeefilms Ltd. 50 Welspun India Ltd (w.e.f. 10.02.2010) 51 Dewan Housing Finance Corporation Ltd(w.e.f. 27.8.2010) LIST OF COMPANIES IN WHICH FII INVESTMENT IS ALLOWED UPTO LIMITS FIXED BY COMPANIES AS INDICATED AGAINST THEIR NAMES 1 2 3 4 5 6 7 8 9 11 Amtek Auto Ltd (74%) Advanta India Limited 49% Amtek India Ltd (74%) Ahmednagar Forgings Ltd (74%) Anant Raj Industries Ltd. (40%) ANG Auto Ltd (49%) Apollo Hospitals (74%) Aptech Ltd (74%) Arshiya International Limited (49%)

10 Ansal Properties Infrastructure Limited (49%)

Bhagwati Banquets & Resorts Ltd.

12 Bombay Rayon Fashions Ltd (26%) 13 Bajaj Auto Finance Ltd (30%) 14 Bajaj Hindusthan Limited (74%) 15 Balrampur Chini Mills Ltd (60%) 16 Birla Power Solutions Ltd. (74%) 17 Core Projects & Technologies Ltd.(74%) 18 Cranes Software International Limited (60%) 19 Crest Communication Ltd (50%) 20 CESC Ltd. (49%) 21 CREW B.O.S. Products Ltd. -(49%) 22 DCM Ltd - (49%) 23 Development Credit Bank Ltd. - (49%) 24 Dagger-Forst Tools Ltd. - (74%) 25 Dewan Housing Finance Corporation Limited (40%) 26 Emco Ltd - (49%) 27 Escorts Ltd - (49%) 28 Era Construction (India) Ltd - (40%) 29 Fedders Lloyd Corporation Limited (74%)

30

Ganesh Housing Corporation Ltd.(49%) (formerly Ganesh Housing Finance Corporation Ltd)

31 Gammon India Ltd - (49%) 32 Garware Offshore Services Ltd-(60%) 33 Godrej Consumer Products Ltd (35%) 34 Great Offshore Limited-(49%) 35 GTL Ltd. (74%) 36 GTL Infrastructure Ltd. (74%) 37 Housing Development Finance Corporation Ltd. (74%) 38 HTMT Global Solutions Ltd.-(74%) 39 Hindustan Construction Co Limited (49%) 40 Hindalco Industries Limited (40%) 41 Igarashi Motors India Ltd. - (40%) 42 Il & FS Investment Managers Ltd- 74% 43 ICSA (INDIA) Ltd. - (49%) 44 I-Flex Solutions Ltd. (60%) 45 India Nivesh Limited (49%) 46 Infrastructure Development Finance Company Limited (74%) 47 Info Edge (India) Ltd. (40%) 48 International Conveyor Limited (74%) 49 IOL Broadband Ltd. - (49%) 50 Jai Corp Ltd. -(49%) 51 Jindal Saw Limited (49%) (formerly Saw Pipes Limited ) 52 Jaisal Securities Limited (50%) 53 Jaiprakash Associates Ltd. (45%) 54 JSW Steel Limited (49%) 55 Jupiter Bioscience Ltd. - (70%) 56 Kamdhenu Ispat Ltd. (49%) 57 Karuturi Networks limited (74%) 58 KEI Industries Ltd. - (49%) 59 Kotak Mahindra Bank Ltd (33%) 60 Laxmi Energy & Foods Ltd (Lakshmi Overseas Industries Ltd) (49%) 61 Lloyd Electric & Engineering Ltd (74%) 62 Logix Microsystems Ltd - (74%) 63 Micro Technologies (India) Limited (49%) 64 Maharashtra Seamless Limited (40%) 65 Mahindra & Mahindra Financial Services Ltd (35%) 66 McDowell Holdings Ltd -(49%) 67 Mercator Lines Ltd (70%) 68 Monnet Ispat & Energy Limited (40%) 69 Moser Baer India Ltd (74%)

70 MARG Limited (40%) 71 McLeod Russel India Limited (40%) 72 Network 18 Media & Investments Limited (Formerly Network 18 Fincap Ltd) - 49% (FIIs/NRIs/PIO upto 40%)

73 Neha International Limited (49%) 74 Nagarjuna Construction Company Ltd. (74%) 75 Nava Bharat Ventures Limited (40%) 76 NITCO Tiles Ltd. (60%) 77 Northgate Technologies Ltd (74%) 78 Om Metals Infra projects Ltd.(49%) 79 Opto Circuits (India) Ltd (40%) 80 Paramount Communications Ltd (39%) 81 Patni computers Ltd (74%) 82 Pioneer Investcorp Limited (40%) 83 The Phoenix Mills Limited. (49%) 84 Pritish Nandy Communications Ltd (60%) 85 Provogue (India) Ltd. (49%) 86 Piramal Healthcare Limited (49%) 87 PTC India Ltd. - (60%) 88 Punjab Tractors Ltd. (64%) 89 PVR Ltd (50%) 90 Pyramid Saimira Theatre Ltd. (40%) 91 M/s. Prime Securities Limited (74%) 92 Parekh Aluminex limited (74%) 93 Precoated Steels Limited (49%) 94 Peninsula Land Limited (40%) 95 Parsvnath Developers Limited (40%) 96 Rajesh Exports Ltd (49%) 97 Rolta India Ltd (75%) 98 Sakthi Sugars Ltd (50%) 99 Sanghvi Movers Ltd.(49%) 100 Satnam Overseas Ltd (51%) 101 Satyam Computer Services Ltd (60%) 102 Shree Renuka Sugars Ltd. (49%) 103 Sical Logistics Ltd. (49%) 104 Sintex Indiastries Ltd. (74%) 105 Srei Infrastructure Finance Ltd (64%) 106 Subex Systems Ltd. (74%) 107 Sun Pharma Advance Research Company Ltd. (49%) 108 SSI Ltd (74%) 109 SESA GOA Limited (45%) 110 Soma Textiles & Industries Ltd. (74%)

111 Suzlon Energy Limited (49%) 112 Tata Motors Ltd.(35%) 113 Tata Tea Ltd (35%) 114 The Tata Power Company Ltd (35%) 115 The Jammu & Kashmir Bank Ltd. (40%) 116 Tanla Solutions Ltd. (49%) 117 Temptation Foods Ltd. -(74%) 118 Tourism Finance Corporation of India Ltd (49%) 119 Tulip IT Services Ltd. (40%) 120 Unichem Laboratories Ltd (39%) 121 United Spirits Limited (59%) 122 Vaibhav Gems Ltd (60%) 123 Vakrangee Softwares Ltd. (49%) 124 Venus Remedies Limited- (49%) 125 Voltas Limited (30%) 126 WELSPUN Gujarat Stahl Rohren Limited (49%) 127 Zicom Electronic Security System Ltd (74%) 128 S.E Investments Limited (74% - 28.01.2010) 129 KRBL Limited (49% w.e.f. March 15, 2010) 130 Su-raj Diamonds and Jewellery Limited (65% w.e.f. 27.10.2010 updated from earlier limit of 49% w.e.f. March 30,2010)

131 M/s. Hathway Cable & Datacom Limited (49% w.e.f.-May 21,2010) 132 M/s.Rei Agro Limited (75% w.e.f.July 7, 2010) 133 M/s. Rural Electrification Corporation Ltd (35% w.e.f.30.9.2010). 134 Cox and Kings (India) Limited (74% w.e.f.-October 5, 2010) 135 M/s.GMR Infrastructure Limited (35% w.e.f.October 22, 2010) 136 M/s. GCV Services Limited (49% w.e.f. December 23, 2010) 137 M/s. IVRCL Assets & Holdings Limited (49% w.e.f. 7.2.2011) 138 M/s. SVC Resources Ltd. (49% w.e.f. 9.2.2011) 139 M/s. Marico Limited (35% w.e.f.25.2.2011) 140 M/s. Compuage Infocom Limited (49% w.e.f. 4.3.2011) 141 M/s. Lupin Limited (33% w.e.f. 28.4.2011) 142 M/s. Tecpro Systems Limited (49% w.e.f. 6.5.2011) 143 M/s. Era Infra Engineering Limited(65% w.e.f. 12.5.2011) 144 M/s. VA Tech Wabag Limited (49% w.e.f.16.6.2011) 145 M/s Jubilant FoodWorks Limited ( 49 % w.e.f 26.08.2011) 146 M/s Info-Drive Software limited (49 % w.e.f. 26.08.2011) LIST OF COMPANIES IN WHICH FII INVESTMENT IS ALLOWED UPTO SECTORAL CAP/STATUTORY CEILING OF THEIR PAID UP CAPITAL

1 AZTEC Software and Technology Services Ltd - (100%) 2 Dynamatic Technologies Limited -(100%) 3 Educomp Solutions Limited. (100%) 4 Gateway Distriparks Ltd - (100%) 5 Geodesic Information Systems Ltd- (100%) 6 Geometric Software Solutions Ltd (100%) 7 Gujarat NRE Coke Limited -(74%) 8 HCL Infosystems Ltd. (100%) 9 Hexaware Technologies Ltd (100%) 10 Housing Development and Infrastructure Limited (100%) 11 Indiabulls Real Estate Limited (100%) 12 Indiabulls Financial Services Ltd (100%) 13 Indiabulls Securities Limited - (100%) 14 Indiabulls Power Limited (100%) (formerly Sophia Power Company Limited)

15 Infotech Enterprises Limited (100%) 16 Infosys Technologies Ltd. (100%) 17 IVRCL Infrastructures & Projects Ltd (100%) 18 India Infoline Ltd. (100%) 19 Mascon Global Ltd. (100%) 20 Mphasis BFL Ltd (100%) 21 Orbit Corporation Limited (100%) 22 Pentamedia Graphics Ltd.- (100%) 23 Pentasoft Technologies Ltd. (100%) 24 Prajay Engineers Syndicate Limited (100%) 25 Punj Lioyd Limited (100%) 26 IFCI Limited. (74%) 27 Reliance Communications Ltd (74%) 28 Sujana Metal Products Ltd - (100%) 29 Sujana Towers Limited-(100%) 30 Sujana Universal Industries Ltd - (100%) 31 Shrenuj & Company Limited- (100%) 32 Unitech Limited (100%) 33 Interworld Digital Limited (100%) 34 Shobha Developers Limited (100% - Feb 3, 2010) 35 Everonn Education Ltd. (100% w.e.f.June 4, 2010) 36 Redington (India) Limited (100% w.e.f. November 29, 2010) 37 Indiabulls Wholesale Services Ltd (100% w.e.f August 23, 2011) LIST OF PRINT MEDIA COMPANIES IN WHICH FDI / FII INVESTMENT IS ALLOWED

1 Jagran Prakashan -26% 2 Deccan Chronicle Holdings Ltd 24% (FIIs upto 14%) 3 IBN 18 Broadcast Ltd.-26% Companies in which overall FII ceiling has reached and no further purchases are allowed Companies falling under 24 % 1 2 3 4 5 6 Pantaloon Retail (India) Ltd. Panyam Cements and Minerals Industries Ltd. Nirlon Ltd.(Nirlon Synthetic Fibres and Chemical Ltd.) (w.e.f.14.2.2011) Elpro International Limited ( wef 25.08.2011) Eclerx Services Ltd (wef 25.08.2011) Anil Modi Oil industries Ltd (wef 25.08.2011)

Companies falling under 30 % None Companies falling under 49% limit None Companies where 38% FII limit has been reached and further purchases are allowed with prior approval of RBI. None Companies where 28% FII limit has been reached and further purchases are allowed with prior approval of RBI. None Companies where 22% FII limit has been reached and further purchases will be allowed with prior approval of RBI 1 2 Grasim Industries Limited Maruti Suzuki India Limited

Companies where NRI/PIO Investment has already reached 10 % and no further purchases can be allowed 1 Chandraprabhu Housing Ltd 2 Coxswain Technology Ltd (Kaveri Biotech Ltd) 3 Dev Sugars Ltd 4 Dharendra Industries Ltd 5 DSQ Biotech Ltd 6 Fintech Communications 7 IQMS Software Ltd 8 Kakatiya Cement Sugar & Industries Ltd 9 Madras Aluminium Co. Ltd. 10 Rama Phosphates Ltd 11 SGN Telecom 12 SPL Ltd. 13 Squared Biotech Ltd 14 Tai Industries Ltd. Companies where the NRI investment has reached the trigger point of 8% and further purchases are allowed only with prior permission of RBI 1 Codura Exports Ltd 2 Cosmo Films Ltd 3 Dalmia Cement (Bharat) Ltd 4 Deccan Cements Ltd 5 Garden Silk Mills Ltd. 6 Nexus Software Ltd 7 Polyplex Corporation Ltd 8 Premier Explosives Ltd Companies in which the Ban limit in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investment as stipulated by Government has been reached. Pantaloon Retail (India) Ltd. Companies in which the Caution limit in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investments as stipulated by Government has reached. None

Print Media

Companies in which the Caution limit in respect of maximum permissible foreign holding including FDI/NRI/PIO/FII Investments as stipulated by Government has reached. None Print Media Companies in which the Ban limit in respect of maximum permissible foreign holding including FDI/NRI/PIO/FII Investments as stipulated by Government has reached. None Public Sector banks in which 20% limit has been reached and no further investments are permitted None Public Sector banks in which 18% caution limit has been reached and further purchases by FIIs/NRIs/PIOs are allowed only with prior permission of RBI 1 Punjab National Bank 2 Union Bank of India 3 Bank of Baroda

Private Sector Banks in which the Caution limit in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investments as stipulated by Government has reached 1 ING Vysya Bank Ltd. 2 IndusInd Bank Ltd 3 Karur Vysya Bank Ltd. (w.e.f. March 23, 2011) Private Sector Banks in which the Ban limit in respect of maximum permissible foreign holding including GDR/ADR/FDI/NRI/PIO/FII Investments as stipulated by Government has reached None

. 268 IFC Bulletin No 28

Trends in portfolio investment statistics India

Agam Prakash Gaur1

Introduction
This paper reviews portfolio investment statistics (inflows/outflows) relating to India, and their dissemination through various publications, as well as initiatives aimed at collecting portfolio data for statistical purposes. The Reserve Bank of India (RBI) serves as the source for information on various

components of foreign investments, with data compiled using the Foreign Exchange Transactions Electronic Reporting System (FETERS) and supported by information provided by custodians regarding flows into the accounts of foreign institutional investors. Foreign investment data are released by the RBI on a monthly basis, along with component details (Global Depository Receipts (GDRs)/American Depository Receipts (ADRs), foreign institutional investors (FIIs), offshore funds, etc). International investment position (IIP) data are compiled at end-March/end-quarter on individual countries stocks of international assets and liabilities. Net portfolio investments through financial instruments (equity and debt) constitute part of the statement. Under SDDS, data on IIPs, disseminated on an annual basis prior to March 2006, are now being disseminated on a quarterly basis (as of June 2006) through RBI press releases. India has been participating in the Coordinated Portfolio Investment Survey (CPIS) since 2004 for mandatory items, providing the 31 December position for resident entities, and also covering securities (equity, short/long-term debt). The information is collected from end-investors, which include banks, mutual funds, insurance companies, asset management companies and non-financial companies. Separate surveys are conducted for the banking sector and for these other entities. International Banking Statistics (IBS), both locational and consolidated, have been collected from banks on a quarterly basis since December 1999, covering international assets and liabilities of banks, along with currency and sectoral breakdowns. India is participating in the IBS system of the Bank for International Settlements (BIS), and data are incorporated in consolidated information, released by the BIS since the quarter ending in March 2001. A process is being developed to unify data collection for banks through the IBS system, so that BIS, CPIS and other statistics on components of portfolio investments can be used in compiling figures on IIPs and external debt. 1. Portfolio investment includes international investments in equity and debt securities issued by unrelated non-resident entities, excluding any instruments classified as direct investments or reserve assets. Portfolio managers set aside a proportion of their funds for investments in developing markets based on risk/return assessment, and also as part of their portfolio diversification strategy. With the opening of the economy and efforts to integrate with global markets in order to attract funds, India has introduced various liberalisation measures in the fiscal, financial, trade and external sectors.
Bank of India, DESACS, C-9, 6th Floor, Bandra-Kurla Complex, Bandra (East), Mumbai 400051, India. E-mail: apgaur@rbi.org.in. The views expressed in this paper are those of the author and do not necessarily represent the views of the institution to which the author belongs. IFC Bulletin No 28 269
1 Reserve

2. The Indian economy entered a new era with the introduction, in 199091, of stabilisation measures and structural reforms aimed at liberalising trade and opening up the economy. That year witnessed an external payments crisis due to unsustainable macroeconomic balances with very low foreign exchange reserves. Extensive decontrol and delicensing were put in place to create a competitive environment and unleash the productive potential of entrepreneurs, thus putting the economy on a path to higher growth. The objective was to improve the BOP at sustainable levels by liberalising international trade, finance and capital inflows, and by instituting an appropriate exchange regime. In 1994, India accepted the IMFs Article VIII, and the rupee thus became officially convertible on the current account. 3. The economy has been on a high growth trajectory, with average growth of 6.4% from 200001 to 200506, 7.5% in 200405 and 8.4% in 200506. The flow of funds has produced comfortable foreign currency asset positions: US$ 145.1 billion in March 2006, rising by US$ 46.8 billion to US$ 191.9 billion as of March 2007. 4. Against the backdrop of continuing integration with the global economy through

liberalisation measures, global best practices have been adopted in various sectors of the economy. The Indian financial market was opened up to FIIs in 1992. Foreign funds flows for equity investment through exchanges were attributable to FIIs including pension funds, mutual funds, asset management companies, investment trusts and institutional portfolio managers registered with the Securities and Exchange Board of India (SEBI). The flow of information to the RBI occurs through custodians. FIIs were allowed to participate in both primary and secondary markets. 5. Portfolio investment includes flows through issuance of ADRs or GDRs, which usually denote ownership of equity and investment by FIIs, offshore funds and others, thus covering the liabilities under portfolio investments. 6. The RBI is the basic source for information on various components of foreign investment. Foreign portfolio investment is compiled by the RBI using FETERS as the principal information source. The RBI also obtains information separately from custodians on a weekly basis, providing the details of flows into/out of the accounts of FIIs. These different components are compiled and consolidated to obtain data on aggregate foreign investment in India. Foreign investments are compiled and presented in US dollars. The RBI publishes foreign investment data on a monthly basis in the RBI Bulletin, which, inter alia, provides component details of portfolio investments (GDRs/ADRs, FIIs, offshore funds, etc). 7. Data on portfolio investment flows published in the March 2007 RBI Bulletin are presented in Table 1, indicating annual investment inflows. 8. The IIP compiled at the end of a specific period (end-March or end of quarter) is a statement of a countrys stock of external financial assets and liabilities, including, inter alia, portfolio investment (equity securities and debt securities). Financial assets consist of claims on non-residents, and liabilities include the countrys financial liabilities to non-residents. Under SDDS, data on IIPs that, prior to March 2006, were disseminated on an annual basis, are now (as of June 2006) being released as an RBI press release on a quarterly basis, with a two-quarter lag. Data relating to June and September 2006 were released on 24 January and 23 March 2007, respectively. An RBI press release dated 23 March 2007, and available on the RBI website, is the source of the data. Data on the overall international investment position, indicating assets and liabilities, are presented in Table 2. The significant feature was that net international investment liabilities increased by 14.4% to US$ 47.8 billion from March 2005 to March 2006, and moderated to US$ 45.9 billion in September 2006. On the liabilities side of the IIP, portfolio investment accounted for more than one fourth of total liabilities, whereas on the assets side portfolio investments represented less than 1% of net international assets.
270 IFC Bulletin No 28

Table 1 Foreign investment inflows Millions of US dollars

Items % share of abc Year Portfolio investment (a + b + c) GDRs/ ADRs1 FIIs2 Offshore funds and others Portfolio and direct

investment col 2 to col 6 col 3 to col 2 col 4 to col 2 123456789 199596 2,748 683 2,009 56 4,892 56.2 24.9 73.1 199899 61 270 390 59 2,401 200304 11,377 459 10,918 15,699 72.5 4.0 96.0 200405 9,315 613 8,686 16 15,366 60.6 6.6 93.2 200506 (P) 12,492 2,552 9,926 14 20,214 61.8 20.4 79.5
Indicates outflow. 1 Represents the amount raised by Indian corporates through GDRs and ADRS. 2 Represents inflow of funds (net) by FIIs. Source: RBI Bulletin, March 2007.

Table 2 Overall IIP

In billions of US dollars Period March 05 March 06 June 06 September 06 (PR) (PR) (PR) (P) Net IIP 41.82 47.83 46.44 45.89 A. Assets 168.21 183.45 191.81 199.86 Including portfolio investment: 0.81 1.29 1.08 1.19 (i) Equity securities 0.4 0.65 0.49 0.54 (ii) Debt securities 0.41 0.64 0.59 0.65 B. Liabilities 210.03 231.28 238.25 245.75 Including portfolio investment: 55.69 64.62 64.82 67.37 (i) Equity securities 43.16 54.74 52.47 54.78 (ii) Debt securities 12.53 9.88 12.35 12.59
Note: PR = partially revised; P = provisional. [The figures in the table have been compiled on the basis of IIP estimates presented in millions of US dollars.] Source: RBI Press Release, 23 March 2007. IFC Bulletin No 28 271

9. FIIs are from geographically dispersed countries: Malaysia, Australia, Saudi Arabia, Trinidad and Tobago, Denmark, Italy, Belgium, Canada, Sweden, Ireland, etc. Institutions around the globe channelled funds to the Indian securities markets for investments. As of 31 March 2006, the SEBI had registered FIIs from 37 countries. The number of FIIs from the United States was the highest at 342, followed by the United Kingdom (148), Luxembourg (64), Singapore (47), Hong Kong (30), Canada (26), Australia, Ireland and the Netherlands with 23 each, Mauritius (32), etc. Long-term institutional investors such as foreign pension funds continued to show interest in Indian securities markets. Other categories of FIIs registered with the SEBI included traditional institutions such as mutual funds, investment trusts, managers of such funds, and banks. The total number of sub-accounts registered with the SEBI also increased from 1,889 as of 31 March 2005 to 2,488 by end-March 2006. The increasing confidence of FIIs in the Indian stock market emerged as a major factor, adding to strong macroeconomic fundamentals (increasing economic growth, comfortable forex reserves, buoyancy in corporate sector earnings, etc), a transparent regulatory system,

abolition of the long-term capital gains tax, etc. Limits have been set for FIIs investments in government securities and corporate bonds. They are permitted to trade in derivatives in order to manage risk and return. Concern has been raised regarding some unregulated entities taking positions in the stock market through participatory notes (PNs) issued by FIIs. The concern regards the sale by the original investors, of PNs issued by FIIs, to other players, many of whom are investing through the Benami route ie disguising the identity of the ultimate beneficiary. Thus, in January 2004 it was stipulated that PNs are not to be issued to any non-regulated entity, and the know your client principle is to be strictly observed. Table 3 Gross purchases/sales by FIIs
Millions of US dollars Total Gross purchases Gross sales Net investment Cumulative net investment at monthly exchange rate (1) (2) (3) (4) (5) 199394 1,783 149 1,634 1,638 199899 3,927 4,313 386 8,898 200304 31,494 21,545 9,950 25,755 200506 78,086 68,754 9,332 45,259
Source: SEBI.

10. Coordinated portfolio investment statistics (assets): As a step towards globalisation and towards integration of the Indian economy with the world market, the corporates are expanding their business, at the same time acquiring overseas assets, improving their competitiveness in the overseas markets, and increasing outward capital flows a reflection of increased development. Acquisitions are being funded through a variety of sources: withdrawal of foreign exchange from India, capitalisation of exports, balances held in EEFC, share swaps ECBs/FCCBs, ADRs/GDRs, etc with major destinations being the United States, Europe, Mauritius and the Cayman Islands. Substantial investment takes place through SPVs set up for the purpose of investing abroad. Existing WOSs/JVs and SPVs are being used to fund acquisitions through the LBO route, and such transactions are not
272 IFC Bulletin No 28

captured in overseas investment statistics. Appropriate measures should be adopted to incorporate data on overseas remittances taking into account innovative funding structures, timeliness, etc in the system for compiling BOP data. The limit on mutual funds overseas portfolio investments in equity and debt securities is being increased to US$ 4 billion from the current US$ 3 billion, allowing for an increase in the scale of operations. The limit on individuals investments in overseas instruments such as equities, mutual funds, private equity funds and hedge funds has been raised to US$ 0.10 million, and individuals may hedge their risks in overseas investments by participating in forward contracts. Statistics on overseas investment involving portfolio investments are being collected as of the 2004 CPIS survey. 11. India has been participating in the CPIS since 2004 for mandatory items, providing the 31 December position for resident entities, and including securities (equity, short/longterm debt). The 2004 and 2005 surveys have already been completed, and the 2006 survey is in the process of being completed. The information is collected from end-investors which include banks, mutual funds, insurance companies, asset management companies and nonfinancial companies through separate surveys for the banking sector and for the other

entities. Only mandatory items, ie securities classified as equity securities, debt securities with an original maturity of one year or less (short-term), and debt securities with an original maturity of over one year (long-term), along with the jurisdiction of the issuer, are covered by the CPIS. In these surveys, data are collected directly from the relevant entities. The survey of mutual funds, insurance companies, asset management companies and non-financial companies is part of the annual 31 March survey of Indias foreign liabilities and assets, reporting data as of 31 December. However, data flows from non-financial corporates are behind schedule. Data from high net worth individuals have yet to be covered by the CPIS. 12. IBS, both locational and consolidated, have been collected from banks on a quarterly basis since December 1999, covering international assets and liabilities of banks, and currency and sectoral breakdowns. India is participating in the IBS system of the BIS, and data have been incorporated in consolidated information released by the BIS since the quarter ending March 2001. A process is being developed to unify the collection of banking data through the IBS system, so that BIS, CPIS and other statistics on components of portfolio investments can be used to compile figures on international investment position and external debt.

Foreign Institutional Investors (FIIs): Increasing Trend In India

Rajesh Kumar A. Saini

Executive Summary

Foreign institutional investors have gained a significant role in Indian capital markets. Availability of foreign capital depends on many firm specific factors other than economic development of the country. In this context this paper examines the contribution of foreign institutional investment particularly among companies included in sensitivity index (Sensex) of Bombay Stock Exchange. Also examined is the relationship between foreign institutional investment and firm specific characteristics in terms of ownership structure, financial performance and stock performance. It is observed that foreign investors invested more in companies with a higher volume of shares owned by the general public. The promoters holdings and the foreign investments are inversely related. Foreign investors choose the companies where family shareholding of promoters is not substantial. Among the financial performance variables the share returns and earnings per share are significant factors influencing their investment decision.

Introduction

Entities covered by the term FII include 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 investments on behalf of a broad-based fund

Foreign portfolio inflows through FIIs, in India, are important from the policy perspective, especially when the country has emerged as one of the most attractive investment destinations in Asia. In this paper an effort has been made to develop an understanding of the investment decisions, trading strategies and behavior of the FIIs in the Indian equity market.

With the emerging market crises of the late 1990s, the role of Foreign Portfolio Investment (FPI) and the major players therein i.e. the foreign institutional investors (FIIs) has come under intense scrutiny by academics as well as policymakers. A general perception about the FIIs is that they are speculators and their investment is motivated by short- term gains. The FIIs in pursuit of short- term gains adopt short- term trading strategies such as positive feedback trading and herding (i.e. buy or sell stocks together as a group). Such behavioral biases of FIIs, it is believed, may lead to price overreaction and contribute to the creation or exacerbation of a financial crisis.

What is FII? How it is permitted?

An 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 term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies.

Foreign Direct Investment in India 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.

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.

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 (provided certain parameters are met) to all proposals involving:

Foreign equity up to 50% in 3 categories relating to mining activities. Foreign equity up to 51% in 48 specified industries. Foreign equity up to 74% in 9 categories. FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining licence from Insurance Regulatory & Development Authority (IRDA)

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

FDI in India on automatic route is not allowed in the following sectors:

Proposals that require an industrial licence and cases where foreign investment is more than 24% in the equity capital of units manufacturing items reserved for the small scale industries. Proposals in which the foreign collaborator has a previous venture/tie-up in India. Proposals relating to acquisition of shares in an existing Indian company in favour of a Foreign/Non-Resident Indian (NRI)/Overseas Corporate Body (OCB) investor; and Proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted and/or whenever any investor chooses to make an application to the Foreign Investment Promotion Board and not to avail of the automatic route.

2. FIPB Route: Foreign Investment Promotion Board (FIPB) is a competent body to consider and recommend foreign direct investment, which do not come under the automatic route. Normal

processing time of an FDI proposal in FIPB is 4 to 6 weeks. FIPB is located in the Department of Economic Affairs, Ministry of Finance. Its constitution is as follows:

Secretary, Department of Economic Affairs (Chairman) Secretary, Department of Industrial Policy & Promotion (Member) Secretary, Department of Commerce (Member) Secretary, (Economic Relation), Ministry of External Affairs (Member)

FIPB can co-opt Secretaries to the Govt. of India and other top officials of financial institutions, banks and professional experts of industry and commerce, as and when necessary. Foreign Investment Implementation Authority (FIIA) Government has set up Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation by providing a pro-active one stop after care service to foreign investors, help them obtain necessary approvals and by sorting their operational problems. FIIA is assisted by Fast Track Committee (FTC), which have been established in 30 Ministries/Departments of Government of India for monitoring and resolution of difficulties for sector specific projects.

Factors contributed significantly to the FII flows to India:

Regulation and Trading Efficiencies: Indian stock markets have been well regulated by the stock exchanges, SEBI and RBI leading to high levels of efficiency in trading, settlements and transparent dealings enhancing the confidence level of FIIs in increasing allocations to India.

New Issuance: We have witnessed extremely high quality issuance during the year from companies such as NTPC, ONGC and TCS leading to strong FII participation with successful new issuance of over $ nine billion, yet another record for the year.

Attractive Markets: Indian equity markets continue to be attractive to foreign investors with expected earnings growth of over 13 per cent compared with negative growth expected among competing countries in the region such as Taiwan and Korea. Indian blue chips are seen to have high quality of balance sheets with net debt to equity of the top 30 companies being negative, with net cash on the balance sheets. However earnings growth is expected to be lower than last year and upside in stock prices will be subject to sentiments in the global markets and foreign

flows to emerging markets. However high quality new issuance from PSUs and other large corporates will continue to see good demand from FIIs. However domestic mutual funds have been net sellers of equities during 2004 with risk aversion still prevalent among local investors after seeing several short periods of high volatility. With the booming stock markets presently catching the headlines in local press, this trend will hopefully reverse during 2005.

Outsourcing: The rhetoric over outsourcing of jobs to India has died down after the US elections and demand will soar for Indian BPO and software services companies. However Indian software companies will need to enhance margins by going up the value chain to high level consulting and scaling up the project sizes. Significant outsourcing opportunities will also open up in textiles and drugs with dismantling of quotas for textiles and introduction of product patent regime for pharmaceuticals.

Infrastructure: Woefully inadequate infrastructure is the biggest bottleneck for the growth and profitability of Indian corporations. The administration needs to move much faster in privatisation of Projects in the areas of power, transportation, ports, airports and other urban infrastructure to enhance competitiveness. This is particularly relevant due to the fact that competing countries in Asia Pacific and China have moved at a much faster pace during the last five years and have in place a first world infrastructure.

Capex Cycle: With strong balance sheets, high liquidity in the banking system, supportive capital markets and growing demand for goods and services we expect to see a strong wave of capital expenditure cycle during the year leading to tremendous opportunities for Indian equities.

Dollar Weakness: Analysts continue to look for a weak US dollar with the US twin deficits (budget and trade deficits) unlikely to be resolved anytime soon. Studies have shown that flows into emerging markets rise significantly during times of dollar weakness and India will continue to be a beneficiary of this trend. Indian Rupee is expected to strengthen further during 2005 which will be particularly favourable for domestic demand oriented businesses such as banks and automobiles.

Rising Commodity Prices: Demand supply dynamics in both crude and metals call for higher prices during 2005 with increasing Chinese demand and economic recovery in Japan. This has inflationary implications for India going forward, though it will be a boon for commodity counters.

Consolidation: FII activity has been focused on large cap companies due to liquidity reasons, and hence several high quality mid cap companies trade at a valuation discount due to lack of investor demand. We expect to see significant merger activity among mid caps which will enable them to gain better valuations under the institutional radar screen, in addition to consolidation efficiencies. While China attracts significantly higher FDI, India with its highly developed capital markets will be a beneficiary of FII flows at increasing pace each year. To summarise, Indian markets have successfully absorbed the gains seen during 2003 and consolidated well during 2004 with a modest gain and look set to outperform the global financial markets during 2005.

Trends of FII investment in India:

Past years FII investment in India

FII investment in India: Gross purchases (Rs Year crore) 1993 2,661.90 1994 9,267.20 1995 6,665.90 1996 15,739.20 1997 18,926.50 1998 13,899.80 1999 37,211.50 2000 77,666.60 2001 56,799.20 2002 5,446.00 Total 2,44,283.8

Gross sales (Rs crore) 66.8 2,476.10 2,812.20 4,935.60 12,719.20 15,379.70 30,514.70 71,155.40 43,506.50 4,746.70 1,88,313.0

Net Inv (Rs cr) 2,595.10 6,791.20 3,853.80 10,803.60 6,207.30 -1,479.90 6,696.80 6,511.20 13,292.70 699.30 55,970.00

2009: FII Investment is increasing in India:

Nearly half of the Rs 70,000 crore offshore investments that have come into Indian bourses this fiscal, till October 2009, are from alleged tax havens such as Mauritius, Hong Kong and Luxembourgthe three together contributing almost Rs 25,000 crore of the net inflow from foreign institutional investors (FIIs). Significant omissions from this list are FIIs of Singapore and Switzerland, the two countries that had figured among the top five with the highest investments in Indian equities during the economic slowdown of 2008. FIIs from the two countries had put in over Rs 15,000 crore last year. The government has said there is no cause of concern on the strong FII flow into stock markets with finance minister Pranab Mukherjee stating that regulators were keeping a close watch on the money flow and would act if it was alarming.

Till October 2009, FII held equities totalled more than $160 billion. According to a finance ministry statement, the highest investments have come from US-based FIIs, to the tune of Rs 21,344 crore till November 10. Second on the list is Luxembourg with Rs 12,275 crore. France, Mauritius, the UK, UAE, Hong Kong, Australia, Norway and Canada are the other countries in the top 10, in that order. Investments from Mauritian FIIs have been Rs 9,400 crore, ahead of the UK (Rs 4,900 crore), UAE (Rs 4,800 crore) and Hong Kong (Rs 3,438 crore). What can be of concern for the government is the rising share of participatory notes (PNs) in the total FII flow into stock markets. Since the identity of PN investors is not known, the government had put a tight leash last year on such investments after it feared that some dirty money may have entered the market riding on P-notes. The story was similar in 2006 when Luxembourg topped all other countries with maximum investment of Rs 12,600 crore. The top four that year included Singapore, Hong Kong and UAEthe US was a distant fifth with Rs 3,300 crore FII investments

One-third of investments made via PNs: Poor market conditions towards the end of 2008 had forced the government to remove restrictions on participatory notes (PNs), but it had asked FIIs to register in India rather than investing through PNs. It is estimated that of net FII inflows of Rs 44,000 crore during September-October 2009, nearly a third, or Rs 14,000, crore investment was on account of PNs.

Findings and Conclusion:

Domestic sources of outside finance are limited in many countries, particularly those with emerging markets. Through capital market liberalization, foreign capital has become increasingly significant source of finance. Since India is a labour intensive country. Therefore, in developing countries like India foreign capital helps in increasing the productivity of labour and to build up foreign exchange reserves to meet the current account deficit. Foreign Investment provides a channel through which country can have access to foreign capital.

It is required to understand when they withdraw their funds and when they pump in more money. Higher Sensex indices and high price earnings ratio are the country level factors attracting more foreign investment in India. This paper empirically observed that the research that market performance is the strong basis for attracting more foreign investment for the individual companies in India. The foreign institutional investors with draw their money when the stock market performance starts sliding down.

Foreign Institutional Investors (FIIs): Increasing Trend In India

International Research Journal of Finance and Economics ISSN 1450-2887 Issue 68 (2011) EuroJournals Publishing, Inc. 2011 http://www.eurojournals.com/finance.htm

Foreign Institutional Investment in Indian Capital Market: A Study of Last One Decade
Narendra Singh Bohra Assistant Professor, Faculty of Management Graphic Era University Dehradun, Uttarakhand (India) E-mail: thakur_bohra@rediffmail.com, nsbohra7@gmail.com Akash Dutt Student (MBA Finance Group), Faculty of Management Graphic Era University Dehradun, Uttarakhand (India) Abstract Since the beginning of liberalization(1991) FII flows to India have steadily grown in importance, any economy in the world is major affected by the foreign investment and the movement of its capital market, as an indicator of performance of its various companies in a particular industry. The dawn of 21st century has shown the real dynamism of stock market and the various benchmarking of sensitivity index (Sensex) in terms of its highest peaks and sudden falls. This paper attempts to understand the behavioural pattern of FII in India and figure out the reason for indifferent responses of BSE Sensex due to FII inflows. The data for the study uses the information obtained from the secondary resources like website of BSE sensex. The paper consists of two sections; the first section aims at

understanding the behavioural pattern of FII by identifying the Decade trend analysis of FII investment in India, the second section attempts to present the correlation between FII turnover and turnover of different individual groups of shares in BSE sensex. Keywords: FII, BSE, Correlation

Introduction
A well-developed stock market has its impact on the development of economy. It provides investors with an array of assets with varying degree of risk, return and liquidity. This increased choice of assets and the existence of a vibrant stock market provide savers with more liquidity and options, thereby inducing more savings. Increased competition from foreign financial institutions also paves the way for the derivatives market. All this, according to the mainstream belief, encourages more savings in equity related instruments. This, in turn, raises the domestic savings rate and improves capital formation. Above model indicating that portfolio investment is also a stimulus of economic development because, its a main source of fund of corporate. The demand of portfolio investment is created by companies and their routes are decided by government. It is considered as less reliable source of fund for economic development because its fluctuate on some minor trends of economy. International Research Journal of Finance and Economics - Issue 68 (2011) 104
Link Model: Portfolio Investment and Economic Development

FII
Share Price Up _ Cheaper Capital _ More Stock Issue _ New Listing Cost of Issue Down Liquidity Up More Equity Issued More Supply Liquidity Demand Local and Foreign Demands Increased More Players & Efficiency Encouraged. Intermediaries ,Broker and Underwriter

Mutual Funds, Insurance Companies and Individuals. Issuers

Review of Literature
Many empirical studies have been conducted to examine the relationship between stock prices and buying of equity by FIIs in Indian stock market. Fang and Loo (1994) studied the relationship between the stock return volatility and international trade for four Asian Countries. Radelet and Sachs (1998) attributed the East Asian economic crisis to financial panic due to sudden reversal of portfolio investment. Academicians often argue that foreign investors destabilize stock prices due to various reasons. According to Dornbusch and Park (1995) foreign investors pursue a positive feedback strategy, which makes stocks to overreact to change in fundamentals. Agarwal (2000) based on the correlation of returns during the period 1987-1996 found that emerging markets exhibit a high correlation with one another except for some of the South-East Asian economies, where the overall correlation between the emerging market is low. The study of Thomas J. Flavin, Margaret J. Hurley and Fabrice Rousseau (2001), reveals that a gravity model, frequently used to explain trade patterns, 105 International Research Journal of Finance and Economics - Issue 68 (2011) is used to explain stock market correlations. They found that geographical variables still matter when examining equity market linkages. In particular, the number of overlapping opening hours and sharing a common border tends to increase cross-country stock market correlation. These results may stem from asymmetrical information and investor sentiment, lending some empirical support for these explanations of the international diversification puzzle. Batra (2003), using both daily and monthly data attempted to understand the trading behavior of FIIs and returns in Indian equity market. He found the strong evidence of FIIs chasing trends and adopting positive feedback and herding trading strategies. Mishra (2004) explored the relationship between stock markets and foreign exchange

markets using Granger causality test and the VAR technique. The study found that there exists a unidirectional causality between exchange rate and interest rate and money rate. Badhani (2005) has attempted to examine the long-term and short-term relationship among stock prices, dollar-rupee exchange rate and net FII investment in India, using the monthly data of BSE sensex, dollar-rupee exchange rates and net monthly FII investment flows from April 1993 to March 2004. The study shows that there is co integration between net FII investment flow and stock prices. Research Objective To study the behavioral pattern of FII in India with special reference to 2000 to 2009. To establish a relationship between FII and different groups of shares in BSE India. Research Methodology The study describes the behavioral pattern and correlation between FII investments in India with special reference to BSE Sensex and also with groups of shares in BSE Sensex. It is based on secondary data obtained from websites, newspaper and journals. The main objective of the present paper is to determine impact and relationship between the Indian stock market, net foreign institutional investment. To test this, we employ the methodology of correlation (linear dependence) between two variables X and Y, giving a value between +1 and 1 inclusively. This study is divided in to two sections: Section - 01 Exploring the behavioral pattern of FII in India in special reference to BSE sensex. Section - 02 Attempts to establish the correlation between FII and individual groups securities in BSE sensex. Section 01 FII in India (2000 2009) Foreign institutional investors have gained a significant role in Indian capital markets. Availability of foreign capital depends on many firm specific factors other than economic development of the country. In this context this paper examines the contribution of foreign institutional investment particularly among companies included in sensitivity index (Sensex) of Bombay Stock Exchange. Also examined is the relationship between foreign institutional investment and firm specific characteristics in terms of

ownership structure, financial performance and stock performance. It is observed that foreign investors invested more in companies with a higher volume of shares owned by the general public. The promoters holdings and the foreign investments are inversely related. Foreign investors choose the companies where family shareholding of promoters is not substantial. Among the financial performance variables the share returns and earnings per share are significant factors influencing their investment decision. International Research Journal of Finance and Economics - Issue 68 (2011) 106 Foreign portfolio inflows through FIIs, in India, are important from the policy perspective, especially when the country has emerged as one of the most attractive investment destinations in Asia. In this paper an effort has been made to develop an understanding of the investment decisions in different group of shares in BSE, and behavior of the FIIs in the Indian equity market of last ten years. This study show that the FII in India was maximum in 2004 then it starts declining (Table -01), then it faced the challenged of global crisis, in 2007 the net sale of shares by foreign investors is mare then net purchases.
Table 1: FII in India (In Rs Cr)
YEAR PURCHASES SALES NET 2000 32913 27028 5885 2001 19325.76 15859.28 3466.48 2002 15535.76 15446.28 89.48 2003 32882 24196 8686 2004 59910.12 47624.19 12285.93 2005 113960 107480 6480 2006 132933 131548 1385 2007 202468 208968 -6500 2008 100077 120491 -20414 2009 89069 82866 6204 TOTAL 799073.64 781506.75 17567.89

FII and BSE Sensex India Sensex is the commonly used name for the Bombay Stock Exchange Sensitive Index an index Composed of 30 of the largest and most actively traded stocks on the Bombay Stock Exchange (BSE). The term FII is used most commonly in India to refer to outside companies investing in the financial markets of India. 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 country like India; statutory agencies like SEBI

have prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. It has been found by the study (Table-02) that BSE Sensex and foreign institutional investment has followed a closed relationship, when net sensex was moved up than the FII was also increased and when net sensex was down the total FII was goes gown.
Table 2: BSE Sensex and FII (In Rs Cr)
Year NET SENSEX NET FIIs 2000 -1448.56 59941 2001 -96.91 3466.48 2002 -451.46 89.48 2003 2509.65 8686 2004 751.97 12285.93 2005 4674.92 6480 2006 1507.74 1385 2007 3189.07 -6500 2008 -5918.12 -20414 2009 7625.78 6204

107 International Research Journal of Finance and Economics - Issue 68 (2011)

FII and Sensex Relationship
-25000 -20000 -15000 -10000 -5000 0 5000 10000 15000 1 2 3 4 5 6 7 8 9 10 Year

FII & BSE Turnover NET SENSEX NET FIIs

Section 02 FII and Individual Group Securities in BSE The Bombay Stock Exchange (BSE), Indias leading stock exchange, has classified Equity scripts into categories A, B1, B2, S, T, TS, & Z to provide guidance to the investors. The classification is on the basis of several factors like market capitalization, trading volumes and numbers, track records, profits, dividends, shareholding patterns, and some qualitative aspects. On the basis of the study it has been found that some group of shares attract the attention of FII at larger (Table -03), some at very low and some group of shares are completely unable to attract the attention of foreign investors these groups are negatively co-related with the total FII in India. This study taking forward by studying each group of shares with total FII individually, explaining the reasons of low and high investment by foreign intuitional investors in India.
Table 03: FII in Different Group of Shares (In Rs Cr)

YEAR A GROUP B1 GROUP B2 GROUP S GROUP T GROUP Z GROUP F GROUP G GROUP B GROUP ST GROUP NET FII's 2000 908947 70951.6 7323.3 NA NA 45.8 42.96 NA NA NA 59941 2001 281969 22233.1 2111.7 NA NA 17.09 82.69 NA NA NA 3466.48 2002 266651 43340.7 3962.9 NA NA 22.59 94.9 1.45 NA NA 89.48 2003 437851 58641.2 4568.6 NA 418.65 321.21 245.51 1.39 NA NA 8686 2004 398861 97269.7 9272.1 5597.9 6335.89 1158.92 220.17 0.05 NA NA 12285.9 2005 482429 237055 35541 46697 12146.4 1934.71 269.71 NA NA NA 6480 2006 552460 312604 33602 48663 7895.96 791.23 170.39 NA NA NA 1385 2007 859286 551613 96614 53904 15723.4 1480.74 235.7 NA NA NA -6500 2008 897682 NA 158250 20277 1773.1 407.18 753.13 NA 20931.1 NA -20414 2009 963736 NA NA 37821 6138.06 20.76 1588.16 NA 368498 1006 6204 TOTAL 6049872 1393708 351245 212960 50431.4 6200.23 3703.32 2.89 389430 1006 17567.9 Coefficien t of Correlati on with Total FII 0.513 0.992 0.679 0.480 0.734 0.657 0.102 -0.721 -0.877

FII & Group-A Shares A Group is a category where there is a facility for carry forward (Badla) to the next settlement cycle. These are companies with fairly good growth record in terms of dividend and capital appreciation. The scrips in this group are classified on the basis of equity capital, market capitalization, number of years International Research Journal of Finance and Economics - Issue 68 (2011) 108 of listing on the exchange, public share holding, floating stock, trading volume etc. As per the finding of this study (Table - 04), this group of shares in the stock market attract the high interest of foreign institutional investors in India, it has shown the incremental growth year by year after 2000, the FII investment in this group of shares was maximum in year 2004 in the same years the total FII was maxim in last decade.
Table 4:
Year A GROUP

TURNOVER FII TURNOVER 2000 908946.85 59941 2001 281968.9 35185.04 2002 266650.7 30982.04 2003 437851 57078 2004 398860.9 107534.31 2005 482429.3 221440 2006 552460.2 264481 2007 859285.6 411436 2008 897682.1 220568 2009 963736.3 171935

FII and A Group Shares

0 200000 400000 600000 800000 1000000 1200000 1400000 1 2 3 4 5 6 7 8 9 10

Year Turnover (FII & A Group Shares) A GROUP TURNOVER FII TURNOVER

FII & Group-B1 & B2 B1, B2 Group is a subset of the other listed shares that enjoy higher market Capitalization and liquidity than the rest. It is another group of shares which hold high market capital. As per the study it has been observed that this group of shares attract the attention of investors quiet well till 2007-08 (Table 05 and Table -06), but after the global crisis this group of shares unable to attract the attention of foreign institutional investors. 109 International Research Journal of Finance and Economics - Issue 68 (2011)
Table 5:
Year B1 GROUP TURNOVER FII TURNOVER 2000 70951.62 59941 2001 22233.14 35185.04 2002 43340.67 30982.04 2003 58641.2 57078 2004 97269.7 107534.31 2005 237055.4 221440 2006 312603.5 264481 2007 551612.5 411436 2008 220568 2009 171935
FII a nd B 1 Gr o u p S h a re s 0 1000 00 2000 00 3000 00 4000 00 5000 00 6000 00 1 2 3 4 5 6 7 8 9 10 Year

Turnover (FII & B1 Group Sha res) B 1 GR O U P TU R NO V ER FII TU RN O V ER

Table 6:
Year B2 GROUP TURNOVER FII TURNOVER 2000 7323.26 59941 2001 2111.74 35185.04 2002 3962.93 30982.04 2003 4568.6 57078 2004 9272.13 107534.31 2005 35541.04 221440 2006 33601.51 264481 2007 96614.14 411436 2008 158250.1 220568 2009 171935

International Research Journal of Finance and Economics - Issue 68 (2011) 110

FI I a n d B 2 G r o u p S h a r e s 0 100000 200000 300000 400000 500000 600000 12345678910 Year Turnover(FII & B2 Sha res) B 2 G R O U P TU R N O V E R FI I TU R N O V ER

FII & Group-S S Group represents scrips forming part of the BSE-Indonext segment. The Exchange has introduced a new segment named BSE Indonext w.e.f. January 7, 2005. The S Group represents scripts forming part of the BSE-Indonext segment. S group consists of scripts from B1 & B2 group on BSE and companies exclusively listed on regional stock exchanges having capital of 3 crores to 30 crores. All trades in this segment are done through BOLT system under S group. As per the study it has been found that (Table - 07) this group of shares attract the highest attention of investors in 2007 after that it has been decreased substantially, as far as the correlation of total FII and S Group share is concern it has shown substantially correlated.
Table 7:
Year S Group FII Turnover 2000 59941 2001 35185.04 2002 30982.04 2003 57078 2004 5597.87 107534.31 2005 46697.48 221440 2006 48662.72 264481 2007 53904.08 411436 2008 20276.97 220568 2009 37821.28 171935
FII an d S G rou p S h are s 0 500 00

1000 00 1500 00 2000 00 2500 00 3000 00 3500 00 4000 00 4500 00 5000 00 1 2 3 4 5 6 7 8 9 10 Ye ar Turnover(FII & S Sha res) S G ro u p FII Tu rn o ve r

111 International Research Journal of Finance and Economics - Issue 68 (2011) FII & T Group Shares T Also termed as the trade to trade group this category comprises of shares which have to be settled in delivery for all buys and sells and square off of bought and sold positions during the day is not permitted. This is a part of the surveillance from the BSE to counter any backward unwarranted movements in such scrip. In 2007 there is maximum FII in T Group shares (Table 08) and lowest in 2008, year 2008 was the year when Indian economy faced impact of global crises and FII was directly by correlated, but one interesting fact has been found that, in 2008 the total FII in India Rs 220568 crore and Rs 1773.1 crore that is minimum after 2005.
Table 8:
Year T Group FII Turnover 2000 NA 59941 2001 NA 35185.04 2002 NA 30982.04 2003 418.65 57078 2004 6335.89 107534.31 2005 12146.37 221440 2006 7895.96 264481 2007 15723.35 411436 2008 1773.1 220568 2009 6138.06 171935
FII an d T Gro u p S h ar es 0 500 00 1000 00 1500 00 2000 00 2500 00 3000 00 3500 00 4000 00 4500 00 1 2 3 4 5 6 7 8 9 10 Ye ar Turnover(FII & T Shares) T G ro u p FII Tu rn o ver

GROUP-Z: Z Group category comprises of shares of the companies which does not comply with the rules and regulations of the Stock Exchange and are at times suspended from trading. As per

the study (Table - 09), this group of shares does not shown any co relation with the total FII in India but it has attract the small attention of foreign portfolio invest.
Table 9:
Year Z Group FII Turnover 2000 45.8 59941 2001 17.09 35185.04 2002 22.59 30982.04 2003 321.21 57078 2004 1158.92 107534.31

International Research Journal of Finance and Economics - Issue 68 (2011) 112

Table 9: - continued
2005 1934.71 221440 2006 791.23 264481 2007 1480.74 411436 2008 407.18 220568 2009 20.76 171935
FII and Z Group Share s 0 50000 100000 150000 200000 250000 300000 350000 400000 450000 1 2 3 4 5 6 7 8 9 10 Year Turnover(FII & Z Shares) Z Group FII Turnover

GROUP-F: F Group represents the debt market segment or represents the Fixed Income Securities. FII are always interested in high return that is the main reasons behind the slow attention of FII in this group of shares.
Table 10:
Year F Group FII Turnover 2000 42.96 59941 2001 82.69 35185.04 2002 94.9 30982.04 2003 245.51 57078 2004 220.17 107534.31 2005 269.71 221440 2006 170.39 264481 2007 235.7 411436 2008 753.13 220568 2009 1588.16 171935

113 International Research Journal of Finance and Economics - Issue 68 (2011)

FII an d F Gro u p S h ar e s 0 500 00 1000 00 1500 00 2000 00 2500 00

3000 00 3500 00 4000 00 4500 00 1 2 3 4 5 6 7 8 9 10 Ye ar Turnover(FII & F Shares) F G ro u p FII Tu rn o ve r

Group-G" G" group consist Trading in Govt. Securities for retail investors. As per the study this group of shares unable to attract the attention of foreign institutional investors. Because the investment in government security is tighten by strong regulations in India.
Table 11:
Year G Group FII Turnover 2000 59941 2001 35185.04 2002 1.45 30982.04 2003 1.39 57078 2004 0.05 107534.31 2005 0 221440 2006 0 264481 2007 0 411436 2008 0 220568 2009 0 171935
FII an d G Gr ou p S h a re s 0 500 00 1000 00 1500 00 2000 00 2500 00 3000 00 3500 00 4000 00 4500 00 1 2 3 4 5 6 7 8 9 10 Ye ar Turnover(FII & G Shares) G Gr ou p FII Tu rn ove r

International Research Journal of Finance and Economics - Issue 68 (2011) 114 GROUP-B: B Group is a subset of the other listed shares that enjoy higher market capitalization and liquidity than the rest. In this study one interesting fact has been found that this group of shares was unable to find the attention of foreign investors till 2007. In 2008 this group of shares has attract the attention of FII in India.
Table 12:
Year B Group FII Turnover 2000 59941 2001 35185.04 2002 30982.04 2003 57078 2004 107534.31 2005 221440 2006 264481 2007 411436 2008 20931.12 220568

2009 368498.4 171935 FII and B Group Share s 0 100000 200000 300000 400000 500000 600000 1 2 3 4 5 6 7 8 9 10 Year Turnover(FII & B Shares) B Group FII Turnover

Findings
This study found that the behavior of FIII in last decade was opportunistic; profit accumulation was prime objective behind the portfolio investments in India. Year 2007 08 is the witness the world global crises and its impact in India, inflow of foreign capital (FDI/FIII) decreased/ stopped in this year. A good co relation was found in the total FII turnovers and A group shares turnover, as ell as this has been attracted the highest attention of portfolio investors in India. There were certain groups of shares like G-group, B-group, ST-group, which do not find the substantial place in the investment basket of portfolio investors in India. 115 International Research Journal of Finance and Economics - Issue 68 (2011) The lack of proper regulation has been found in the stock market for guiding the movement of foreign portfolio investors in India

Conclusion
The result shown a positive correlation between stock market and investment of FIIs in a relation that sensex follows the investment behavior of FIIs, but there are some exception seen in year 2005 and 2008.The net foreign institutional investment, thus implying that the market informational efficiency hypothesis can be rejected for BSE Sensitive Index with respect to the FII. It also shows that positive or negative movement of FIIs leads to a major change/shift in the sentiments of domestic or related investors in market. It suggests the policy implication that the authorities can focus on domestic economic policies to stabilize the stock market. Where as in the case of individual group securities FIIs had shown a positive correlation in less regulated and high capitalized securities in the market to

earn high equity yield. Investors can therefore apply profitable trading rules to earn supernormal profits. Under the circumstances, the Indian stock market seems to be bearing the underlying strain not currently visible at the surface. The implementation of profitable trading strategy may at any point of time generate over-enthused investment and this, if coupled with market overreaction, may result in a destabilized system. A point also to be noted here is the heavy investment and selling attitude of FIIs causing a major hurdle in stabilization of market sentiments.

Reference
Research Articles [1] Ahluwalia, Montek S., 2002a, Economic reforms in India since 1991: Has Gradualism Worked?, Journal of Economic perspectives 16(3), 67-88. [2] Ahluwalia, Montek S., Indias Economic Reforms: An Appraisal, in Jeffrey Sachs and Nirupam Bajpas (eds.), India in the Era of Economic Reform, Oxford University Press, New Delhi, 2000. [3] Sigma. "World Insurance in 1999." No. 9/2000. Published by SwissRe. Available at www.swissre.com [4] Waldkirch, Andreas. 2003. The New Regionalism and Foreign Direct Investment: The Case of Mexico. Journal of International Trade and Economic Development 12 (2): 151-184. [5] P K Mishra, Wiil their dominance in the Indian market continue Financial Express (September 15, 2006). [6] Singh, Narendra & Shailendra K FII and Capital Market Development in India: A Study after Liberalization international journal of business management, economics and information technology vol. 02 no.01 Jan Jun 2010, 103 108 [7] Bansal Anand, Pasricha. J.S. foreign institutional investors impact on stock prices in India journal of academic research in economics. [8] Kim, E. H. and Singal, V. (2000). Stock market openings: Experience of emerging economies. Journal of Business, University of Chicago Press, Vol. 73, No.1, 25-66. [9] Coondoo, Dipankar and Paramita Mukherjee (2004): Volatility of FII in India, Money and Finance, October-March. [10] Gordon, James and Poonam Gupta (2003): Portfolio Flows into India: Do Domestic Fundamentals Matter?, IMF working paper No 03/20. [11] De Santis, G. and Imrohoroglu, S. (1997). Stock returns and volatility in emerging financial

markets. Journal of International Money and Finance, Elsevier, Vol. 16, No.4, 561-579. [12] Chukwuogor, Chiaku (2007). An econometric analysis of African Stock Market: Annual returns analysis, day-of-the-week effect and volatility of returns African Journal of Accounting, Economics, Finance and Banking Research, Vol. 1, No. 1, 26-43. International Research Journal of Finance and Economics - Issue 68 (2011) 116 Websites http://dipp.nic.in/implrepo/implrepo1.pdf http://dipp.nic.in/dipp_manuals/CabinetDecisionsImplementation_Status.pdf http://www.cci.in/upload%5CArticle%5Cfile%5CFileLXTIVVICross-Boder-MergerAcquisition.pdf. http://www.bseindia.com/mktlive/circuit_filter/upper_cf/groupwise.asp http://www.sebi.gov.in/Index.jsp?contentDisp=Database http://www.rbi.org.in/scripts/PublicationsView.aspx?id=12882 http://www.rbi.org.in/scripts/PublicationsView.aspx?id=12883 http://www.oppapers.com/essays/Impact-Of-Fii-On-Indian-Economy/623367.

ISID
INDIAS FDI INFLOWS Trends & Concepts
February 2011 Working Paper No: 2011/01
K.S. Chalapati Rao & Biswajit Dhar K.S. Chalapati Rao & Biswajit Dhar Institute for Studies in Industrial Development
4, Institutional Area, Vasant Kunj, New Delhi - 110 070

Phone: +91 11 2676 1600; Fax: +91 11 2676 1631 E-mail: <info@isid.org.in> Website: <http://isid.org.in>

February 2011 ISID

WORKING PAPER

2011/01

INDIAS FDI INFLOWS Trends and Concepts

CONTENTS Abstract 1
1. Introduction 2 2. Conceptual and Definitional Issues 6 2.1 10% Threshold and Significant Influence vs. Control 11 2.2 Need for CasebyCase Approach 15 2.3 RoundTripping 18 2.4 Indian Practice 19 3. Analysis of Inflows 22 3.1 The Aggregates 22 3.2 Analysis of Individual Inflows 30 3.3 Other Aspects 42 3.4 Private Equity and Venture Capital 47 4. Summary and Concluding Observations 52 4.1 Measurement and Classification (Direct or Portfolio?) 56 4.2 A Case for Selective Approach towards FDI 60 4.3 Need for a Relevant Data System 66

List of Table 1 Table 2 Table 3 Table 4

Tables

Crossborder M&As by Private Equity firms, 20002010 9 Daimler Chrysler Investment in Tata Motors 15 Foreign Promoter of Ballarpur Industries Ltd 16 Reported FDI Flows into India and their Main Components (As per International Best Practices) 23 Table 5 Entry Routewise Distribution of FDI Equity Inflows 25 Table 6 Major Sectorwise Distribution of FDI Equity Inflows during 20052008 27 Table 7 Major Sectorwise Distribution of FDI Inflows in 2009 28 Table 8 Indias FDI Equity Inflows: Top 10 Home Countries 29 Table 9 Sector and Entry Modewise Distribution of Top 2,748 Reported FDI Inflows during September 2004 and December 2009 31 Table 10 Illustrative Cases of Business Unit Transfers to FDI Companies 32 Table 11 London Stock Exchange Listed Companies whose Control Appears to be with Indians and which Invested in India 35 Table 12 Sector and Type of Foreign Investorwise Distribution of Top 2,748 Inflows 36 Table 13 Sectoral Distribution of Various Types of Top 2,748 Inflows 38 Table 14 Foreign Investorwise and Entry Routewise Distribution of the 2,748 FDI Inflows 39 Table 15 Type of Foreign Investorwise and Source Country Typewise Distribution of the 2,748 FDI Equity Inflows 40 Table 16 Sectorwise and Source Country Typewise Distribution of FDI Inflows 41 Table 17 Reported FDI inflow into Some Listed Companies 43 Table 18 Illustrative List of Reported Inflows which do not Qualify as FDI 44 Table 19 Reported FDI Inflows on account of Home Sweet Home Developers Ltd. 44 Table 20 Companies which could be Classified as FDI Companies by the 10% Criterion 46 Table 21 Companies which could be Classified as FDI Companies by the 10% Criterion and where the Companies are Constituents

of Some Indian Promoter Groups 47 Table 22 Illustrative Cases of Overlapping of Domestic and Foreign Venture Capital Investors Registered with SEBI 49 Table 23 Growing Importance of Roundtripping Inflows 50 Table 24 Yearwise FDI Equity Inflows According to the Type of Investor 51

List of Chart 1 Chart 2 Chart 3

Charts

Average Reported FDI Equity Inflows during Different Periods 24 Share of Inflows through the Acquisition Route in FDI Equity Inflows 25 Sectoral Composition of Reported FDI Equity Inflows during 20052008 28 Chart 4 Type of Investorwise Distribution of Top 2,748 Inflows 37 Chart 5 Sectoral Composition of Private Equity and RoundTripped Investments 38 Chart 6 Share of Inflows subjected to Specific Government Approvals for Different Types of Inflows 39 Chart 7 Share of Tax Havens in the Inflows by Different Types of Investors 40 Chart 8 Share of Tax Havens in the FDI Equity Inflows of Different Sectors 41 Chart 9 Share of Different Categories of Foreign Investors in Inflows during 2009 51 Chart 10 Differing Behaviour of FDI, Portfolio and Roundtripping Investments in 2009 52

List of Boxes and Diagrams Diagram Composition of the Reported Top 2,748 FDI Inflows 55 Box FDI Comprises a Package of Resources 63 List of Annexure Annexure A Illustrative Cases of FDI Inflows which Involve Acquisition of Companies in India 69 Annexure B Illustrative Cases of Large FDI Inflows where the
Indian Investee Company/Promoters Appears to have Direct Relationship with the Foreign Investor 70 Annexure C1 Corporate structure of Ishaan Real Estate plc., Isle of Man 72 Annexure C2 Corporate Structure of Unitech Corporate Parks plc., Isle of Man 73 Annexure C3 Vedanta Groups Organisational Chart as on February 28, 2010 74 Annexure D Educational Qualifications and Past Experience of Indians Working with General Atlantic, a Leading USBased PE Firm 75 Annexure E Tables Relating to PE/VC Investments in India 78

INDIAS FDI INFLOWS Trends and Concepts

K.S. Chalapati Rao and Biswajit Dhar*
[Abstract: Indias inward investment regime went through a series of changes since economic reforms were ushered in two decades back. The expectation of the policy makers was that an investor friendly regime will help India establish itself as a preferred destination of foreign investors. These expectations remained largely unfulfilled despite the consistent attempts by the policy makers to increase the attractiveness of India by further changes in policies that included opening up of individual sectors, raising the hitherto existing caps on foreign holding and improving investment procedures. But after

200506, official statistics started reporting steep increases in FDI inflows. This paper is an attempt to explain this divergence from the earlier trend. At the outset, the paper dwells on the ambiguities surrounding the definition and the nonadherence of international norms in measuring the FDI inflows. The study finds that portfolio investors and roundtripping investments have been important contributors to Indias reported FDI inflows thus blurring the distinction between direct and portfolio investors on one hand and foreign and domestic investors on the other. These investors were also the ones which have exploited the tax haven route most. These observations acquire added significance in the context of the substantial fall in the inflows seen during 201011. In most countries, particularly those that have faced chronic current account deficits, obtaining stable long term FDI flows was preferred over volatile portfolio investments. This distinction between long term FDI and the volatile portfolio investments has now been removed in the accepted official definition of FDI. From an analytical point of view, the blurring of the lines between long term FDI and the volatile portfolio investments has meant that the essential characteristics of FDI, especially the positive spillovers that the long term FDI was seen to result in, are being overlooked. FDI that is dominated by financial investments, though a little more stable than the portfolio investments through the stock market, cannot deliver the perceived advantages of FDI. The net result is that while much of the FDI cannot enhance Indias ability to earn foreign exchange through exports of goods and services and thus cover the current account gap on its own strength, large inflows of portfolio capital causes currency appreciation and erodes the competitiveness of domestic players. The falling share of manufacturing and even of IT and ITES means that there is less likelihood of FDI directly contributing
K.S. Chalapati Rao (rao@isid.org.in) is with the Institute for Studies in Industrial Development (ISID), New Delhi and Biswajit Dhar (biswajit@ris.org.in) with the Research and Information System for Developing Countries (RIS), New Delhi. Disclaimer: The views expressed here are those of the individual authors and do not necessarily reflect the official policy or position of their respective institutions. References to companies, organisations and individuals have been made only to illustrate or explain a phenomenon for discussion purposes and these are based on publicly available information. 2
*

to export earnings. India seems to have been caught in a trap wherein large inflows are regularly required in order to finance the current account deficit. To keep FDI flowing in, the investment regime has to be liberalised further and M&As are allowed freely. Even at the global level, the developmental impact of FDI is being given lesser importance notwithstanding the repeated assertions to the contrary in some fora. International data on FDI and its impact has never been unambiguous. If FDI has to deliver, it has to be defined precisely and chosen with care instead of treating it as generic capital flow. India should strengthen its information base that will allow a proper assessment of the impact that FDI can make on its development aspirations.]

1. Introduction
The perception of the role foreign direct investment (FDI) plays in the development process has evolved over time. Starting from the midsixties when the role of FDI in economic development was recognised and obstacles to the flow of FDI from industrialized to developing countries were sought to be removed there was a sharp change in the early 1970s when TNCs, the chief vehicles for FDI, were looked at suspiciously notwithstanding the recognised benefits. The dominant approach was to monitor, restrict and regulate the activities of TNCs. Following the commercial bank debt crisis and the aid fatigue, in the 1980s, once again, countries became more interested in nondebt creating sources of external private finance. 1 Since then, more attention is being paid to the possible role of FDI in economic development. An extensive amount of literature on FDI has emerged regarding its role in not just augmenting domestic savings for investment but more as provider of technologies and managerial skills essential for a

developing country to achieve rapid economic development. While many questions relating to the impact of TNCs on development have remained controversial, the focus now is more on how to maximize the positive effects of FDI.2 A concomitant form of capital flows to FDI is portfolio investment (FPI). Notwithstanding its attractiveness as nondebt creating nature, a facet seen to be positive because of the debt crises of the eighties, and its contribution to financial sector development, FPI, which is volatile in nature, is associated with problems specific to it. Steep appreciation in the currencies of recipient countries and the consequent adverse impact on the price competitiveness of domestic players and asset price bubbles have been associated with large influx of foreign portfolio capital flows. The loss of competitiveness diminishes the host countrys ability to improve its current account on
Yingqi Wei and V. N. Balasubramanyam, Foreign Direct Investment: Six Country Case Studies, Edward Elgar Publishing, 2004. 2 For a description of this and the role played by the UN, especially UNCTAD, in this process see: Torbjorn Fredriksson, Forty years of UNCTAD research on FDI, Transnational Corporations, Volume 12, Number 3, December 2003, pp. 139. See also Marica Carcokovic and Ross Levine, Does Foreign Direct Investment Accelerate Economic Growth? in Theodore H. Moran, Edward M. Graham and Magnus Blomstrom (eds.), Does Foreign Direct Investment Promote Development?, Centre for Global Development, Washington, 2005, for a review of the literature on the impact of FDI on economic growth. 3
1

the strength of export of goods and services thus contributing to a situation of perpetual dependence. Managing the external sector has thus become a major issue by itself and attracted suggestions for imposing capital controls to moderate the flows. The recent global financial crisis has revived the need to place some restrictions on capital flows. Even the IMF, a staunch votary of capital account convertibility, has acknowledged that capital controls are a legitimate part of the toolkit to manage capital inflows in certain circumstances.3 Thus, FDI is preferred over FPI because the former is seen to be stable and, being a bundle of assets in addition to capital, it could enable the host economy to gain competitiveness. As global capital flows expanded manifold and into different sectors, Indias approach towards FDI too changed ever since independence; the initial approach overwhelmingly reflecting hostility following the experience with the colonial rule. From being assigned the role of supplementing and strengthening the domestic private sector, FDI was given greater freedom and a role of its own to contribute to Indias development process along with gradual liberalization of Indias economic policies which started in the 1980s. 4 The New Industrial Policy, 1991, which accelerated the process of liberalisation, stated: While Government will continue to follow the policy of selfreliance, there would be

greater emphasis placed on building up our ability to pay for imports through our own foreign exchange earnings. Foreign investment and technology collaboration will be welcomed to obtain higher technology, to increase exports and to expand the production base.
Foreign investment would bring attendant advantages of technology transfer, marketing expertise, introduction of modern managerial techniques and new possibilities for promotion of exports. The government will therefore welcome foreign investment which is in the interest of the country s industrial development.5 (Emphasis added) More recently, the Economic Survey 200809 reiterated that: FDI is considered to be the most attractive type of capital flow for emerging economies as it is expected to bring latest technology and enhance production capabilities of the economy.6 (Emphasis added) And the National Manufacturing Competitiveness Council specified that:
3

Jonathan D. Ostry, et. al., Capital Inflows: The Role of Controls, IMF Staff Position Note, February 19,

2010, SPN/ 10/04. Last year, Brazil, Thailand and South Korea strengthened capital controls. See: Biswajit Dhar, Uses and abuses of capital controls, Mint, October 26, 2010. 4 For a review, see Biswajit Dhar, State Regulation of Foreign Private Capital in India, Corporate Studies Group Working Paper, 1988. 5 See: Statement on Industrial Policy July 24, 1991 in Ministry of Commerce and Industry, Handbook of Industrial Policy and Statistics, 2001. 6 Ministry of Finance, Economic Survey 200809, para 133. 4

Foreign investments mean both foreign portfolio investments and foreign direct investments (FDI). FDI brings better technology and management, access to marketing networks and offers competition, the latter helping Indian companies improve, quite apart from being good for consumers. This efficiency contribution of FDI is much more important.7 Starting from such basic premise, from a regime of selective approach to foreign investment with emphasis on transfer of high technology and promotion of exports, since the beginning of the nineties India has gradually expanded the scope for FDI by progressively increasing the number of eligible sectors as also the limits for FDI in an enterprise. The steps taken included removing the general ceiling of 40% on foreign equity under the Foreign Exchange Regulation Act, 1973 (FERA), lifting of restrictions on the use of foreign brand names in the domestic market, removing restrictions on entry and expansion of foreign direct investment into consumer goods, abandoning the phased manufacturing programme (PMP), diluting the dividend balancing condition and export obligations, liberalising the terms for import of technology and royalty payments and permitting foreign investment up to 24% of equity of small scale units and reducing the corporate tax rates. FDI limit for small scale units was, however, dispensed with in 2009. The number of items reserved for the small scale sector has since been drastically pruned to just 20 thus virtually freeing the sector both from ownership criterion and product reservation.8 The parallel process of virtual withdrawal of the Industrial Licensing System and the retreating from the primacy given to public sector also enhanced the scope for FDI participation in India. Alongside opening up of the FDI regime, steps were taken to allow foreign portfolio investments into the Indian stock market through the mechanism of foreign institutional investors. The objective was not only to facilitate nondebt creating foreign capital inflows but also to develop the stock market in India, lower the cost of capital for Indian enterprises and indirectly improve corporate governance structures. On their part, large Indian companies have been allowed to raise capital directly from international capital markets through commercial borrowings and depository receipts having underlying Indian equity. Thus the country adopted a twopronged strategy: one to attract FDI which is associated with multiple attendant benefits of technology, access to export markets, skills, management techniques, etc. and two to encourage portfolio capital flows which ease the financing constraints of Indian enterprises. FDI is also preferred as it is seen to be more stable than short term portfolio capital flows which have the tendency to be volatile and hence can cause financial instabilitybasic expectations from both types of capital have been different from each other.
India, National Manufacturing Competitiveness Council, The National Strategy for Manufacturing, 2006, pp. 2324. 8 See: http://www.dcmsme.gov.in/publications/reserveditems/reserved2010.pdf 5
7

As a result of the many steps that have been taken, Indias FDI policy is now quite open and comparable to many countries. 9 Caps on FDI shares are now applicable to only a few sectors, mainly in the services sector. 10 Barring attempts at protecting Indian entrepreneurs with whom the foreign investors had already been associated with either

as joint venture partners or technology licensors, it has been a case of progressive liberalisation of the FDI policy regime. Simultaneously, the government has continuously strived to remove the hurdles in the path of foreign investors both at the stage of entry and later in the process of establishing the venture, in order to maximize FDI inflows. Much of the foreign investment can now take advantage of the automatic approval route without seeking prior permission of the Central Government. While India did attract considerable amount of foreign portfolio investments, its record in FDI inflows for a long time was seen to be below its potential particularly when seen in comparison with the massive inflows reported by China. The progressive liberalization of the foreign investment policy as well as the steps to improve the investment climate could thus be seen as attempts to overcome this perceived failure to match initial expectations and also in comparison with China. More recently, however, additional scrutiny for security reasons11 and for minimizing loss of revenue due to abuse of the double taxation avoidance agreements and roundtripping have been additional but restrictive features that are being referred to in respect of Indias FDI policy regime. In the overall, inflows of FDI have increased substantially compared to the earlier regime in which the scope for FDI was quite restricted. As a result, the stock of FDI in India jumped from $1.66 bn at the end of 1990, to $17.5 bn by the end of 2000 and further to a little above $164 bn by the end of 2009. 12 In the process, the FDI stock more than doubled between 2000 and 2004 and more than quadrupled between 2004 and 2009. The addition during 2004 and 2008 is quite spectacular as the stock increased by nearly $125 bn. Since 200001 an important change was introduced in the way FDI statistics are compiled which has made strict comparison of inflows overtime inapt. Though this did contribute
See: Planning Commission, Report of the Steering Group on Foreign Direct Investment, August 2002, p. 22 and Foreign Direct Investment in India: How Can it be Increased? in IMF, India: Selected Issues, January 7, 2005, available at http://www.imf.org/external/pubs/ft/scr/2005/cr0587.pdf. 10 These include air transport services, ground handling services, asset reconstruction companies, private sector banking, broadcasting, commodity exchanges, credit information companies, insurance, print media, telecommunications and satellites and defence production. Besides, FDI is not permitted in a few areas like agriculture (except floriculture, horticulture, development of seeds, animal husbandry, pisciculture, aquaculture and cultivation of vegetables and mushrooms) retail trading (except single brand product retailing), lottery, gambling and betting, chit fund, mutual benefit financial companies, trading in transferable development rights, real estate, manufacturing of cigars, cigarettes, tobacco or tobacco substitutes, atomic energy, and railway transport (other than mass rapid transport systems). See Consolidated FDI Policy (Effective from October 1, 2010) of the Department of Industrial Policy and Promotion (DIPP), Government of India, available at http://www.dipp.nic.in/FDI_Circular/ FDI_Circular_02of2010.pdf. 11 This issue was taken up by the National Security Council. 12 UNCTAD, World Investment data. 6
9

to the observed increase in the reported FDI inflows there is no denying the fact of the sharp increase in the inflows especially during the last few years. There were hints that private equity might have been a major contributing factor to the enhanced inflows. 13 However, this question has not been examined in any detail. This was the starting point of our enquiry into the nature of FDI inflows in the recent past. A preliminary examination of the individual inflow details did throw up the need to analyse the data more intently. Subsequently, a perusal of RBIs Master Circular on Foreign Investment in India and the Draft Press Note (DPN) on FDI Regulatory Framework issued in December 2009 made us further aware of the issues that could be associated with compilation of FDI inflows in India. The present exercise is thus primarily an attempt to examine the inflow data by going beyond the broad aggregates with a view to bring out the lesser explored characteristics of FDI in India and their developmental implications. This has necessarily led us to examine Indias efforts to conform to international best practices

on the one hand and to take a close look at some of the criteria adopted by international agencies themselves on the other. In the process, we also had an opportunity to look at the rationale and implications of the criteria proposed by the DPN and its follow up viz., Consolidated FDI Policy (CFP) which became effective from April 1, 2010. In view of the difficulties faced in getting the relevant information, we are constrained to term the exercise as a first approximation to the ground reality. Notwithstanding this limitation, we do hope that the exercise succeeds in creating awareness among policy makers and researchers not only in India but also at the international level that there is a need to take a closer look at the present phenomenon of FDI. The study covers the reported FDI inflows during September 2004 and December 2009. The choice of the period has been solely influenced by the availability of data on actual inflows by recipient companies incorporated in India, the disclosure of which was started in September 2004. Till then only approvals were being reported. Importantly, this covers the period which witnessed the sharpest increases in inflows. It may also be pointed out that the analysis provided in the paper would be helpful in understanding the sharp fall in FDI inflows during 201011 when the inflows for the first nine months have fallen almost by a quarter compared to the inflows during the corresponding period of the previous year.

2. Conceptual and Definitional Issues

Before embarking on a discussion of Indias FDI inflows and their various characteristics it would be relevant and essential to describe what has come to be internationally recognized as FDI. This could provide a basis for categorising Indias inflows. Here we
See for instance: CP Chandrasekhar, Private Equity: A New Role for Finance?, Economic and Political Weekly, March 31, 2007, CP Chandrasekhar and Jayati Ghosh, Private Equity and Indias FDI Boom, Business Line, May 1, 2007; T T Ram Mohan , Are FDI flows into India for real?, Economic Times, October 5, 2007 and RBI confirms FDI data included PE inflowsLivemint.com, July 9 2007. 7
13

shall rely extensively on official documents and academic literature. According to the Benchmark Definition of OECD, the most referred to and relied upon definition of FDI: Foreign direct investment reflects the objective of establishing a lasting interest by a resident enterprise in one economy ( direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. The lasting interest implies the existence of a longterm relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise. The direct or indirect ownership of 10% or more of the voting power of an enterprise resident in one economy by an investor resident in another economy is evidence of such a relationship. ...Direct investment is not solely limited to equity investment but also relates to reinvested earnings and intercompany debt.14 It needs to be underlined that the key aspect of the above definition is lasting interest which is supposed to be evidenced by the fact of ownership of at least 10% voting power (because it is assumed to give the investor power to exercise significant influence over the investee). It should also be noted that apart from equity inflows there are other items to be considered for inclusion in the FDI statistics and there can be a variety of difficulties in measuring each of these. The crucial point, however, is that the first stage of identifying a direct investment enterprise is the ownership of 10% voting power and the rest basically follow from that. All investments below the 10% limit are considered as portfolio investments.

While this is the operational distinction between FDI and FPI, for a theoretical differentiation between the two one can refer to Dunning, who said: First, FDI involves the transfer of other resources than capital (technology, management, organizational and marketing skills, etc.) and it is the expected return on these, rather than on the capital per se, which prompts enterprises to become MNEs. Thus capital is simply a conduit for transfer of other resources than the raison dtre for direct investment. Second, in the case of direct investment, resources are transferred internally within the firm rather than externally between two independent parties: de jure control is still retained over their usage. ... These are the essential differences between portfolio and direct investment .15 (emphasis added)
Debt instruments include marketable securities such as bonds, debentures, commercial paper, promissory notes, nonparticipating preference shares and other tradable nonequity securities as well as loans, deposits, trade credit and other accounts payable/ receivable. All crossborder positions and transactions related to these instruments, between enterprises covered by an FDI relationship other than between related financial intermediaries are included in FDI. See: OECD, Benchmark Definition of Foreign Direct Investment, Fourth Edition, 2008, pp. 4849. 15 John H. Dunning, Trade, location of economic activity and the multinational enterprise: a search for an eclectic approach, in John Dunning (ed.), The Theory of Transnational Corporations, UN Library on Transnational Corporations, Volume I, Routledge, 1993, p. 185. UNCTAD too made similar observations when comparing foreign portfolio and direct investments. See: UNCTAD, World Investment Report, 1997, Chapter III (Foreign Portfolio Equity Investment). 8
14

Long back, Hymer, in his seminal work, offered an explanation why portfolio investors seek control and made a distinction within FDI. He had classified direct investment into two types: Type 1 and Type 2. There are two main types of reasons why an investor will seek control. The first, which I shall call direct investment, Type 1, has to do with the prudent use of assets. The investor seeks control over the enterprise in order to ensure the safety of his investment. This reason applies to domestic investment as well. ...

The theory of Type 1 direct investment is very similar to the theory of portfolio investment.
The interest rate is the key factor in both. Direct investment of Type 1 will substitute for portfolio investment when the distrust of foreigners is high or when fear of expropriation and risks of exchangerate changes are high, but its movements will still be in response to differences in the interest rate. ... There is another type of direct investment that does not depend on the interest rate and which I shall call direct investment of Type 2, or international operations. In this second type of direct investment, the motivation for controlling the foreign enterprise is not the prudent use of assets but something quite different. The control of the foreign enterprise is desired in order to remove competition between that foreign enterprise and enterprises in other countries. Or the control is desired in order to appropriate fully the returns on certain skills and abilities. 16 It can be seen from the above that but for the control aspect Type 1 direct investment is nothing but portfolio investment. 17 Buckley and Brookes characterisation that FDI ... represents a packaged transfer of capital, technology, management and other skills, which takes place internally within the multinational firms (emphasis added) is similar to Dunnings description of FDI and Hymers elaboration of Type 2 direct investment.18
Stephen Hymer, On multinational corporations and foreign direct investment, in John Dunning (ed.), The Theory of Transnational Corporations, UN Library on Transnational Corporations, Volume I, Routledge, 1993,
16

p. 25. 17 Interestingly, the European Commission also in its submission to the WTO categorically stated that: Portfolio investors, as a general rule do not expect to obtain additional benefits derived from the

management control of the enterprise in which they invest. Their main concern is the appreciation of the value of their capital and the return that it can generate regardless of any longterm relationship consideration or control of the enterprise. This is the main rationale behind portfolio investment, that makes it substantially different from FDI. The Commission, however, mentioned that if any of those instruments complies with the criteria of FDI capital transactions they are considered part of FDI. See: Concept Paper on the Definition of Investment WT/WGTI/W/115, 16 April 2002, available at http://trade.ec.europa.eu/doclib/docs/2004/july/tradoc_111123.pdf 18 Peter J. Buckley and Michael Z. Brooke, International Business Studies : An Overview, Blackwell Publishers, Oxford, 1992, p. 249. 9

This distinction between FDI and FPI is extremely relevant in the present context because of the changing sectoral composition of the reported global FDI flows and nature of foreign investors. A good part of global FDI flows are accounted for by private equity funds (PE), hedge funds (HF) and sovereign wealth funds (SWF); the former two falling under the category of collective investment funds/institutions. 19 UNCTAD in its World Investment Report 2010 noted that FDI by private equity funds and sovereign wealth funds together accounted for over onetenth of global FDI flows in 2009: up from less than 7 per cent in 2000 but down from 22 per cent in the peak year of 2007. 20 PE funds are also major contributors to crossborder M&As which in turn are a major form of the global FDI phenomenon. (Table 1)
Table 1 Crossborder M&As by Private Equity firms, 20002010

Year Number of Deals Value Number Share in Total (%) $ billion Share in Total (%)
2000 1,338 13 92 7 2001 1,246 15 88 12 2002 1,244 19 85 18 2003 1,486 22 108 27 2004 1,622 22 157 28 2005 1,725 19 205 22 2006 1,688 18 267 24 2007 1,906 18 456 27 2008 1,776 18 303 24 2009 1,987 24 106 19 2010* 696 22 38 16
Source: UNCTAD, World Investment Report 2010, Table I.4.
* For 2010, JanuaryMay only. Note: Includes M&As by hedge funds. Private equity firms and hedge funds refer to acquirers as investors not elsewhere classified. This classification is based on the Thomson Finance database on M&As.

While there is a strong theoretical difference between FDI and FPI, it is evident that the importance given to control and the 10% cutoff point required the categorisation of portfolio investments into direct investments. The forced classification of private equity investments as FDI becomes further evident from the World Investment Report, which while acknowledging the phenomenon of collective investment funds becoming the growing sources of FDI, stated that:
According to OECD, collective investment institutions include Investment funds, Mutual funds, Unit trusts, Variable capital companies, Investment limited partnerships, Feeder/master funds, umbrella funds/subfunds, funds of funds, Hedge funds, Professional investor funds, Private equity funds, Distressed funds, Property and real estate funds, and Money market funds. See: OECD, Benchmark Definition of Foreign Direct Investment, 4th Edition, p. 193. 20 UNCTAD, World Investment Report, 2010, p. xviii. 10
19

As long as crossborder investments of private equity and hedge funds exceed the 10% equity threshold of the acquired firm, these investments are classified and

should be recorded as FDI, even if a majority of such investments are short term and are closer in nature to portfolio investments. Investments by these funds may be the latest examples of portfolio investment turning into FDI .21 (emphasis added) Just a little earlier UNCTAD had said: Crossborder investments of private equity funds that lead to an ownership of 10% or more are in most cases recorded as FDI even if private equity funds do not always have

the motivation for a lasting interest or a longterm relationship with the acquired enterprise.22
(emphasis added) It, however, cautioned that: FDI by collective investment funds is a new form of foreign investment, which raises a number of questions that deserve further research. For instance, how does FDI financed by private equity funds differ from FDI by TNCs in its strategic motivations? Who controls such funds? And what are their impacts on host economies?23 OECD too echoed this when it said: Both aspects, investments in CIIs (collective investment institutions) and by CIIs, are included in FDI statistics as far as the basic FDI criteria are met. However, the nature and motivation of CIIs may differ from those of MNEs and there is a need to observe this phenomenon more closely in the coming years.24 OECD in its benchmark definition (4 th Edition) clarified that investments by CIIs which were till then being classified as portfolio investments due to lack of clarity in international standards should be included in FDI statistics as long as they meet the FDI criteria. Interestingly, OECD also said that CIIs are generally brass plate enterprises and are managed by professional investors who may offer a variety of funds with their own market orientation and who make investment decisions on behalf of investors. Administration, management, custodial and trustee services may be provided to the CIIs by separate service providers,...25 Private equity (including venture capital) certainly has a shorter investment horizon unlike the traditional FDI which would not start off with a preconceived idea of exiting an enterprise.26 Private equity investors have the overriding objective of large and fast
UNCTAD, World Investment Report, 2006, p. 16. UNCTAD, World Investment Report, 2005, p. 37, n31. 23 UNCTAD, World Investment Report, 2006, p. 21. 24 OECD, Benchmark Definition of Foreign Direct Investment, 4th Edition, 2008, p. 23. 25 ibid., pp. 192193 26 In sharp contrast to FDI is the behaviour of private equity. Private equity professionals have their eye on the exit from the moment they first see a business plan. ... If a
21 22

contd
11

capital gains and revenue in other forms and there is no question/intention of integrating the investee company into their own structures like an MNC does. 27 By their very character, these are not long term investors. Also, in their operations one cannot distinguish between domestic and foreign. They do not fall under any of the motives of FDI namely, resource seeking, efficiency seeking, market seeking or strategic asset seeking. If their investments have to be treated as FDI, they may be categorised as pure return seeking FDI. 2.1 10% Threshold and Significant Influence vs. Control Keeping the issue of classification of private equity and other collective investments per se aside for the time being, there is a need to have a close look at the crucial 10% threshold

itself. Indeed, one of the tasks assigned to the Direct Investment Technical Expert Group (DITEG), a joint IMF/OECD expert group, was to examine whether it could be raised to 20%. The DITEG recommended the increase in the threshold to 20% in the following manner. The group endorsed the proposal to move to 20 per cent of voting power or ordinary shares as the threshold for the operational definition for a direct investment relationship, even though it was recognised that changing the current threshold of 10 per cent to 20 per cent would not have a significant impact on the data. The group

found that there were no strong conceptual grounds for choosing 10 or 20 per cent, and so any choice below 50 per cent would be arbitrary. However, there are strong practical
arguments for supporting the change to 20 per cent threshold, namely with regard to accounting standards. International Accounting Standards (IAS) as well as the accounting standard used by the United States utilize a 20 per cent threshold for financial statements.28 (emphasis added) This recommendation was, however, rejected by the OECD Workshop on International Investment Statistics which decided to: (i) to maintain the current 10 per cent threshold, thus not endorsing the recommendation of DITEG to change the threshold to 20 per cent; (ii) to maintain the strict application of the 10 per cent threshold with a view to achieving crosscountry comparability of FDI statistics,...29 (emphasis added)
fund manager can t see an obvious exit route in a potential investment, then it won t touch it. See: http://www.altassets.com/privateequityglossary.html 27 It is indeed said that: Ultimately, of course, the private equity business is all about achieving financial returns. Some firms may have aspirations to add value and growth, but that is a means to an endthe goal is to make money. See: Private Equity in India: An Executive Round Table at http://content.spencerstuart.com/sswebsite/pdf/lib/PrivateEquityIndia_2007_web2.pdf 28 Direct Investment Technical Expert Group (DITEG) Outcome Paper # 2 (Revised version), September 24, 2004. The DITEG was created in 2004 as a joint IMF/OECD expert group to make recommendations on the methodology of direct investment statistics for the revision of the BPM5 and the Benchmark Definition. 29 Draft Summary of the Meeting of the OECD Workshop on International Investment Statistics (October 1213

contd
12

While it is repeatedly emphasized that investors could exercise significant influence even with less than 10% share in equity and that there can be situations where even a higher share in equity need not be accompanied by control, yet a strict adherence to the 10% criterion is advocated for the sake of uniformity at the international level. The OECDs position in this regard is that: Some compilers may argue that in some cases an ownership of as little as 10% of the voting power may not lead to the exercise of any significant influence while on the other hand, an investor may own less than 10% but have an effective voice in the management. Nevertheless, the recommended methodology does not allow any qualification of the 10% threshold and recommends its strict application to ensure statistical consistency across countries. (emphasis added).30 It is thus evident that there is no absoluteness to the 10% level and the criterion has remained unchanged in the most recent exercise on the definition mainly in order to ensure international comparability. On the other hand, the assumption that raising the threshold would not have much impact on the FDI data is something that needs to be looked closely into especially when the nature of foreign investors has got diversified. In this context, the assertion of IMF Balance of Payment Manual (5 th Edition) needs special mention. Most direct investment enterprises are either (i) branches or (ii) subsidiaries that are wholly or majority owned by nonresidents or in which a clear majority of the voting

stock is held by a single direct investor or group. The borderline cases are thus likely to form a rather small proportion of the universe. 31 It is, however, more likely that the lower limit of 10% for ascertaining influence coupled with nonexclusion of investments by collective investment schemes for consideration as FDI would have resulted in the estimated FDI flows being far larger than otherwise especially in the context of the global capital flows changing their character and collective investment funds playing a major role. A foreign investor when investing in another enterprise in the same line of activity, whether domestic or foreign, would seek to have control because of the involvement of many factors. While the general preference could be a whollyowned entity, circumstances like the necessity to enter into joint ventures and host country regulations may require the foreign investor to settle for a lower share. In each of these situations control on the one hand and directly relevant contribution to
2004), prepared by the OECD. 30 OECD, Benchmark Definition of Foreign Direct Investment, Fourth Edition, 2008, p. 49. Interestingly, the New Palgrave Dictionary of Economics does not use the term significant influence. It terms 10% as implying controlling interest when it says: Foreign direct investment (FDI) occurs when an individual or firm acquires controlling interest (typically defined as at least ten per cent ownership) in productive assets in another country. Bruce A. Blonigen, Foreign Direct Investment, in Steven N. Durlauf and Lawrence E. Blume (eds.), The New Palgrave Dictionary of Economics, Second Edition, 2008, pp. 459462. 31 IMF Balance of Payments Manual, 5th Edition, p. 87. 13

the enterprises operation by the foreign investor on the other, are logical to expect. Going by Hymers direct investment of Type 2, control would be necessary so as to prevent competition. In case of joint ventures it has been indeed said: Even if a foreign entity cannot own a majority of a joint venture, it may be able to legally obtain operational control through other means. One may surround the joint venture with contractual obligations to the foreign venturer. For example, if the joint venture is to assemble components manufactured in the United States, the U.S.

investor retains significant control over the joint venture regardless of how many shares the investor owns or how many directors it can name to the board because it controls the
supply of components. Similarly, a U.S. investor can exercise control through supply contracts, marketing agreements, management contracts, and veto power in the joint venture agreements. (emphasis added)32 Another relevant aspect is that the widely adopted OECD definition is based on the assumption of significant influence. Interestingly, a distinction was made by Lipsey by referring to United Nations System of National Accounts (SNA) wherein he said: What constitutes a foreign direct investment entity has been defined differently for balance of payments purposes and for studies of firm behavior. The dominant current definition of a direct investment entity, prescribed for balanceof payments compilations by the International Monetary Fund (IMF) (1993), and endorsed by the OECD (1996), avoids the notion of control by the investor in favor of a much vaguer concept (long term interest and significant influence). The IMF definition is governing for balanceofpayments compilations, but there is a different, but related, concept and a different official definition in the United Nations System of National Accounts, ... that retains the idea of control, and reflects the micro view more. In these accounts, which measure production, consumption, and investment, rather than the details of capital flows, there is a definition of foreigncontrolled resident corporations. Foreigncontrolled enterprises include subsidiaries more than 50 percent owned by a foreign parent. Associates of which foreign ownership of equity is 1050 percent, may be included or excluded by individual

countries according to their qualitative assessment of foreign control

(InterSecretariat Working Group on National Accounts, 1993, pp. 3401). Thus, from the viewpoint of a host country, and for analyzing production, trade, and employment, control remains the preferred concept.33 (emphasis added) IMF also made this point clear when it said: The concept described in this Manual is broader than the SNA concept of foreigncontrolled, ..., resident enterprises. In the SNA, that distinction ... is made in the
Schaffer Richard, Beverley Earle and Filiberto Agusti (1999), International Business Law and Its Environment, 4th Edition, West Educational Publishing Co, Cincinnati, p. 581. 33 Robert E Lipsey, Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History, and Data, in E. Kwan Choi and James Harrigan (ed.), Handbook of International trade, Blackwell, 2003, pp. 287319. 14
32

compilation of various accounts because of the distinctions potential analytic usefulness in the examination of differences (characteristics such as value added, investment, employment, etc.) between enterprise subsectors. Thus, linkage of the direct investment component of the financial account with the foreigncontrolled sector is by no means a complete one, primarily because the two serve different purposes. As presented in this Manual, the primary distinguishing feature of direct investment is the significant influence that gives the investor an effective voice in management. For the foreigncontrolled sector, the primary distinguishing feature is control.34 Thus for economic analysis of foreign investment one needs to focus more on control and look into the circumstances of investment rather than any specific percentage. In fact, the European Commission (EC) suggested that to ascertain a direct investment relationship when the foreign investor holds less than 10% of the equity, the following criteria could be taken into account to determine whether a direct investment relationship exists: a) representation in the Board of Directors; b) participation in policymaking processes; c) intercompany transactions; d) interchange of managerial personnel; e) provision of technical information; and f) provision of longterm loans at lower than existing market rates. 35 On the other hand, the EC also emphasised the need to go beyond the standard definition and taking into account the national legal provisions as also circumstances. Situations vary very much from country to country and depend on the legal framework for corporate governance, i.e. the legislation regulating the allocation of property rights and control of enterprises. ... Precise allocation of control between national and foreign entities requires compilers of statistics not just to apply the definition but also to make a supplementary assessment. 36 Since, voting power of more than 10% also does not always ensure control, it is logical that one needs to follow a casebycase approach in such cases too.
IMF, Balance of Payments Manual, 1993. Supra note 17. 36 See: Eurostat, European Commission, Foreign Affiliates Statistics (FATS) Recommendations Manual , Eurostats Methodologies & Working Papers, 2009 Edition, p. 14. Available at http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KSAR09014/EN/KSAR09014EN.PDF. A description of legal provisions in India and how in practice the general perceptions can be defeated has been described in K.S. Chalapati Rao and Biswajit Dhar, Operation of FDI Caps in India and Corporate Control Mechanisms, ISID Working paper WP2010/11 available at http://isid.org.in/pdf/WP1011.PDF. 15
34 35

2.2 Need for CasebyCase Approach

2.2.1 Tata Motors Ltd The necessity for a case by case approach may be better understood from a few practical examples. The classification could become extremely important when leading companies of an economy/sector are involved. For instance, Tata Motors Ltd (earlier Tata Engineering & Locomotive Co Ltd), Indias leading truck manufacturer, entered into collaboration with Daimler Benz way back in 1954 for manufacturing commercial vehicles. The collaboration ended in 1969. Since then the vehicles are being called Tata Trucks instead of Tata MercedesBenz Trucks. But the foreign investor did not completely withdraw its investment in the equity capital of Tata Motors. Its nominee also continued to be on the board of Tata Motors. In 1986 the company started producing light commercial vehicles. In 1991 Tata Sierra SUV and later in 1992 Tata Estate MUV were launched. Tata Motors entered into a separate 49:51 JV with DaimlerChrysler in 1994 for manufacture of MercedesBenz cars in the country. This alliance ended in 2001. In 1998 Tata Safari and Indica passenger cars were launched. In 2007, Tata Motors had given a no objection to the German firms plans to set up its independent commercial vehicles business in the country. From the beginning the German investor had more than 10% equity. From the time we could get the shareholding details, i.e., since 2001 and until December 2009, there had been no change in the number of shares held by Daimler. However, due to the expansion of Tata motors equity, the share of Daimler came down from 10% in December 2001 to 5.34% in December 2009. (Table 2) Subsequently, Daimler sold off its entire equity. On the day when the announcement came, the stock market did not react adversely to the news indicating that the divestment would not have any adverse impact on Tata Motors working. In fact, there was a marginal increase in the companys share price on that day. Earlier Daimlers representative on the companys board did not seek reelection in the AGM held in July 2006.
Table 2 Daimler Chrysler Investment in Tata Motors

End of No. of Shares % Share in Total

December 2001 2,55,96,476 December 2002 2,55,96,476 December 2003 2,55,96,476 December 2004 2,55,96,476 December 2005 2,55,96,476 December 2006 2,55,96,476 December 2007 2,55,96,476 December 2008 2,55,96,476 December 2009 2,55,96,476 March 2010 sold off 0.00
16

10.00 8.00 7.75 7.08 6.80 6.64 6.64 5.69 5.34

Source: Shareholding pattern of the company reported by the Bombay Stock Exchange website.

In the prospectus issued in 1980, the company did not mention any special relationship with Daimler. It merely stated: As regards DaimlerBenz AG their present holding in the company is approximately 13% of the subscribed equity capital. It is in the long term interest of the Company that DaimlerBenz AG, who are world leaders in the field of automobile manufacture, maintain their equity percentage. 37 Given this background, it would be important whether Tata Motors can be classified as an FDI company and if so till what period. For us it looks appropriate, notwithstanding the continued equity participation by Daimler of at least 10% thereafter and representation on the board, to treat it as an FDI company only till 1969 when the technical collaboration ceased. There is no evidence to show that the subsequent developments at Tata Motors were in any way directly contributed by Daimler.

2.2.2 Ballarpur Industries Ltd (BILT) Another relevant case is that of Ballarpur Industries Ltd (BILT), a welldiversified leading paper manufacturing company in India. With no track record of substantial foreign equity earlier, in 1998, the company received governments permission to give 16.7% stake to AlMurjan Trading & Industrial Co Ltd of Saudi Arabia. This was the time when the Thapar group was undergoing restructuring and required funds. Agreement with Al Murjan involved induction of their nominee on BILTs board. The foreign investor exited BILT in March 2005 and withdrew its nominee. (Table 3) A senior official of the company said in this context that (T)hey sold their equity stake in the market as they are mainly a trading company and want to exit from noncore business. It is evident that AlMurjan was only a financial investor and it could not have brought with it any additionality into the functioning of BILT. From this perspective, one can assume that BILT was not an FDI company even when AlMurjan had more than 10% equity in it. 38
Table 3 Foreign Promoter of Ballarpur Industries Ltd

End of Name of the Foreign Investor No. Of Shares % Share in Total

March 2001 AlMurjan Trading & Industrial Co Ltd # 1,00,00,000 13.98 March 2002 Foreign Company 1,18,08,882 16.51 March 2003 Al Murjan Trading & Industrial Co Ltd # 1,00,00,000 7.78 Mar 2004 Foreign Companies 1,30,48,882 8.03 December 2004 Foreign Companies 1,11,98,882 6.89 Mar 2005 Sold off the entire shareholding 0 0.00
Source: Shareholding pattern of the company reported by the Bombay Stock Exchange website.
# Shown among the promoters. 37 Tata Engineering & Locomotive Co. Ltd, Prospectus dated14th August 1980. 38 AlMurjan Exits Bilt, http://www.financialexpress.com/news/almurjanexitsbilt/105100/0 17

2.2.3 VST Tillers Tractors (VST) The company, market leader in tillers, was started in 1967 as a joint venture and technical collaboration with Mitsubishi Heavy Industries and Mitsubishi Corporation, Japan for the manufacture of Power Tillers and Diesel Engines. In 1984, an additional technical and financial collaboration was entered into with Mitsubishi Agricultural Machinery Company Ltd, Japan for the manufacture of 18.5 HP, 4 wheel drive Tractor. According to the earliest available shareholding pattern of the company (June 2002), the foreign collaborators had 3.78% equity shareholding. Subsequently, this shareholding was shown against foreign promoters, Mitsubishi Heavy Industry Pvt Ltd being one of them. The companys annual report also acknowledged the joint venture partners, Mitsubishi Heavy Industries Ltd and Mitsubishi Machinery Co Ltd, Japan till 200304. It is only in 200607 when the company promoted MHIVST Diesel Engines Pvt Ltd as a joint venture with the Mitsubishi group that the representation on the companys board was reduced from two to one. It is pertinent to note that the Articles of Association of VST specifically state that: The regulation for the management of the Company and for the observance of the members thereof and their representatives shall be such as are contained in these Articles. The Company shall adopt and carry into effect the Joint Venture agreement dated 10th November 1966 entered into by the Promoters with the Joint Venture partners M/s. Mitsubishi Heavy Industries Ltd. and Mitsubishi Corporation (formerly known as Mitsubishi Shoji Kaisha Ltd, Japan). The aforesaid agreement shall form a part of these articles of association for all intents and purposes and particularly the provisions contained therein relating to transfer of shares and preemptive rights of the parties thereto, to acquire the shares.

The joint venture partners M/s. Mitsubishi Heavy Industries Limited, M/s. Mitsubishi Corporation and M/s. Mitsubishi Agricultural Machinery Company Limited, Japan shall be collectively entitled to appoint one Director mentioned in clause (a) above, and shall be entitled to remove him from that office and to appoint any other person thereto from time to time.39 In the circumstances, the company may be treated as an FDI company in spite of such a low share of the foreign partners. The above examples underline the need for casebycase approach for ascertaining control. In this context, it may also be relevant to refer to the Securities and Exchange Board of India (SEBI) Takeover Regulations Advisory Committee which noted that ... given the casespecific nature of control as a concept, the Committee decided to refrain from stipulating whether the power to say no would constitute control
Memorandum and Articles of Association of VST Tillers Tractors Ltd filed on November 10, 2009 with the MCA. 18
39

for purposes of the Takeover Regulations. Whether a person has acquired control by virtue of affirmative rights would therefore have to be discerned from the facts and circumstances surrounding each case. 40 2.3 RoundTripping Another important aspect of the global capital flows is the phenomenon of roundtripping which acquired prominence in the context of huge FDI inflows to China.41 The OECD was of the view that Roundtripping refers to the channelling abroad by direct investors of local funds and the subsequent return of these funds to the local economy in the form of direct investment.42 In general, OCED categorised direct investment enterprise to be of the roundtripping type if its ultimate investor belongs to the same economy. 43 Again, OECD noted that, in practice, all transactions/positions between fellow enterprises relate to the funds circulating within multinational groups via shared service centres or to take advantage of the best financing opportunities and that (T)hey may also represent roundtripping of capital.44 While Chinas roundtripping FDI is often discussed, in fact, because of flow of investments among group companies, even FDI into the USA has an element of roundtripping.
45

OECD identifies the main incentives for roundtripping as: (i) tax and fiscal advantages; (ii) property right protection; (iii) expectations on exchange control and exchange rate and; (iv) access to better financial service. Regarding the last one, it explains that financial markets of some economies not being well developed, enterprises resident in these economies have to access overseas financial markets for better financial services, such as listing of companies in overseas stock markets. The funds raised will be brought back to host economies in the form of FDI. Roundtripping may occur as a part of this process. In order to give an idea of the genuine magnitude FDI, the Benchmark Definition recommended separate supplementary breakdowns when this phenomenon affected significantly FDI data of a country. 46
Securities and Exchange Board of India, Report of the Takeover Regulations Advisory Committee, July 19, 2010, p. 29. (Chairman: C. Achutan) 41 See for example: Nirupam Bajpai and Nandita Dasgupta , What Constitutes Foreign Direct Investment? Comparison of India and China, CGSD Working Paper No. 1, January 2004, Working Papers Series, Center on Globalization and Sustainable Development, The Earth Institute at Columbia University. Also see: Geng Xiao, Peoples Republic of Chinas RoundTripping FDI: Scale, Causes and Implications, July 2004 available at www.hiebs.hku.hk/working_paper_updates/pdf/wp1137.pdf.
40

OECD, Benchmark Definition of Foreign Direct Investment,: Fourth Edition, 2008, p. 158. ibid., pp. 159160. 44 ibid., p. 24. 45 ibid., pp. 212213. 46 ibid., p. 159. 19
42 43

Roundtripping is important not only from the point of view of overstating of capital flows. As the OECD pointed out, some domestic companies may raise finances abroad and bring the same back into the national economy. In this case, though it would not amount to overstatement of capital flows, the flows do not carry with them the additional attributes of technology, management skills, marketing network, etc. Thus the receiving enterprises would be like domestic enterprises irrespective of the level of foreign held equity. 2.4 Indian Practice From the above, it is evident that the choice of 10% for determining FDI relationship has been more of a convenient thumb rule and that it has been mandated in order to maintain international comparability. In India, for a long time, foreign direct investments were associated with control and direction of the enterprise by foreign investors. Branches of foreign companies were the obvious cases to fall under this category. In addition, Indian joint stock companies were also regarded as controlled from abroad if either of the following two conditions were met: (a) the foreign ownership was sufficiently large to bestow control over the affairs of the company and/or (b) there was an association or an agreement with the foreign owners by virtue of which control is vested (directly or indirectly) in them.47 For operational purposes, besides Indian subsidiaries of foreign companies, (i) companies in which nonresidents belonging to one country owned 40 per cent or more of the ordinary shares, (ii) companies managed by foreigncontrolled managing agents in terms of a managing agency agreement and (iii) other companies 25% or more of whose ordinary shares were owned by another foreigncontrolled company in India were treated as controlled from abroad. Interestingly, portfolio investments comprised ordinary shares held by nonresidents, other than those treated as foreign controlled, as well as preference shares and debentures held by all nonresidents, irrespective of whether they exercised control or not. For studies on finances of foreign controlled rupee companies (FCRCs) RBI essentially followed the above basic approach with some modification possibly because the Managing Agency system was abolished in 1969. FCRCs were defined as: Indian joint stock Companies which were subsidiaries of foreign companies, companies in which 40 per cent or more of the equity capital was held outside India in any one country and companies in which 25 per cent or more of the equity capital was held by a foreign company or its nominee were treated as ForeignControlled Rupee Companies (FCRCs). 48
RBI, Report on the Survey of Indias Foreign Liabilities and Assets as on 31st December 1955, 1957, p. 10. RBI, Finances of Foreign Direct Investment Companies, 199394, RBI Monthly Bulletin, March 1999, p. 245. 20
47 48

However, following the Balance of Payments Manual (5 th edition), RBI adopted the FDI company concept and explained: A direct investment enterprise is defined as an incorporated or unincorporated enterprise in which a direct investor, who is resident in another economy, owns 10% or more of the ordinary shares or voting power (for an incorporated enterprise) or the equivalent (for an unincorporated). As such, a company in which 10 per cent or more equity capital is held by a single nonresident investor is defined as a Foreign Direct Investment Company. (emphasis added) 49

The emphasis has been more on bringing Indias FDI reporting system in alignment with the international reporting system. This was further operationalised following the recommendations of the RBI Committee on Compilation of Foreign Direct Investment in India in 2002. In this process, the 10% criterion has been taken as inviolable and the finer aspects of FDI have been ignored. In particular, the representative character of company finance studies based on the new criteria compared to those based on FCRCs to reflect the operations of FDI in India were also not discussed. The fact of unquestioned allegiance to the 10% criterion ignoring the context surrounding the investment is reflected at many places. For instance, the Economic Advisory Council to the Prime Minister in its Review of the Economy 200708 said: Inflows of Private Equity (PE) investments have also been quite large. Since in most cases PE flows constitute less than 10% of the capital of the company being invested they should ideally be reported under Portfolio Capital, and not under FDI. It is not clear what the current accounting practice is. (emphasis added) Implied in this statement is the EACs belief that in India FDI is measured strictly according to the minimum 10% shareholding criterion. It is also evident that but for the insistence on the 10% criterion, foreign private equity would have been classified as portfolio capital rather than as FDI. Also reflected in the above is the fact that an important official advisory body was unaware of certain aspects of computing FDI in India. The thin line between FDI and foreign portfolio investments (by FIIs) as far as classification of foreign private equity and venture capital in India is further evident from the following observation of the Working Group on Foreign Investment set up by the Ministry of Finance. Inflows into unlisted equity: At a conceptual level, a private equity or venture capital fund outside India can invest in India in three ways. First, private investment in unlisted equity can take place if the foreign entity creates an investment vehicle which obtains an FII registration. Second, even without registering as an FII a private equity or venture capital fund outside India can invest in an Indian unlisted company up to the level of caps for FIIs. These investments would be treated as FDI, ... These two mechanisms, put together, characterize the main avenues for private
49

ibid.

21

equity/venture capital inflows into India. The third way for private equity or venture capital funds outside India to invest in the country is to register as an FVCI with SEBI and be regulated as such.50 (emphasis added) The Consolidated FDI Policy (CFP) issued by the Department of Industrial Policy and Promotion (DIPP) on March 31, 2010 and its predecessor Draft Press Note (DPN) on FDI Regulatory Framework throw light on the way FDI is being measured in India. While reiterating the motivation of the direct investor as: ... a strategic long term relationship with the direct investment enterprise to ensure the significant degree of influence by the direct investor in the management of the direct investment enterprise. the CFP further explained: Investment in Indian companies can be made both by nonresident as well as resident Indian entities. Any nonresident investment in an Indian company is direct foreign investment.51 (emphasis added) Interestingly, the DPN issued earlier for discussion by the Government, stated that: In India the lasting interest is not evinced by any minimum holding of percentage of

equity capital/shares/voting rights in the investment enterprise. 52 This suggests that all foreign investments (other than those purchased by FIIs on the stock market) in equity capital and equity related instruments are being treated as FDI irrespective of the extent of foreign share. It is obvious that in not all the cases there will be lasting interest and the ability or intention to significantly influence the management of the investee company. While this contrasts sharply with the international best practice, one cannot expect such FDI to be accompanied by the attendant attributes and deliver the perceived benefits from FDI. Dunnings OLI paradigm suggests that the foreign investor should have certain advantages over the domestic enterprises in order to compensate for the disadvantages associated with operating in an alien environment. Pure financial investments are less likely to be accompanied by such ownership advantages which the foreign investor would like to internalise. In the backdrop of the internationally adopted criterion not being followed in practice, one may not expect roundtripping by domestic investors to be treated separately as a distinct category of capital flow other than FDI. In spite of the fact that some wellknown companies which raised money by listing abroad have invested back in India and occasional reports in the press regarding some delayed or disapproved FDI proposals because of suspected round
See: Ministry of Finance, Report of the Working Group on Foreign Investment, 30 July 2010, p. 71. (Chairman: U.K. Sinha) 51 Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Consolidated FDI Policy (Effective from April 1, 2010) available at http://siadipp.nic.in/policy/fdi_circular/fdi_circular_1_2010.pdf. 52 Draft Press Note: Regulatory Framework of FDI, issued in December 2009 by the DIPP. 22
50

tripping of funds, this phenomenon has never been explored fully in case of India.53 A news report of 2003 attributed to RBI did, however, say that roundtripped FDI as a part of the total FDI was insignificant and could be as low as 23%.54 Interestingly, Bain & Co., a major global business and strategy consulting firm, says: Employing another tactic, some domestic PE funds invest in Indian companies through wholly owned offshore subsidiaries. Because several jurisdictions, including Singapore and Mauritius, have doubletaxed treaties with India, PE funds can use Special Purpose Vehicles based there to avoid transferability restrictions when they eventually exit from an investment. 55 From the foregoing it is evident that besides the usual classification of market seeking, efficiency seeking, resource/strategic asset seeking FDI there are also categories that could be called return seeking and round tripping FDI. The last two, strictly speaking, cannot be equated with FDI. Thus there is a case for analysing the reported FDI inflows, keeping the expectations from FDI, by suitably classifying the foreign investors. We shall, in the following, try to analyse Indias FDI inflows from this perspective.

3. Analysis of Inflows
3.1 The Aggregates As noted above, the reported stock of FDI in India increased substantially after opening up of the economy. Table 4 presents the inflows data for the 10year period 200001 to 200910 which does not suffer from comparison problems. 56 The change in the reporting practice which introduced new items, especially reinvested earnings of the already established ones, did contribute significantly to the reported higher total inflows: 44.21% during 200001 200506 and 30.63% during 200506 200910. There is, however, no denying the fact of a dramatic rise in the inflows after 200506 as the reported equity inflows which fluctuated between 200102 and 200405, managed to climb slowly initially

and rapidly after 200506. The FDI Equity inflows during the five years 200506 to 2009 10 were almost seven times those of the previous five years 200001 to 200405. (Chart 1)
Wenhui Wei, China and India: Any difference in their FDI performances?Journal of Asian Economics, 16 2005, pp. 719736. 54 http://www.rediff.com/money/2003/apr/12fdi.htm 55 Bain & Company, India Private Equity Report 2010 available at http://www.bain.com/bainweb/PDFs/cms/Public/India_Private_Equity_Report.pdf 56 India adopted the international practice of reporting FDI inflows data and started giving out the information for the year 200001 onwards. Till then reinvested earnings and other capital provided by foreign direct investors were not being reported as part of the inflows data. Thus the reported inflow figures have better comparability from 200001 onwards and the earlier figures suffer from a degree of underestimation. This was introduced following the recommendations of the RBI Committee on Compilation of Foreign Direct Investment in India, October 2002. 23
53

Table 4 Reported FDI Inflows into India and their Main Components

(As per International Best Practices) (US $ mn) Financial Year (AprilMarch) Main Components Share of new items in the total [(3)+(4)+(5)]/ (6)x100 Equity Inflows (FIPB/SIA, Automatic & Acquisition Routes)# Equity capital of unincorporated bodies ## Reinvested earnings + Other capital + Total FDI Inflows (1) (2) (3) (4) (5) (6) (7)
200001 2,339 61 1,350 279 4,029 41.95 200102 3,904 191 1,645 390 6,130 36.31 200203 2,574 190 1,833 438 5,035 48.88 200304 2,197 32 1,460 633 4,322 49.17 200405 3,250 528 1,904 369 6,051 46.29 200506 5,540 435 2,760 226 8,961 38.18 200607 15,585 896 5,828 517 22,826 31.72 200708 24,573 2,291 7,679 292 34,835 29.46 200809 27,329 702 9,030 777 37,838 27.77 200910(P) (+) (++) 25,609 1,540 8,669 1,945 37,763 32.18 201011(P) + (up to

Nov)
14,025 437 4,237 303 19,002 26.19

Memorandum Items 199192@ 199900 15,483 15,483 200001 to 200405 14,264 1,002 8,192 2,109 25,567 44.21

200506 to 200910 98,636 5,864 33,966 3,737 1,42,223 30.63 200001 to 200910 1,12,900 6,866 42,158 5,846 1,67,790 32.70
Source: Based on DIPP, Fact Sheet on Foreign Direct Investment (FDI), December 2009 and November 2010 and RBI Bulletin May 2010.
@ August 1991 to March 1992. + (P) All figures are provisional and data in respect of Reinvested earnings & Other capital for the years 20092010 & 201011 are estimated as averages of previous two years. ++ Data on equity capital of unincorporated bodies, reinvested earnings and other capital pertains to the period from April 2009 to December 2009. # Hereafter referred to as FDI Equity Inflows. ## Figures for equity capital of unincorporated bodies for 200910 are estimates. 24

Chart 1 Average Reported FDI Equity Inflows during Different Periods

Incidentally, in March 2005, the government announced a revised FDI policy, an important element of which was the decision to allow FDI up to 100% foreign equity under the automatic route in townships, housing, builtup infrastructure and constructiondevelopment projects. 57 The year 2005 also witnessed the enactment of the Special Economic Zones Act, which entailed a lot of construction and township development that came into force in February 2006. Further, it can be seen from Table 5 that acquisition of existing shares of companies by foreign investors contributed substantially to the FDI Equity Inflows 58 and it peaked in 200506 and 200607 to reach almost twofifths of the total FDI Equity flows. Acquisition of shares together with reinvested earnings (which do not represent actual inflows) account for a substantial proportion of the reported total inflows. (Chart 2) Another notable feature of the inflows is that the proportion of the inflows subject to specific government approvals declined from 62.25% in 200001 to 13.55% in 200910 reflecting the progressively greater freedom enjoyed by the foreign investors in making their investment decisions. A development which provides a specific context to the present study is the sharp decline in the reported total FDI Equity inflows during the first eight months of 201011 by 23.88% over the inflows of the corresponding period of 200910. The corresponding
This includes, but not restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) subject to certain guidelines. 58 Inflows through the FIPB/SIA, Automatic and Acquisition routes. 25
57

Table 5 Entry Routewise Distribution of FDI Equity Inflows# in US $ mn

Year Entry Route Total (2)+(3)+(4) Share in Total (%) FIPB/SIA Automatic* Acquisition of shares FIPB/SIA Automatic Acquisition of shares (1) (2) (3) (4) (5) (6) (7) (8)
200001 200102 200203 200304 200405 200506 200607 200708 1,456 521 362 2,339 62.25 22.27 15.48 2,221 802 881 3,904 56.89 20.54 22.57 919 739 916 2,574 35.70 28.71 35.59 928 534 735 2,197 42.24 24.31 33.45 1,062 1,258 930 3,250 32.68 38.71 28.62 1,126 2,233 2,181 5,540 20.32 40.31 39.37 2,156 7,151 6,278 15,585 13.83 45.88 40.28 2,298 17,127 5,148 24,573 9.35 69.70 20.95

200809 4,699 17,998 4,632 27,329 17.19 65.86 16.95 200910 (P) 3,471 18,990 3,148 25,609 13.55 74.16 12.29 201011 (Apr
Nov)(P)

1,604 8,950 3,471 14,025 11.44 63.81 24.75

Source: Based on Table No. 44, RBI Monthly Bulletin, January 2011, p. S 86.
# Excluding investments in Unincorporated Bodies, Reinvested Earnings and Other Capital. (P): Provisional * Includes small quantities on account of NRI investment for the years 200001 and 200102.

Chart 2 Relative Contribution of Reinvested Earnings and Acquisition of Shares to FDI Inflows
Reinvested Earnings and Acquisition of Shares as % of Total FDI Inflows. Acquisition of Shares as % of FDI Equity Inflows. 26

fall in FDI Equity inflows was 27.43%. UNCTAD estimated the fall in Indias FDI inflows during the calendar year 2010 at 31%. 59 From Table 5 (and Chart 2) it can be seen that even this level of inflow was sustained by a sudden increase in the inflows through the acquisition route. From a share of 12.29% in the FDI Equity inflows of 200910, its share doubled to 24.75% in 201011. Acquisition related inflows in value terms during the first eight months of 201011 already exceeded that for the entire 200910. And it is the inflows through the automatic route which were affected substantially rather than those through the Foreign Investment Promotion Board/Secretariat for Industrial Assistance (FIPB/SIA) approval route suggesting that more than the problems in getting the approvals through, it is the voluntary restraint on part of the foreign investors which was responsible for the slow down. The major fall in FDI inflows has caused concern in policy making circles and has become a subject matter of public comments. 60 RBI in particular is now worried about the fall in FDI inflows in the context of higher level of current account deficit and dominance of volatile portfolio capital flows. The volatile FII inflows which accounted for a substantial proportion of the equity flows have in turn contributed to the volatility in equity prices and the exchange rate. RBI underlined the sustainability risks posed by the composition of capital flows and the need for recovery in FDI which is expected to have longerterm commitments.61 Besides environmentally sensitive sectors like mining, integrated township projects and construction of ports, it identified the sectors responsible for the slow down as construction, real estate, business and financial services. 62 It does appear that the role of FDI is now being seen more from the point of managing the current account deficit due to its more stable nature, 63 rather than for it being a bundle of assets. The increased inflows have been characterised by a sharp change in their sectoral composition. By 2008, while the share of manufacturing declined to almost half of what it was in 200564, share of services increased the maximum with mining and agriculture
UNCTAD, Global and Regional FDI Trends in 2010, Global Investment Trends Monitor, No. 5, January 17, 2011, available at http://unctad.org/en/docs/webdiaeia20111_en.pdf. 60 A study by the Standard and Chartered Bank is reported to have identified issues relating to governance (e.g. scams, slow pace of public infrastructure projects and stalled economic reforms) and inflation have hurt investor confidence. It was suggested that unless more sectors are opened up and policies streamlined FDI inflows are unlikely to bounce back. See: Governance, inflation hit FDI flow, at http://timesofindia.indiatimes.com/business/indiabusiness/GovernanceinflationhitFDIflow/ articleshow/7428514.cms. See also: Rajat Guha, The FDI Trickle, The Financial Express, January 2, 2011. 61 RBI, Macroeconomic and Monetary DevelopmentsThird Quarter Review 201011, at http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Macroeconomic%20and%20Monetary%20Dev elopments&fromdate=01/23/2011&todate=01/25/2011 62 ibid. p. 16. 63 The Deputy Chairman of the Planning Commission is also credited with the view that India needed FDI to bridge the rising current account deficit. See: India attractive destination despite some slow down:
59

Montek, at http://economictimes.indiatimes.com/news/politics/ nation/indiaattractivefdidestinationdespite someslowdownmontek/articleshow/7385709.cms 64 Due to the change in reporting format (especially with regard to computer software and electronics) a comparison with the earlier years was not attempted here. Since the inflows increased substantially after

contd
27

related activities receiving marginal amounts. Within services, Construction and Real Estate sector gained the most. The Financial services sector too gained in importance. Major setback was, however, experienced by the IT & ITES sector. While the Energy sector gained relatively, telecommunication services managed to retain its share. Construction & Real Estate and Finance are thus the major gainers in this period. (Table 6 and Chart 3) A further scrutiny of the data suggested that only a few of the Indian investee companies in the former can be categorised as engineering & construction companies like Punj Lloyd, Soma Enterprises and Shriram EPC and the rest are developersa few of these were engaged in setting up IT Parks and SEZs. A similar examination of the inflows to the Financial sector suggested that close to 40% of the inflows were into companies that serve the securities market suggesting that they do not directly contribute to the financing needs of the Indian businesses. These could be termed as adjuncts to the foreign portfolio investors. In 2009, the situation changed somewhat. (Table 7) While the manufacturing sector gained marginally, the Construction and Real Estate sector improved its position further to claim more than onefifth of the inflows. IT & ITES slipped even further with a share of just 2.55% of the total.
Table 6 Major Sectorwise Distribution of FDI Equity Inflows during 20052008#

Sector 20052008 2005 2006 2007 2008 20052008 (1) (2) (3) (4) (5) (6) (7)
Total Inflow (US $ mn) 64,423 4,354 11,119 15,921 33,029 64,423 Of which, (% Share in Total Inflow for the Year) Manufacturing 13,436 41.41 17.44 18.67 20.35 20.86 Finance 12,114 11.68 19.77 18.08 19.77 18.80 Construction & Real Estate 10,754 3.12 11.50 17.41 19.88 16.69 Other Services 8,915 11.31 20.22 10.74 13.52 13.84 IT & ITES 7,016 21.21 17.25 15.18 5.32 10.89 Telecommunications 4,737 3.64 8.37 6.72 7.80 7.35 Energy 2,933 1.44 2.26 3.69 6.15 4.55 Trading 1,367 0.65 0.76 3.62 2.05 2.12 Mining 488 0.15 0.03 2.65 0.17 0.76 Agriculture 136 0.21 0.01 0.75 0.02 0.21 Unclassified 2,529 5.19 2.39 2.50 4.96 3.93 Total 100.00 100.00 100.00 100.00 100.00
Source: Based on the data provided in SIA Newsletter (various monthly and annual issues).
# Excluding those into Unincorporated Bodies, Reinvested Earnings and Other Capital. 200506 and our aim is to understand the developments after 200506, this would be a limitation. A broad indication of the position in 2009 is given in Table 7. 28

Chart 3 Sectoral Composition of Reported FDI Equity Inflows during 20052008 Table 7 Major Sectorwise Distribution of FDI Inflows in 2009

Sector Inflow(US $ mn) Share in Total (%) (1) (2) (3)

1. Services Sector 18,871.60 69.78 Of which, - Housing, Real Estate & Construction 5,658.40 20.82 - Telecommunications 2,557.65 9.50

- Agriculture Services 1,307.37 4.84 - Information & Broadcasting (Including Print Media) 782.77 2.90 - Computer Software* 688.30 2.55 2. Manufacturing 5,791.21 21.41 Of Which - Automobile Industry 1,338.38 4.94 - Electrical Equipments 787.56 2.91 - Metallurgical Industries 470.73 1.74 - Chemicals (Other than Fertilizers) 451.36 1.69 3. Energy 2,137.60 7.90 4. Others 243.73 0.91 Total 27,044.14 100.00
Source: Based on data available in SIA Newsletter, January 2010.
# Excluding those into Unincorporated Bodies, Reinvested Earnings and Other Capital. * Following the previous years distribution, the share of computer software within the broad classification of Computer Software & Hardware has been taken approximately as 96%. 29

Another important aspect of the inflows is the substantial shift in the immediate source country for FDI into India (Table 8). While the prominence of Mauritius for routing foreign capital to India has been well known, the more recent period witnessed further strengthening of Mauritius as the source country. For the period 2005 to 2009, the country accounted for practically half of the total reported inflows. Interestingly, Singapore secured the second position with Cyprus and UAE entering the group of top 10 home countries for FDI into India. Overall, countries categorised as tax havens accounted for much higher share of nearly 70% of the total FDI inflows during the more recent period compared to their share of 40% till 2000 or even the 45% in the immediate preceding period.
Table 8 Indias FDI Equity Inflows*: Top 10 Home Countries Share (in percentage)

S.No. Country Aug. 1991 to Dec. 2000 2001 to 2004 2005 to 2009 (1) (2) (3) (4)
1Mauritius 31.51 38.81 49.62 2Singapore 2.76 2.22 11.33 3U.S.A. 20.10 14.36 7.28 4U.K. 5.44 7.80 5.64 5Cyprus 0.20 0.18 4.41 6Netherlands 5.19 9.48 3.83 7Japan 7.41 7.32 3.22 8Germany 5.61 4.13 2.61 9U.A.E. 0.08 0.66 1.75 10.France 2.59 3.22 1.24 SubTotal 80.90 88.19 90.80 Others 19.10 11.81 9.20 Total FDI Inflows# 100.00 100.00 100.00

Memorandum Items: Nature of Source Country

(i) Premier Tax Havens 7.57 6.27 18.79 (ii) MidRange Tax Havens 31.94 39.26 50.29 (iii) Minor & Notional Tax Havens 0.01 0.02 0.09 Subtotal Tax Havens (i+ii+iii) 39.51 45.55 69.17 (iv) Others 60.49 54.45 30.83 Grand Total 100.00 100.00 100.00

Source: Based on the data provided in SIA Newsletter (various monthly and annual issues). Classification of home countries into Tax Havens is based on: (1) Tax Justice Network, Closing the Floodgates: Collecting Tax to Pay for Development, 2007, commissioned by the Norwegian Ministry of Foreign Affairs and (2) United States Government Accountability Office, Large U.S. Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions, December 2008.
* Excluding NRI investments and those for which country details have not been reported. The ranking is based on their position in 200509. 30

3.2 Analysis of Individual Inflows To understand the above developments better, we now turn to data on individual inflows reported for the period September 2004 December 2009 and analyse these by the sector, homecountry type and nature of inflow route. A crucial element added by us to the official data is classification of the foreign investors. To keep the exercise within manageable limits while also retaining its representative character, we have chosen all the inflows each amounting to US $ 5 mn or more.65 Out of the 29,233 reported inflows through (i) Foreign Investment Promotion Board (FIPB)/Secretariat for Industrial Assistance (SIA) approval route, (ii) automatic route and (iii) acquisition of existing shares of Indian companies by foreign investors covering an investment of US $ 92.36 bn (FDI Equity inflows), the relevant ones were 2,748. This data was taken from successive issues of the SIA Newsletter.66 The 2,748 equity inflows accounted for $80.92 bn out of $92.36 bn or 87.61% of the total inflows reported for the period by the SIA on its website. Since these are individual inflows and a company could have received inflows more than once during the period, we have tried to identify individual companies by taking into account name changes that have occurred. We could thus identify 1,659 recipient companies corresponding to these 2,748 cases of inflows. 67 One major lacuna of this data source is that it does not reveal the share of the foreign investor in the Indian investee company. Since only a few of the 1,659 companies were listed on the Indian stock exchanges, we could not independently ascertain the foreign shares in most cases. From Table 9 it can be seen that the sectoral distribution of inflows represented by the top 2,748 cases broadly corresponds to the overall distribution presented in Table 6. Only about 15% of the selected inflows were subjected to a formal approval process. Overall, about 21% of the inflows were on account of acquisition of existing shares by foreign investors. This practice was, however, more prominent in the case of IT & ITES companies. A word of caution is, however, called for in interpreting the data on acquisitions as the inflows reported under this head could be underrepresenting the extent of acquisition of existing businesses by foreign investors in India.68 The inflows
It is quite possible that the same combination of foreign investor and Indian investee company might have reported other inflows too but which were lower than $ 5mn each. These however, were not taken into account in this exercise. 66 The individual elements of information on inflows are: name of the foreign investor, name of the country from which the amount was remitted, name of the recipient Indian entity, product/activity of the venture, inflow in Indian rupees and equivalent US $. The SIA Newsletter offers three lists, one each for FIPB/SIA approvals, payment against acquisition of existing shares and inflows recorded by the RBI under the automatic route. 67 The number of companies is only an approximation as we might not have been able to take note of all the name changes in case of Indian investee companies. 68 Preliminary results of an ongoing study suggest that inflows into acquired companies accounted for a little less than half of the total FDI inflows (other than that classified as portfolio/PE/VC/HF/roundtripping, etc.) into manufacturing companies See: K.S. Chalapati Rao and M.R. Murthy, Location of FDI in India: A Discussion of Some Less Explored Aspects, paper presented in the international seminar The Globalization of Production Models and Innovation in Emerging Economies: Comparative Research on Subnational Industrial Policies,
65

contd
31

reported under this category should reflect purchase of shares of companies incorporated

in India in the process of their takeover by foreign companies. A few illustrative cases given in Annexure A show that the reported data do not uniformly reflect this process. For instance, the 2,748 large inflows selected by us for detailed examination have three entries relating to Cementrum BVs (Netherlands) investment in Mysore Cements Ltd. Two entries are reported as being under the Acquisition Route and the third under the Automatic Route. Possibly this is due to the fact that the former two relate to the transfer of existing shares of Mysore Cements to Cementrum and in case of the third one, newly created shares of Mysore Cements (expansion of capital) were issued to Cementrum.
Table 9 Sector and Entry Modewise Distribution of Top 2,748 Reported FDI Inflows# during September 2004 and December 2009

No. of Companies Inflow (US $ mn) Share in Total (%) Shares of Different Routes of Inflow (%) FIPB/SIA Approval RBI Automatic Route Acquisi tion Total (1) (2) (3) (4) (5) (6) (7) (8)
Manufacturing 492 18,015 22.26 19.59 56.56 23.85 100.00 Services 1,084 54,739 67.65 14.81 65.87 19.32 100.00 Real Estate & Construction 382 14,526 17.95 2.85 88.68 8.47 100.00 Financial 194 13,974 17.27 18.96 64.60 16.44 100.00 IT & ITES 147 8,283 10.24 10.44 43.73 45.83 100.00 Telecommunications 25 6,292 7.78 29.58 58.72 11.70 100.00 Other Infrastructure 50 4,364 5.39 7.08 64.65 28.26 100.00 Research & Development 5 90 0.11 27.73 56.70 15.57 100.00 Other Services 281 7,209 8.91 27.50 54.92 17.58 100.00 Energy 75 6,251 7.72 3.57 81.06 15.37 100.00 Mining & Agriculture 8 1,911 2.36 1.23 30.01 68.75 100.00 Grand Total 1,659 80,915 100.00 14.68 64.13 21.19 100.00
Source: Based on the actual inflows reported in the monthly issues of SIA Newsletter. # Each amounting to US $ 5 mn or more.

There is also the possibility of when a division/unit of an existing company was taken over by a foreign company it may not always be reported as an acquisition by the same company. What appears to have been followed is that when the foreign investor bought the shares which were already held by another investor, it is treated as a case of acquisition and when new shares of the target are issued to the same foreign investor they are reported under the FIPB/SIA or Automatic Routes as the case may be. It is
held at the Institute for Studies in Industrial Development, New Delhi, during November 1920, 2010.

32

obvious that both these type of inflows are related to a takeover of an Indian company. There could be justification for treating them differently if fresh shares are issued after a long gap when the foreign investor felt the need to infuse more funds to revive the business or expand it. Further, for a proper assessment of the M&A situation in India, it is essential to take note of the acquisition of specific business units of companies as distinct from takeover of the companies themselves. A few illustrative such cases involving foreign companies are listed in Table 10. 69
Table 10 Illustrative Cases of Business Unit Transfers to FDI Companies

Acquirer Acquired Division of

Birla NGK Insulators Pvt Ltd Jayshree Insulator unit of Indian Rayon. & Industries Ltd EBG India Pvt Ltd (now Thyssen Krupp Electrical Steel India Pvt Ltd) Steel division of Raymond Ltd FCB KCP Ltd Sugar Machinery Division of KCP Ltd KBX Motorbike Products Pvt Ltd Kalyani Brakes twowheeler brake production Kirloskar Copeland Ltd Compressor manufacturing division of Kirloskar Brothers Ltd Lafarge Aggregates & Concrete (I) Pvt Ltd Concrete mix division of Larsen & Toubro Ltd Lafarge India Pvt Ltd Tata Steel s Cement Plant Lafarge India Pvt Ltd Cement division of Raymond Ltd Lanxess India Pvt Ltd Chemicals & wind power business of Gwalior Chemical Industries Ltd Novozymes South Asia Pvt Ltd Enzymes business of Biocon Osram India Pvt Ltd Lighting Davison of ECE Industries Ltd Parry Monsanto Seeds Pvt Ltd Seeds division of EID Parry India Ltd Raymond UCO Denim Pvt Ltd Denim unit of Raymond Ltd was transferred to the JV Sinochem India Pvt Ltd Butachlor and alachlor businesses of Monsanto India South Asia Tyres Ltd 2 & 3 wheeler tyre unit of Ceat. Tecumseh Products India Pvt Ltd Compressor manufacturing unit of Shriram group Thyssenkrupp ECE Elevator Pvt Ltd Elevator Division of ECE Industries Ltd VE Commercial Vehicles Ltd LCV unit of Eicher Motors Ltd Vetoquinol India Animal Health Pvt Ltd Animal healthcare business of Wockhardt Ltd

While the manufacturing sector stood at the top with the largest number of companies, its share in the amount received was considerably lower. In terms of number of recipients, Construction & Real Estate stood at the second position with as many as 382
This phenomenon was discussed earlier in some detail in S.K. Goyal, et. al., Foreign Investment Approvals and Implementation Status: A Review (August 1991 December 1994), Institute for Studies in Industrial
69

Development, March 1995. 33

companies. It is interesting to note that only a small proportion (2.85%) of the foreign investment in Construction and Real Estate sector entered through the formal approval route. The Financial sector also has a relatively better position both with regard to the number of companies as also the inflows. While inflows to Mining & Agriculture sectors were subject to least approval mechanism, their share in the total was quite low. The Energy sector is also largely free from initial approval process. R&D (excluding the companies covered in IT&ITES) attracted a miniscule share of the inflows represented by the 2,748 cases. In order to further understand the nature of reported FDI inflows, which could indicate the possible behaviour of the foreign investors and their contribution to enterprise

development, we have classified the foreign investors into different categories keeping in mind the discussion on concepts presented in Section II. The classification heavily relied upon of websites of companies, newspapers, analysts, professional bodies, consultants, investment advisers, etc. as also and ISID Press Clippings archives. Foreign companies which invested in their own area of functioning irrespective of the sector they are engaged in have been categorised as FDI investors. 70 This is because an investor investing in his own line of activity could directly contribute to the functioning of the investee company. Since it was not possible to get the foreign share in each of the companies, all those cases were uniformly treated as FDI. Since there could be some passive investments, our estimate of FDI could be on the higher side. All individual investors whose names suggest that they could be of Indian origin and companies known to have been promoted by them are termed as NRIs. Investments by banks and other financial intermediaries (unless these are in their own respective sectors) are termed as Other Portfolio investments as the main objective of such investments could be capital gains and they on their own may not be able to add directly to the functioning of the domestic investee company. For instance, a bank investing in a manufacturing company is identified as a portfolio investor (e.g., investments of HSBC Bank and Royal Bank of Scotland in Reliance Ports and Terminals Ltd). This is because their involvement could at best be like a financial investor who (whether domestic or foreign) might seek representation on the recipient companys board in case of substantial investments. The same, however, is classified as FDI in case the recipient Indian entity is a bank. Other portfolio investors known to be in the private equity/venture capital activity, hedge funds or sovereign wealth funds (SWF) have been classified as PE/VC/HF investors. 71 There have been some important cases where no specific information was available from
However, cases like Cargill Holdings BV investing in Cargill Capital & Financial Services Pvt Ltd. and HPFS Venture Holdings Ltd. investing in Hewlett Packard Financial Services (India) Pvt Ltd. are also treated as FDI. 71 While venture capital is a subset of private equity and has a different connotation in respect of risky and high technology ventures, available information does not enable an easy and clearcut distinction between the two. Hence these are very often referred to together. 34
70

any source. The classification of such investments took into account the circumstances of the investment and as such there could be some subjective element. 72 Inflows by those who have their main base in India and who have expanded out of India have been treated as cases of Roundtripping. This is irrespective of whether the money brought in by them is raised abroad from other investors, might have been taken out from India by them at some point in the past or generated out of their past foreign investments. In a way this is expected to reflect the fact that control over the investee company remains with Indians who have strong base in India and except for capital inflow there would not be any additionality in terms of foreign management expertise, technology, etc. Apart from the wellknown cases of Essar group, Zee Tele group and Vedanta/Sterlite group, we could identify some more with the help of internet. For instance, Biometrix Marketing Pvt Ltd of Singapore is a subsidiary of Reliance Genemedix PLC (which the Reliance Life Sciences group took over in early 2007). In view of this, the investments of Biometrix in Reliance Ports & Terminals Ltd, Relogistics Infrastructure, Reliance Utilities Ltd and Reliance Gas Transportation Infrastructure Ltd have been put under the roundtripping category by us. The investments by Ballarpur Paper Holding BV and NQC Global (Mauritius) Ltd in Bilt Graphic Paper

Products Ltd and Bilt Paper Holdings Ltd respectively were also placed in this category. Similar is the case with the investments by Ishaan Real Estate and Unitech Corporate Parks (See Annexure B for an illustrative list and Annexures C1, C2 & C3 for diagrammatic representation of three sets of companies). 73 We have also classified the investment of Hitech Infra Ltd (Mauritius) in Krishnapatnam Port Co Ltd (KPCL) as a case of Roundtripping.74
A relevant case is that of Travorto Holdings Ltd of Cyprus which is reported to have invested `1,418 crore in Tata Capital Ltd. Neither a perusal of the prospectus nor a search of the internet or even the documents filed by Tata Capital with the ROC (available on the Ministry of Corporate Affairs website) yielded any details of the foreign investor. It could be any thing: A PE/VC investor, a case of roundtripping or simple portfolio capital seeking good return or FDI by a foreign financial institution. We have classified it as portfolio investment. Another important case is that of Gypsy Rover (or Gytsy Rover?), a foreign investor in BPL Mobile communication Ltd., about which only suggestive information is available but no confirmation could be made. Given the circumstances in which it was made, we have treated it as a case of roundtripping. See for instance: Gypsy Rover Mystery Deepens at http://economictimes.indiatimes.com/articleshow/3830644.cms?prtpage=1. Another case which we could finally trace as an OCB belonging to Mr. P.K. Jani and his associates is that of Satin Ltd of British Virginia, a nonpromoter shareholder of Standard Industries Ltd with 38.86% share in equity. 73 Here too one finds the leading international audit firms playing multiple roles. 74 It has been reported that Hitech Infra had common directors with KPCL and that it had borrowed funds from the Bahrain branch of ICICI. The proposal was reported to have been approved by the FIPB overruling the objections raised by the Department of Revenue in the Ministry of Finance. See: http://steelguru.com/news/index/Njg5Mjk%3D/ FIPB_approves_Hitech_Infra_investment_in_Krishnapatnam_Port%250D%250A.html (accessed last on May 21, 2010). KPCL also received investment from (i) Chinta Investment Private Co Ltd; (ii) CVR Investments Pvt Co Ltd; and (iii) Navaneeta Investments Pvt Co. Ltd (all of Mauritius) for which postfacto approval was given by the Government. Incidentally, the group is known as CVR Group (after the founders name C. Visweswara Rao) and Chinta is the surname of the promoter family. Two of the Indian shareholders of the company are: Navaneeta Agriculture Development Co Ltd and Navaneeta Agritech Pvt Ltd. (See the
72

contd
35

It is relevant to underline here that a good number of companies listed on the London Stock Exchange which have operations in India and which appear to be controlled by Indians are registered in tax havens. (Table 11) some of these in turn have set up SPVs in Mauritius to
Table 11 London Stock Exchange Listed Companies whose Control Appears to be with Indians and which Invested in India

Company Country of Incorporation Activity Listing Date (1) (2) (3) (4)
West Pioneer Properties Ltd British Virgin Islands Real Estate Holding & Development 13122006 India Hospitality Corp Cayman Islands Restaurants & Bars 24072007 Indus Gas Ltd Guernsey, Channel Islands Exploration & Production 06062008 Skil Ports & Logistics Ltd Guernsey, Channel Islands Transportation Services 07102010 IEnergizer Ltd Guernsey, Channel Islands Business Support Services 14092010 Greenko Group PLC Isle of Man Alternative Electricity 07112007 DQ Entertainment PLC Isle of Man Broadcasting & Entertainment 18122007 Eros International PLC Isle of Man Broadcasting & Entertainment 04072006 KSK Power Ventur PLC * Isle of Man Electricity 31032010 OPG Power Venture PLC Isle of Man Electricity 30052008

Dhir India Investments PLC Isle of Man Equity Investment Instruments 12072007 Elephant Capital PLC Isle of Man Equity Investment Instruments 25042007 Hirco PLC Isle of Man Real Estate Holding & Development 13122006 Ishaan Real Estate PLC Isle of Man Real Estate Holding & Development 24112006 Unitech Corporate Parks PLC Isle of Man Real Estate Holding & Development 20122006 Jubilant Energy N.V. Netherlands Exploration & Production 24112010 Photon Kathaas Productions Ltd Singapore Broadcasting & Entertainment 04112010 Mortice Ltd Singapore Business Support Services 15052008 Essar Energy PLC * UK Integrated Oil & Gas 07052010 Vedanta Resources * UK (Parent in Bahamas) General Mining 10122003
Except for those marked with an asterisk (*) which are listed on the UK Main Market, all are listed on the Alternative Investment Market (AIM) of the London Stock Exchange. companys filing with the Bombay Stock Exchange available at: http://www.bseindia.com/downloads/ipo/200933116251KPCLDisclosure%20Document%20Final.pdf. (accessed last on May 21, 2010) 36

invest in India. While we do not know how the shareholding of the founders was financed, in a few cases institutional investors appear prominently in the list of shareholders. To that extent, it suggests that FII funds instead of coming directly into the Indian stock market, in which case they would have been classified as portfolio capital, are coming via the LSE listed companies into India as FDI. Had they subscribed to GDR/ADRs of Indian companies, the funds would again have been classified as foreign portfolio inflows. This was the case with some other nonIndian controlled LSE listed companies as well. As we shall see later, since a good part of such inflows was not subjected to the FIPB/SIA route, one could say that it is neither subjected to FII nor FDI regulations. Going by the foregoing criteria, out of the total $81 bn inflows under study less than half can be termed as FDI. The next most important category is PE/VC/HF with almost 27% in the total followed by the Roundtripping variety with a share of about 10%. It needs to be specified here that Roundtripping investments which also have the characteristics of PE/VC/HF have been clubbed with total PE/VC/HF investments. If these are also taken into account, the share of Roundtripping investments will work out to about 14% of the total. Other portfolio investments work out to a little more than 9% and NRI investments, some of

which can be termed as portfolio investments, are about 5% of the total. What strikes one most is that PE/VC/HFs were more important in case of the services sector compared to the manufacturing sector. (Table 12 and Chart 4) Within the services, they were more important for the Construction & Real Estate sector. What could be termed as FDI accounts for only 13%
Table 12 Sector and Type of Foreign Investorwise Distribution of Top 2,748 Inflows

Sector Total Inflow (US $ mn) Share of Different Types of Foreign Investors (%) FDI Other Portfolio PE/VC/ HF # Round Tripping Only NRI Unclassif ied Total (1) (2) (3) (4) (5) (6) (7) (8) (9)
Total 80,915 47.85 9.25 26.91 10.30 5.22 0.48 100.00 A. Manufacturing 18,015 61.57 8.82 15.48 8.05 5.47 0.61 100.00 B. Services 54,739 44.06 8.51 31.80 9.85 5.28 0.49 100.00 Construction & Real Estate 14,526 12.82 9.77 58.17 13.25 4.43 1.56 100.00 Financial 13,974 58.70 5.11 29.09 2.62 4.28 0.21 100.00 IT & ITES 8,283 61.35 2.85 19.95 1.19 14.66 0.00 100.00 Telecommunications 6,292 80.75 3.79 7.66 7.80 0.00 0.00 100.00 Other Infrastructure 4,364 14.11 29.60 13.15 38.19 4.96 0.00 100.00 Research & Development 90 56.87 0.00 43.13 0.00 0.00 0.00 100.00 Other Services 7,209 44.72 10.55 29.79 11.71 3.03 0.19 100.00 C. Energy 6,251 36.08 19.10 18.72 20.47 5.52 0.10 100.00 D. Mining & Agriculture 1,911 65.42 1.99 21.43 11.16 0.00 0.00 100.00
Source: See Table 9.
# includes investment that could be categorised as roundtripping. 37

Chart 4 Type of Investorwise Distribution of Top 2,748 Inflows

of the inflows into this sector.75 This sectors inflows are also important for Roundtripping investment. Most of the investment in the Telecommunications sector is in the form of FDI. Understandably, the R&D sector (excluding the IT&ITES) received investment only from two types of investors: either FDI or PE/VC/HF. Other infrastructure sectors depended heavily on portfolio or Roundtripping investment. In a way, this might be suggestive of the position that in most of the infrastructure sectors foreign investment offered little except for financial resources. The financial sector too was exposed to a large proportion of PE/VC/HF

investments and portfolio capital. While FDI accounted for less than half of the total inflows studied, only a little more than onefourth of it went into the Manufacturing sector which means that manufacturing FDI accounted for just about 14% of the total reported inflows during the period. (Table 13) A good percentage of it went into Financial services (21.19%), IT&ITES (13.12%) and Telecommunications (13.12%). Important recipients of portfolio capital are manufacturing (21.25%), Construction and Real Estate (18.97%), other infrastructure (17.26%) and Energy (15.96%). Construction and Real Estate sector had the lions share of investments by PE/VC/HFs with 38.8% share followed by Financial Services with 18.67%. The Manufacturing Sector received 12.81% of their investment. Prominent recipients of Roundtripping investment are Construction and Real Estate (23.10%), Other Infrastructure (20%) and Energy (15.22%). While 80% of the PE/VC/HF investment is in the Services sector, Construction and Real Estate alone accounted for 38.80% of the total followed by the financial sector with 18.67%. Though total Round Tripping investments were slightly more evenly distributed compared to PE/VC/HF investments, nearly 70% of it is in services with Construction and Real Estate alone claiming onethird. Interestingly, 60% of the
This is by companies like EMAAR of UAE and Capitaland of Singapore. 38
75

investment that could simultaneously be classified as both PE/VC/HF and Roundtripping went into the Construction and Real Estate sector. (Chart 5)
Table 13 Sectoral Distribution of Various Types of Top 2,748 Inflows (in Percentages)
Sector FDI Portfolio PE/VC/HF (incl. Round Tripping) Round Tripped PE/VC/HF Round Tripping (excl. PE/VC/HF) Round Tripping Total NRI (1) (2) (3) (4) (5) (6) (7) (8)
Manufacturing 28.65 21.25 12.81 10.84 17.40 15.56 23.35 Services 62.30 62.29 79.94 85.19 64.69 70.45 68.48 Construction & Real Estate 4.81 18.97 38.80 60.11 23.10 33.49 15.25 Financial 21.19 9.54 18.67 9.85 4.39 5.92 14.16 IT & ITES 13.12 3.16 7.59 1.75 1.18 1.34 28.77 Telecommunications 13.12 3.19 2.21 3.23 5.89 15.29 0.00 Other Infrastructure 1.59 17.26 2.63 0.38 20.00 4.34 5.12 Research & Development 0.13 0.00 0.18 0.00 0.00 0.00 0.00 Other Services 8.33 10.17 9.86 9.88 10.13 10.06 5.18 Energy 5.83 15.96 5.37 3.96 15.36 12.16 8.18 Mining & Agriculture 3.23 0.51 1.88 0.00 2.56 1.84 0.00 Grand Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Source: See Table 9. Note: Unclassified ones are not shown here.

Chart 5 Sectoral Composition of Private Equity and RoundTripped Investments

39

Interestingly, almost threefourths of the PE/VC/HF capital which is a prominent source for the Construction & Real Estate sector, came through the automatic route. A further 17% followed the acquisition route with only about 9% being subjected to government approval. (Table 14 and Chart 6) Similar is the case with the inflow that could be termed as Roundtripping. Onethird of the Other Portfolio capital took the acquisition route thereby suggesting that much of it was not adding to the existing investment. In any case, it is unlikely to be interested in/capable of directly contributing to enhance the functioning of the investee companies. While the proportion of inflows that are subject to a formal approval process is generally low, the proportion surprisingly is the highest for FDI. It does appear that an overwhelming portion of the foreign investment made under categories other than FDI does not go through a formal approval process. At 36%, nonacquisition type FDI accounts for only a shade over onethird of the total report equity inflows.
Table 14 Foreign Investorwise and Entry Routewise Distribution of the 2,748 FDI Inflows in Percentages
Type of Foreign Investor Total Inflow ($ mn) FIPB/SIA Approval RBI Automatic Acquisition Total (1) (2) (3) (4) (5) (6)

FDI 38,717 22.77 52.99 24.25 100.00 Portfolio 7,481 3.89 62.55 33.56 100.00 PE/VC/HF (incl. RT) 21,778 8.94 74.07 17.00 100.00 Round Tripping (excl.

PE/VC/HF)
8,333 8.35 73.70 17.95 100.00 NRI 4,222 1.65 97.12 1.23 100.00 Unclassified 385 16.39 83.61 0.00 100.00 Grand Total 80,915 14.68 64.13 21.19 100.00
Source: See Table 9.

Chart 6 Share of Inflows subjected to Specific Government Approvals for Different Types of Inflows
40

An important and wellrecognised dimension of Indias FDI is the fact of foreign investors extensive use of recognized tax havens for entry into India. Table 15 (and Chart 7) presents the use of such countries by different categories of foreign investors. In a number of cases, predominantly NRIs and acquisition cases, the data source did not report the country of the foreign investor. For purposes of this exercise, such cases had to be excluded. While in the overall, the share of tax havens conforms to the general pattern, it is apparent that the route is exploited more by investors under the PE/VC/HF and
Table 15 Type of Foreign Investorwise and Source Country Typewise Distribution of the 2,748 FDI Equity Inflows
Type of Foreign Investor Total Inflow ($ mn) Of which Share of Different Types of Source Countries (%) (classified investments only) Classified* Unidentified Premier Tax Havens Other Tax Havens

Other Countries Total Classified (1) (2) (3) (4) (5) (6) (7) (8)

FDI 38,717 34,874 3,843 15.93 46.27 37.80 100.00 Portfolio 7,481 4,552 2,929 25.73 31.67 42.60 100.00 PE/VC/HF incl. RoundTripping 21,778 20,985 793 15.84 72.86 11.30 100.00

PE/VC/HF & RT 3,252 3,134 98 7.23 91.99 0.78 100.00

Round Tripping (excl. PE/VC/HF) 8,333 7,508 825 30.07 59.59 10.34 100.00 NRI 4,222 1,444 2,778 50.94 1.98 47.07 100.00 Unclassified 385 375 10 40.16 48.75 11.09 100.00 Grand Total 80,915 69,737 11,179 18.92 53.85 27.23 100.00
Source: See Table 9.
* Excluding the cases where the country of the foreign investor was not identified. These mostly involved the acquisition of existing shares and NRIs. For the basis of country classification, see: Table 8.

Chart 7 Share of Tax Havens in the Inflows by Different Types of Investors

41

Roundtripping categories. Further from Table 16 (and Chart 8) it can be seen that Telecommunications, Construction and Real Estate activities as also IT/ITES extensively used the tax havens which by all indications could not be the primary home countries. Manufacturing and Energy sectors used this route to the least extent. Practically the entire amount that is Roundtripped by Indian PE/VC/HF investors came through taxhavens as indicated by Bain & Co and cited in Section II.
Table 16 Sectorwise and Source Country Typewise Distribution of FDI Inflows
Sector Identified Inflows * ($ mn) Share of Different Types of Source Countries (%) Premier Tax Havens Other Tax Havens Other Countries Total (1) (2) (3) (4) (5) (6)
Manufacturing 14,484 17.15 32.21 50.64 100.00 Services 49,399 19.72 62.51 17.78 100.00 Construction & Real Estate 13,256 15.71 74.19 10.10 100.00 Financial 12,683 23.12 54.38 22.50 100.00 IT & ITES 7,481 17.13 72.83 10.03 100.00 Telecommunications 5,742 9.39 84.90 5.72 100.00 Other Infrastructure 3,516 48.33 22.90 28.77 100.00 Research & Development 90 0.00 58.76 41.24 100.00 Other Services 6,630 18.17 44.71 37.12 100.00 Energy 5,283 11.10 34.96 53.94 100.00 Primary 572 67.19 28.68 4.12 100.00 Grand Total 69,736 18.92 53.85 27.23 100.00 Source: See Table 9. * Excluding the cases where the country of the foreign investor was not identified. These mostly involved the acquisition of existing shares and NRIs.

For the basis of country classification, see: Table 8.

Chart 8 Share of Tax Havens in the FDI Equity Inflows of Different Sectors
42

3.3 Other Aspects Apart from these broad but important characteristics of the inflows, we did come across certain aspects of the reported inflows which suggest that the reported inflows may not strictly conform to the international practice of identifying an FDI relationship. For instance, some of the reported inflows into listed companies did not appear among the shareholders with at least 1% shareholding either because they had already withdrawn their investment or their share (either initially or remaining at the end of December 2008) amounted to less than 1% of the investee companys equity capital.76 Further evidence to the fact that not all inflows would qualify to be FDI in the sense that is normally understood is provided in Table 17 and Table 18. The foreign investors shown in Table 17, most of which are evidently investment companies/fund managers do not qualify as FDI even on the basis of the percentage of shares held by them. We have classified these investments under PE/VC/HF or portfolio categories as the case may be. It would be difficult to visualize that Various FIIs and NRIs would exhibit the characteristics associated with foreign direct investors. Similar is the case with the individuals shown in Table 19 who probably subscribed to the shares of a housing project. It is highly unlikely that anyone of them would be holding a stake that would exert significant influence on the management of Home Sweet Home Developers Ltd. Further, irrespective of the perspective regarding PE/VC/HF investments, it is difficult to visualize the types of inflows shown in Tables 18 & 19 and the ESOPs given to the employees of HCL Technologies Ltd, as FDI. Even going by the internationally adopted criteria all these inflows should have been treated as portfolio capital. This opens up a critical aspect of reporting of FDI data in India. Irrespective of the share of such inflows in the total reported FDI, these examples are important because they illustrate that India has not been looking for the critical aspects of internationally propagated FDI definition in classifying the inflows. While international best practices are sought to be followed, the critical aspects of minimum qualifying share in equity capital, ability to significantly influence management and lasting interest may not have been taken into consideration while compiling Indias FDI statistics. This was evident from the discussion presented in Section II. Merely looking for 10% share of a single foreign shareholder for identifying an FDI company, which the RBI seems to have followed for its studies on Finances of FDI Companies, without taking into consideration that could be a portfolio investor (including an FII) opens up the possibility of classifying the companies listed in Table 20 as FDI companies. It would be difficult to visualise that these can exhibit the characteristics associated with an FDI company and that the foreign shareholder would contribute anything more than risk capital (if the shares were acquired in the secondary
There is, however, a possibility that some of the foreign investors might have subscribed to convertible preference shares/bonds which could get reflected in the equity after conversion. 43
76

Table 17 Reported FDI inflow into Some Listed Companies

Indian Company Foreign Investor Inflow Route & Month and Year of Reporting Share (%) in Equity Capital as

on 31122008 (1) (2) (3) (4)

ABG Shipyard Ltd Merlion India Fund I Ltd ROct.2005 8.76 Allcargo Global Logistic Ltd New Vernon Pvt Equity Ltd ROct.2006 3.81 Anant Raj Industries Ltd Master Trust Bank of Japan Ltd. A/c HSBC Indian Equity Mother Fund RAprSep. 2006 1.36 Anant Raj Industries Ltd Quantum (M) Ltd RApr.2008 1.50 Anant Raj Industries Ltd Lehman Brothers Asia Ltd RApr Sep.2006 1.82 Bharat Hotels Ltd Dubai Ventures Ltd RMay.2008 5.00 Dalmia Cement (Bharat) Ltd Boron (I) Ltd ROct.2006 4.42 Development Credit Bank Ltd GRA Finance Corpn. Ltd. RDec.2007 1.87 Edelweiss Capital Ltd Lehman Brothers Netherlands Horizon BV RFeb.2008 1.80 Edelweiss Capital Ltd Shuaa Capital Psc RFeb.2008 2.20 Hexaware Technologies Ltd GA Global Investments Ltd RNov.2007 7.36 Indiabulls Financial Services Ltd Deutsche Bank Trust Company R Aug.2005 1.31 Jindal Poly Films Ltd SAIF II Mauritius Co Ltd ACAprSep. 2006 6.66 JK Paper Ltd International Finance Corp RAprSep.2006 9.84 Jubilant Organosys Ltd GA European Investments Ltd ACJul.2005 7.93 KPR Mill Ltd Ares Investments RFeb.2007 6.78 Punj Lloyd Ltd Merlion India Fund III Ltd RDec.2005 3.19 Sarda Energy & Minerals Ltd LB India Holdings Mauritius Ii Ltd RMar.2008 7.73 Torrent Pharmaceuticals Ltd GPC Mauritius ACOct.2007 & ACJan.2008 4.83 Yes Bank Ltd Orient Global Tamrind Fund Pte Ltd RApr.2008 4.95
Source: Companywise details of FDI inflows reported in the SIA Newsletter, various issues. The Shares in equity
capital of the respective companies shown in column (4) are taken from the Bombay Stock Exchange website. In Column (3) R indicates that the inflow was through the Automatic Route and AC indicates the Acquisition of existing shares by the foreign investor. 44

Table 18 Illustrative List of Reported Inflows which do not Qualify as FDI

Indian Company Foreign Investor Reporting Month # Inflow (` Cr.) (1) (2) (3) (4)

Akruti Nirman Ltd Various Apr.2007 155.34 Arshhiya Technologies Various FIIs May2008 350.00 Bajaj Auto Finance Ltd Various Oct.2007 157.50

Bajaj Auto Finance Ltd Various NRIs Dec.2007 126.48 Bharat Earth Movers Ltd 42 FIIs Jan.2008 147.15 Gitanjali Gems Ltd Various NRIs/FIIs Nov.2007 109.11 Hindalco Industries Ltd Various Feb.2008 666.58 Hindustan Oil Exploration Co Ltd Various NRIs/FIIs Sep.2008 220.36 Housing Development & Infrastructure Ltd Various May2008 706.67 IRB Infrastructure Developers Ltd Various IPO Sep.2008 476.61 Kotak Mahindra Bank Ltd Various Feb.2008 1,615.00 Mahindra & Mahindra Ltd Various FFI,FC, FFI ApSep.2006 260.63 Mahindra Gesco Developers Ltd Various Jun.2007 324.08 Mercator Lines Ltd Various FIIs May2008 196.97 Mercator Lines Ltd Various NRIs May2008 21.56 Mundra Port and SEZ Ltd Various NRIs/FIIs Feb.2008 710.57 Panacea Biotec Ltd As Per List Attached Nov.2006 118.31 Panacea Biotec Ltd As Per List Nov.2006 101.59 Phoenix Mills Ltd Various FIIs Dec.2007 317.72 Reliance Communications Ltd Various FIIs May2008 845.48 Sterlite Industries Ltd Various NRIs Oct.2007 1,667.64 Tata Consultancy Services Ltd Group of NonResident Mar.2006 2,148.61 Tech Mahindra Ltd Various Jul.2007 171.97 Welspun Gujarat Stahl Rohren Ltd Various FIIs Feb.2008 302.15 Zee Telefilms Ltd Various Investors Apr.2008 152.49
Source: Companywise details of FDI inflows reported in the SIA Newsletter, various issues.
# All these inflows were through the Automatic Route.

Table 19 Reported FDI Inflows on account of Home Sweet Home Developers Ltd.
Name of the Foreign Investor Inflow (` mn) Name of the Foreign Investor Inflow (` mn)

Archana Vadya 0.01 Satya Kavachri 0.01 Ashish Srivastava 0.01 Satya Simha Prasad 0.01 Baiju Anand G Nair 0.01 Senthil Palanisamy 0.01 Brajesh Goyal 0.01 Shiddalingnagouda Rati 0.01 C.Sivanandan 0.01 Srikanth Patibanda 0.01 Devi Prasad Ivaturi 0.01 Srikumar Gopakumar 0.01
45

Name of the Foreign Investor Inflow (` mn) Name of the Foreign Investor Inflow (` mn)

Eswar Vemulapalli 0.01 Srinivasu Sudireddi 0.01 Jayakrishnan Radhakrishnan 0.01 Srinvasa R Gaddamadugu 0.01 Krishna Kumar Vavilala 0.01 Sukir Kumaresan 0.01 Lakkoji 0.01 Venkateshwarlu Ravikant 0.01 Leela Prasad Koneru 0.01 Vijaya Kumar Christopher 0.01 Nakkapalli Veera Sekhar Babu 0.01 41 Non Resident Indians 0.21 Nirupama Henjarappa 0.01 Six NRI s One share each 0.03 Pradeep Shantaram Bhat 0.01 Six NRIs 1 share each 0.03 Raghu Bharadvaj 0.01 Ravi Kanth V. 0.01 Rama Murthy Setty 0.01 Suman Vijayagopal 0.01 Ramesh Babu Doddi 0.01 1.Srivamsi Madhwapthy 2.Ravi Mikkilineni 0.01 Ramesh Babu Vusirikala 0.01 Padmanabha C.J. 0.01 Ranganatha Bande 0.01 Raju Nunna 0.01 Sangeeth Omanama 0.01 Ramesh Racheria 0.01
Source: Inflow details reported in the SIA Newsletter, various issues of 2006.

market, even that contribution cannot be counted upon). In fact, assuming that PE/VC/HF investors would exercise management control an appropriate question to ask

would be whether one could distinguish between such domestic and foreign investors in terms of their management inputs and contribution to the performance of the domestic company. Interestingly, Hymer pointed out that such foreign investors seek control over the enterprise in order to ensure the safety of his investment and that the reason applies to domestic investment as well. These are the cases that fall under Hymers Type 1 FDI category. In fact, it might not be possible to distinguish domestic and foreign financial investors especially when the latter are promoted by locals after gaining considerable experience in similar businesses abroad. For instance, a perusal of senior management (including Indians) and other Indians working with General Atlantic, a leading global investment firm, reveals that most of these have commonality in terms of the business schools they attended and past employment with consultancy/investment firms. (Annexure D) This is also true when operations in the host country are handled by locals with foreign investors exercising control but not strategy. 77 Then there are Indian companies which float offshore companies and bring back the funds raised abroad as FDI. It is evident that analysis of FDI companies operations based on the sole 10%
It is even said that Whereas an Indianbased private equity firm is more likely to understand the particular dynamics affecting an Indian company, USbased firms often mistakenly approach investment opportunities with a belief that a model that works in the US will transpose successfully to India. It can be difficult for them to get the balance right between introducing best practice and discarding what is irrelevant and possibly even damaging for Indian companies. See: Private Equity in India: An Executive Round Table at http://content.spencerstuart.com/sswebsite/pdf/lib/PrivateEquityIndia_2007_web2.pdf (Accessed on May 18, 2010). 46
77

foreign equity criterion is likely to come out with erroneous results. Added to such financial investors, if companies in which Indians themselves hold shares and control enter as FDI investors, there will be very little justification for classifying such investment as FDI. As has been mentioned earlier, such cases appearing among the 2,748 inflows have been treated as roundtripping ones by us. (Table 21) An analysis which treats such companies as FDI companies could obviously end up projecting a misleading picture.
Table 20 Companies which could be Classified as FDI Companies by the 10% Criterion
Name of the Indian Company Name of the Foreign Investor holding 10% or more in Equity Share in Equity (%) (1) (2) (3)

Apollo Hospitals Enterprises Ltd Apax Mauritius FDI One Ltd, a PE Company 11.41 Binani Cement Ltd JP Morgan Special Situations Mauritius Ltd 11.59 Hindustan Sanitaryware & Inds. Ltd HPC Mauritius Ltd, investment management co. 14.99 Infotech Enterprises Ltd GA Global Investments Ltd, investment management Co. 12.86 IOL Chemicals & Pharmaceuticals Ltd India Star Mauritius Ltd, a PE Company 14.80 Kanoria Chemicals & Industries Ltd International Finance Corp (IFC), World Banks private sector investment arm 10.84 Max India Ltd Parkville Holdings Ltd, a Warburg Pincus co. 12.83 Modern Dairies Ltd International Finance Corp (IFC) , World Banks private sector investment arm 19.90 Moser Baer India Ltd Woodgreen Investments Ltd, Warburg Pincus

co. 13.10 Shriram EPC Ltd Bessemer Venture Partners Trust 23.84 Spanco Telesystems and Solutions Ltd Monet Ltd., s/o ChrysCapital, a PE 14.92 Varun Shipping Co Ltd Caledonia Investments Plc, an investment trust 11.16 Alfa Transformers Ltd Strategic Venture Fund Mauritius, Venture Fund 14.93
Source: Based on the shareholding patterns as on September 30, 2010, available at the Bombay Stock Exchange
website http://www.bseindia.com.

It is evident that one can place far more reliance on RBIs FCRC studies which followed stricter criteria than on those based on the broader FDI criterion. At one point of time in the past, the Research & Statistics Division of the then Department of Company Affairs used to bring out Factsheets on Foreign Subsidiaries and Branches in India. Unfortunately, while there is far more emphasis on attracting FDI in India now, reliable and representative data sources on FDI company operations have not developed commensurately. In fact, one could affirm that there has been marked deterioration. Even the Research & Statistics division has stopped bringing out Factsheets on Foreign Branches and Foreign Subsidiaries, not to speak of those Indian nongovernment
47

companies with a minimum of paidup capital. The emphasis has been on relaxing policies and improving procedures.
Table 21 Companies which could be Classified as FDI Companies by the 10% Criterion and where the Companies are Constituents of Some Indian Promoter Groups
Indian Company Foreign Promoter Share in Equity (%) (1) (2) (3)

Sterlite Industries India Ltd Twinstar Holdings Ltd 56.98 Madras Aluminium Co. Ltd Twinstar Holdings Ltd. 80.00 Zee Entertainment Enterprises Ltd Delgrada Ltd 17.20 Essar Shipping Ports & Logistics Ltd Teletech Investments India Ltd 20.56 United Breweries Holdings Ltd Watson Ltd 21.19 Essel Propack Ltd Lazarus Investments Ltd 10.90 Rama Phosphates Ltd NRI Investors Inc 31.86 Exide Industries Ltd Chloride Eastern Ltd 48.87 Zensar Technologies Ltd. Pedriano Investments Ltd 21.55 Punj Lloyd Ltd Cawdor Enterprises Ltd 24.94 Patni Computer Systems Ltd iSolutions Inc 14.25 Ispat Industries Ltd Ispat Steel Holdings Ltd 17.00 HCL Technologies Ltd HCL Holdings Pvt Ltd 18.26
Source: Based on the shareholding patterns as on September 30, 2010, available at the Bombay Stock Exchange
website http://www.bseindia.com.

3.4 Private Equity and Venture Capital In view of the important place of PE/VC/HFs in the reported FDI inflows it would be in order to pay specific attention to their characteristics keeping in view the expectations from such investments in general and from foreign companies in particular. While there is no systematic reporting of PE/VC/HF investments by the government, some private agencies collect data from various sources and bring out reports periodically to give their own assessment of the situation. Observations based on such studies would always have classification and coverage problems and have to be interpreted with caution. Nevertheless, we shall present a few impressions emerging out of the available data and information. It appears that globally private equity investments have been shifting to emerging markets.

Though their share fluctuated, it increased from about 4% in 2001 to the peak of 22.20% in 2009. The reported amounts were $ 1.93 bn in 2001 and $ 7.20 bn in 2004. Thereafter the investments increased rapidly to $ 53.14 bn in 2007. In the subsequent two years, the amount fell to reach $ 22.10 bn in 2009. The share of BRICs (including South Africa) within the emerging markets remained about half. Within BRICs, Indias position improved visa48 vis China till 2007 when it managed to overtake China, though it fell behind China in the subsequent two years.78 The Working Group on Foreign Investment also acknowledged this when it said: FDI inflows began in the early 1990s and have gathered momentum, particularly after India became important to global private equity funds. 79 Though precise breakup between foreign and local PE/VC/HF investors is not available, it does appear that foreign funds dominate the PE/VC/HF scene in India. For instance, according to SEBI, at the end of December 2009, against the total investments of `26,827 crore by Foreign Venture Capital Investors (FVCIs) registered with it, investments by Indian Venture Capital Funds (VCFs) was of the order of `15,232 crore.80 A closer examination of the list of registered FVCIs, however, suggests that some of the FVCIs were indeed promoted by Indian financial institutions like the ICICI, IDFC, UTI and IL&FS.81 (Table 22) In view of this, not all FVCIs can be expected to exhibit the characteristics of a foreign venture capital. Yet another aspect to the registered FVCIs, relevant in the overall context of this study is that out of the 144 FVCIs as many as 140 were based in Mauritius (including the ones related to Indian institutions; expectedly most of these (once again including those promoted by the Indian institutions) are located at just a few addresses), two in Cyprus and the remaining two in Singapore. Another dimension to the domestic VCFs is that some of these belong to Indian large business group and financial institutions. Composition of top management and investment advisers of some of the registered VCs suggests that it is difficult to classify them either as Indian or foreign. 82 From probably a more systematic study of the sector (foreign and domestic funds together) in India, we find that Manufacturing was not the favoured area for PE/VC investment as telecom & media, engineering & construction and financial services claimed increasingly larger shares. 83 (Annexure E) Companies which are in their late stage of development or which are already listed on the stock exchanges were the most
EMPEA Industry Statistics & PitchDeck available at http://www.empea.net/MainMenuCategory/Resource Library/EMPEAIndustryStatisticsPitchDeck1H2010pptPublic.aspx 79 Ministry of Finance, Report of the Working Group on Foreign Investment, 30 July 2010, p. 45. 80 Excluding the `9,661 crore investment foreign FVCIs in Indian VCFs. 81 Were getting enquiries from several investment managers now. The idea of setting up offshore funds is fast catching among Indian asset management companies, said Chetan Nagendra, head of India practice, Harneys Westwood & Riegels, a firm that services clients setting up businesses in British Virgin Islands (BVI) and Cayman Islands. See: Indian mutual funds approach zero tax destinations to raise offshore capital at http://economictimes.indiatimes.com/articleshow/5582011.cms?prtpage=1 (last accessed on May 24, 2010). Also relevant here are the observations of Bain & Co cited in Section II. 82 E.g. Helio Venture Partners India LLC, Mauritius FIRE Capital Fund, Nexus India and NEA IndoUS Ventures. Confusion of a similar kind is unavoidable when going though the Ernst & Youngs joint publication with Outlook Business magazinePrivate Equity in Numbers, December 2008. 83 Thillai Rajan A and Ashish Deshmukh, On Top of the World; Still Miles to Soar, India Venture Capital and Private Equity Report, Indian Institute of Technology Madras, 2009. By many indications it was the real estate sector that the funds including VCs were targeting. Relaxation of FDI policy and encouragement to SEZs gave a boost to this phenomenon. 49
78

Table 22 Illustrative Cases of Overlapping of Domestic and Foreign Venture Capital Investors Registered with SEBI

Foreign Venture Capital Investor(s) Corresponding Domestic Venture Capital Fund(s)

(1) (2)
2i Capital PCC Indian Enterprise Fund AIF III Sub Pvt. Ltd (sponsored by UTI) UTI India Technology Venture unit scheme Aureos Offshore India Opportunities Fund, LLC Aureos South Asia Fund LLC Aureos India Fund Avigo venture Investments Ltd Avigo India Private Equity Trust BTS India Private Equity Fund Ltd BTS India Private Equity Fund Footprint Ventures (Mauritius), Ltd Footprint Venture India Fund IDFC Private Equity (Mauritius) Fund II IDFC Private Equity (Mauritius) Fund III IDFC Project Equity Company II (Mauritius) Ltd IDFC Project Equity Company IV (Mauritius) Ltd IDFC India Infrastructure Fund 3 IDFC Infrastructure Fund IDFC Infrastructure Fund 2 Dynamic India Fund 1 Dynamic India Fund III Dynamic India Fund V Dynamic India Fund IV (ICICI Real Estate Fund) India Advantage Fund 1 India Advantage Fund III India Advantage Fund IV India Advantage Fund V India Advantage Fund VIII ICICI Econet Fund ICICI Emerging Sector Trust India Leverage Fund LLC IL&FS ORIX Trust IL&FS Private Equity Trust JM Financial Old Lane India Corporate Opportunities II Ltd (previously known as JM Financial India II Ltd) JM Financial India Fund JM Financial Property Fund KSK Emerging India Energy Pvt Ltd I Small is Beautiful SEAF India International Growth Fund SEAF India Investment Trust Ventureast Biotech Fund Ventureeast Telnet India Fund Zephyr Peacock India I Zephyr Peacock India II Trust
Source: Selected from the lists available at the SEBI website http://www.sebi.gov.in.

preferred recipients. In this, the study also found that while majority of early stage investments are contributed by domestic investors, a large share of PIPE 84 and buyout investments are funded by foreign investors, suggesting the tendency of foreign investors to invest in established businesses. 85 Further, it was noticed that as many as 75% growth stage investments exited in less than 2 years underlying the shortterm nature of PE/VC investments in India. PE/VC investments in India were indeed put
PIPE stands for Private Investment in Public Equity i.e., in already stock exchange listed companies. This analysis suffers from serious classification issues. 50
84 85

under the category of quick flips. 86 A recent study noted that an overwhelming proportion of PE/VC fund managers have experience in financial management thereby further underlining their financial investment nature in India. 87 It is evident that Indias experience with PE/VC investments does not support the traditional view for such investments and it is highly unlikely that India would be able to derive the benefits associated with such investments unless there is a drastic change in their approach. It is,

therefore, further justified to term them as portfolio investments instead of treating them as FDI merely because the respective investors happen to hold the minimum qualifying equity level of 10%. Further, given the manner in which private equity funds are floated and run, to which venture capital belongs to, one wonders in what way foreign venture capital differs from domestic private venture capital and why should the former be preferred to the latter. In any case, it is extremely relevant to note that Roundtripping related PE/VC/HF investments and Roundtripping as such gained in importance in the total inflows while the other PE/VC/HF investments declined relatively in line with international experience. (Table 23 and Chart 9). It can be seen further that it is the portfolio investments comprising of PE/VC/HF, NRIs and Other Portfolio types which declined sharply in 2009 while there was only a slight dip in what can be termed as realistic FDI inflows. In contrast, total Roundtripped investments registered a marginal increase. (Table 24 and Chart 10). Instead of the aggregates, an analysis of the individual inflows could thus throw better light on the factors/investors that are responsible for the slowdown during 2010.
Table 23 Growing Importance of Roundtripping Inflows

Year Share in Total of 2,748 Inflows (%) PE/VC/HF Only Roundtripped PE/VC/HF Roundtripping Only Total Roundtripping Cols. (3) + (4) (1) (2) (3) (4) (5)
2004 (SepDec.) 29.83 0.00 1.68 1.68 2005 15.96 1.92 1.38 3.30 2006 20.94 2.81 1.28 4.10 2007 34.87 2.88 9.19 12.07 2008 23.20 3.72 11.48 15.19 2009 16.67 6.09 14.94 21.03 Total 22.90 4.02 10.30 14.32
A. Thillai Rajan, A LifeCycle Analysis of VCPE Investments in India, The Journal of Private Equity, Winter 2010, Vol. 14, No. 1, pp. 7282. 87 A. Thillai Rajan and Vishal Kamat, India Venture Capital and Private Equity Report 2010: Contours of Smart Capital, Indian Institute of Technology, Madras, 51
86

Chart 9 Share of Different Categories of Foreign Investors in Inflows during 2009 Table 24 Yearwise FDI Equity Inflows According to the Type of Investor

in $ mn Type of Investor 2005 2006 2007 2008 2009 (1) (2) (3) (4) (5) (6)
1 2 3 4 FDI 2,482 6,184 5,962 12,526 11,154 PE/VC/HF 540 2,056 4,947 6,959 3,796 Portfolio 209 625 785 3,738 2,093 NRI 17 536 770 2,167 706

SubTotal (2+3+4) 766 3,217 6,502 12,864 6,595

5 Roundtripping 47 126 1,304 3,443 3,400 6 Roundtripped PE/VC/HF 65 276 409 1,115 1,387

SubTotal (5+6) 112 402 1,713 4,558 4,787

7 Unclassified 24 17 8 50 228 Grand Total 3,384 9,820 14,186 29,996 22,764

Source: See Table 9.

52

Chart 10 Differing Behaviour of FDI, Portfolio and Roundtripping Investments in 2009

4. Summary and Concluding Observations

The new economic policy regime in India, which came into being in mid1991, emphasised the role that foreign capital can play in furthering the countrys development aspirations, in particular her industrialisation needs. In so doing, a twopronged strategy was adopted: one to attract FDI which is seen, in addition to capital, as a bundle of assets like technology, skills, management techniques, access to foreign markets, etc; and two, to encourage portfolio capital flows which help develop capital markets and ease the financing constraints of Indian enterprises. The FDI policy was liberalised gradually in terms of the eligible sectors, extent of foreign participation and the need for casebycase approvals. The expectations from the two types of flows were quite different. After a slow and gradual rise till the middle of 2000s, inflows increased rapidly thereafter. From an average of just $ 1.72 bn. during 199192 to 199900, and the slightly higher $ 2.85 bn. during 200001 to 200405, the equity inflows surged to $ 19.78 bn. during 200506 to 200910. Viewed in the context of considerable discussion and concern regarding FDI inflows not matching Indias potential and being far lower than the initial expectations, the surge since the mid2000s did succeed in projecting the picture of growing confidence in India of international investors. Recent data, however, suggests that inflows during 201011 would be substantially lower than that in 200910. A detailed analysis of the FDI inflows is the subject matter of the present study. In the process of analysing the characteristics of the increased inflows, the study underlined the ambiguities in the measurement of FDI, especially the choice of 10% as being sufficient condition to represent control and lasting interest, propriety of treating certain categories of investments as FDI (the consequence of which being the blurring of boundaries
53

between direct and portfolio investments) and adherence to the accepted international norms by the Indian official agencies. It also raised the possibility of reported acquisition of shares underestimating the extent of takeover of Indian businesses by foreign companies. Aggregate data suggest that a major contributor to the recent increase has been reinvested capital (which is being estimated since 200001 following Indias decision to adopt international practices in reporting FDI data) which does not represent fresh inflows. Another important component is the inflows through the acquisition route. While the former does not represent fresh inflows, the latter generally does not add to the existing production or services capabilities. Official data also suggest that there has been a perceptible shift in the sectoral composition of inflows with the growing dominance of nonmanufacturing sectors. Increasing proportion of inflows being routed through tax shelters implies considerable revenue loss to the exchequer. Characteristics of the global FDI flows suggest that Indias experience with FDI inflows is not specific to her. For instance, according to UNCTAD World Investment Reports, the share of Manufacturing sector in world FDI flows declined from 34.23% to 24.01% between 19891991 and 2005 2007.88 The corresponding decline for developing economies was from 46.54% to 31.00%. One the other hand, the share of services increased from 50.45% to 58.95% for the world, whereas for developing countries the increase was from 30.78% to 56.68%. Within services the financial sector has acquired an important place in the latter period: from 17.74% to 21.37%. In case of developing countries, the increase was far sharper: from 6.31% to 19.31%. It is also acknowledged that private equity plays a major role in global

FDI flows, especially in those involving M&As. While these broad features of inflows are somewhat wellknown, questions are occasionally raised about the nature of FDI flows in India which might not be strictly equated with direct investment and which may not be able to deliver the expected benefits. Keeping this and the widely accepted definition of FDI in view, the study analysed the officially reported largest 2,748 cases of FDI Equity inflows, each individually accounting for at least $ 5 mn during September 2004 to December 2009, the period during which inflows recorded a sharp increase. The 2,748 inflows are fairly representative in value terms of the total equity inflows through the FIPB/SIA, Acquisition and Automatic routes as they accounted for about 88% of the total for the period. A distinctive feature of this exercise, which to the best of our knowledge has not been attempted so far, is the classification of the foreign investors with a view to assess the flows from the point of their meeting the criteria and expectations from FDI. It has been quite a challenging task which has never left one satisfied because of many information gaps. Notwithstanding these limitations, we do hope that the exercise would
UNCTAD, World Investment Report, 2009. World includes SouthEast Europe and CIS. 54
88

help take the understanding of FDI further not only in India but even in the international context. Some of the key findings of this exercise are as follows. Going by the basic premise of FDI and identifying the foreign investors who also operate in the same sectors in their home countries and thus could (i) be long term players and (ii) bring in not only capital but also the associated benefits on their own strength, we found that only a little less than half of the inflows could be realistically categorised as FDI. We have specifically kept out the private equity investors and other portfolio investors as well as inflows under control of Indians/Indian companies (termed as Roundtripping investment) from the realistic FDI category. The next most important category of investments is by PE/VC/HF investors followed by Roundtripping investment and other Portfolio investors in that order. There is a degree of overlap between PE/VC/HF investments and Roundtripping. It is quite relevant to note that Roundtripping related investments increased gradually during the period from just a little less than 2% in 2004 to 21% in 2009. While the share of PE/VC/HF not related to Roundtripping declined from the peak of 34.87% reached in 2007 (in line with the international experience), the share of Roundtripping related PE/VC/HF increased gradually. The share of realistic FDI in total inflows into the Manufacturing sector is relatively higher at about 62%. It was the highest in case of Telecommunications. On the other hand, it was the least in case of the Construction & Real Estate sector and Other Infrastructure, thereby implying that there was not much that the foreign investor brought in as proprietary knowledge into these sectors. Realistic FDI that could add to the existing manufacturing facilities, the main focus of the Statement on Industrial Policy of July 1991, formed only a small proportion of the total reported inflows. In general, nonacquisition type realistic FDI accounted for 36% of the total inflows of $81 bn. covered by the 2,748 cases and that going into Manufacturing sector formed a mere 10% of the total. (See Diagram). Only a small proportion of the total inflows are subjected to specific government approvals. Interestingly, compared to the other investors, specific approval from the government (FIPB/SIA) was sought to the maximum extent by what we termed as realistic FDI investors. Nearly all of NRIs investment is through the Automatic Route. More importantly, more than 90% of the inflows under the Roundtripping and PE/VC/HF categories of investors are entering without the need for casebycase

approvals just like FII investments which do not require specific approval once they are registered with the Indian regulatory authorities. In case of India while it is typical of the FDI inflows to enter via tax havens, this route is exploited the most by PE/VC/HF and Roundtripping variety of inflows. This is more so by PE/VC/HFs promoted by Indians. Most of the investments by Telecom and IT&ITES investors followed by those in Construction & Real Estate sector passed though such countries. Interestingly, about 90% of such investments in the Construction & Real Estate
55

Diagram Composition of the reported Top 2,748 FDI Inflows

Figures in parentheses are percentages are calculated with respect to total Reported Inflows. 56

sector were routed through the tax havens and benefited from the automatic entry facility. While one would not say foreign PE/VC/HF investments are wholly unwelcome, it can be said that those investments that do not match the expectations from FDI need to be viewed differently. Since such financial investors seek higher and quicker gains and their preferred sector of investment is prone to speculative expectations,89 net addition to domestic investible resources on their account could also not be guaranteed even in the medium term. On top of that, the tax haven route that they have exploited for entry into India ensures that the exchequer would not gain much from the profits they earn. Thus, inflows that cannot be characterised as FDI not only have had a relatively easy passage but they had also exploited the tax haven route to much greater extent. 4.1 Measurement and Classification (Direct or Portfolio?) An inescapable conclusion, notwithstanding the status accorded to such investments by the international agencies and adopted across nations, is that a good part of the FDI flowing into India is closer to portfolio investment than to FDI having long term interest and a bundle of attributes. Then there is also the increasing share claimed by Roundtripping investments. Worse still, some part of the inflows to India does not qualify as FDI even going by the 10% criterion. What seems to be happening in practice is that all equity investments which are not coming through the foreign institutional investor (FII) route are being treated as FDI irrespective of the proportion of shares held abroad and the extent of influence of the foreign investor. 90 This becomes amply clear from the Draft Press Note on FDI Regulatory Framework. Interestingly, even important official advisory bodies appear to be unaware of how the FDI data were being compiled. The FDI figures made up in the above manner may help India project a healthy picture of inflows but these do not ensure the expected benefits no better than ADRs/GDRs which are treated as portfolio capital and external commercial borrowings. Indeed, given the possibility that institutional investors who invest in companies listed on the Indian stock exchanges as FIIs, subscribe to ADR/GDRs as also invest in Indiafocussed companies on the London Stock Exchange, the inflows on account of the latter could also be seen as another form of foreign portfolio capital.91
Indeed, the government had imposed a threeyear lockin for FDI in the real estate sector. Incidentally, it is reported that DIPP had clarified that FIIs cannot take more than 10% equity and that they will have to follow the rules applicable to portfolio investors even if they are investing through the foreign direct investment route. See: FIIs taking FDI route face 10% stake cap in local co at http://economictimes.indiatimes.com/ articleshow/5814523.cms?prtpage=1 91 Interestingly, the Working Group on Foreign Investment suggested a new category of portfolio investors namely, Qualified Foreign Investors which would subsume FIIs, FVCI and NRI investments. The Working Group also recommended that (W)ithin the automatic route, there would be no distinction between FDI
89 90

and portfolio investment. Ministry of Finance, Report of the Working Group on Foreign Investment, 30 July 2010, p. 77. 57

It is evident that at the global level the 10% criterion is being used as a thumb rule and even investments which are unlikely to exhibit the characteristics of typical FDI are being categorised as such for BOP measurement purposes. That the 10% criteria is adopted mainly because of the stated objective of ensuring comparability across nations, and that a suggestion to raise the limit to 20% in accordance with the International Accounting Standards was summarily rejected makes the limit even more open to question. As a result, various forms of financial investments which one finds difficult to unquestionably treat as FDI are being considered as such. There is also the question of their potential impact on the host countries about which not much is known. These are not miniscule in size as they account for a sizeable portion of global FDI flows. Notwithstanding the fact that such investments are accompanied by control/influence as well, their investments cannot be distinguished from typical financial investors. Unlike typical FDI, private equity investments come with a preconceived idea of exiting the venture after certain duration92. They do not own any proprietary technology and hence the investee enterprises may only be directed to the appropriate sources. Private equity and other portfolio investments do not fall under the standard motives of resource seeking, efficiency seeking, market seeking and strategic asset seeking FDI. They may, if necessary, be categorised as pure return seeking FDI. Given the manner in which the sector proliferated, those who promote and run the PE firms are more like global consultants who work for a fee. These include persons of Indian origin/nationality many of whom cannot be distinguished from foreigners in terms of education, training and experience. Except for the fact that capital flows from another country, one does not find anything related to nationality about them. Indias experience with PE/VC investments suggests that their preference for established companies and the Construction & Real Estate sector on the one hand and the quick flips nature on the other make their contribution questionable.93 The way domestic investors floated PE firms abroad (and possibly raised money abroad genuinely 94), some of the registered domestic venture capital companies having strong foreign affiliation and many large Indian business groups and banks entering private equity business, the distinction between domestic and foreign has got even further blurred. In the choice of
For a description of private equity, see: Kavaljit Singh, Fixing Global Finance, Madhyam, Delhi and SOMO, Amsterdam, 2010. 93 In fact to contain the real estate bubble, to which these funds also contributed, India had to raise interest rates. 94 It may not always be easy to find out on whose behalf the funds have invested. For instance, Rudolf Elmer, a former employee of Julius Baer, a Swiss bank, who has passed on the details of about 2000 of the banks account holders to Wikileaks explained the modus operandi as: You are an Indian client and you want to have money in Julius Baer. You have good relationship with a relationship manager who makes investments. The banker sets up a fund in the Cayman Islands and asks his client to invest in that mutual fund. The relationship manager makes the decision to buy the fund and make investments in India for the client See: Leaks Reveal Cayman Black Money Trail, Mail Today, January 19, 2011. 58
92

tax havens too, both have something in common. In the end, the FDI route has also become a conduit for domestic entrepreneurs to avoid taxes and worse still in some cases going by the multilayering adopted by them raise serious doubts about the origin of the funds.95 The differences in the behaviour of realistic FDI, all Portfolio investors (excluding Roundtripping) and Roundtripping came out sharply in 2009. While realistic FDI declined marginally, portfolio investments fell sharply. On the other hand, Roundtripping

investments increased slightly. In 2003, while deciding on the Azadi Bachao Andolan petition, the Supreme Court justified the tax advantage offered to foreign investors coming through the tax havens like Mauritius in the following manner: There are many principles in fiscal economy which, though at first blush might appear to be evil, are tolerated in a developing economy, in the interest of longterm development. Deficit financing, for example, is one; treaty shopping, in our view, is another. Despite the sound and fury of the respondents over the socalled abuse of treaty shopping, perhaps, it may have been intended at the time when the IndoMauritius DTAC was entered into. Whether it should continue, and, if so, for how long, is a matter

which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This court cannot judge the legality of treaty shopping
merely because one section of thought considers it improper. 96 In early 2010, the Authority for Advance Rulings (Income Tax) New Delhi, while upholding the foreign investors claim of nonliability of Tax on the sale of shares held by ETrade Mauritius Ltd in an Indian company, said: Though it looks odd that the Indian tax authorities are not in a position to levy the capital gains tax on the transfer of shares in an Indian company, this is an inevitable effect of the peculiar provision in IndiaMauritius DTAA, the Circular issued by CBDT and the law laid down by Supreme Court in Azadi Bachao case. Whether the

policy considerations underlying the crucial Treaty provisions and the spirit of the Circular issued by the CBDT would still be relevant and expedient in the present day fiscal scenario is a debatable point and it is not for us to express any view in this behalf. (emphasis added).97
See for instance: ED traces key suspect s 2G money trail to Cyprus, Libya, Mauritius, at http://timesofindia.indiatimes.com/india/EDtraceskeysuspects2GmoneytrailtoCyprusLibya Mauritius/articleshow/7080911.cms; Raids reveal Mittallinked co got huge foreign inflows at http://timesofindia.indiatimes.com/india/RaidsrevealMittallinkedcogothugeforeigninflows /articleshow/6868740.cm; and 2G scam: ED questions Unitech on fund transfers at http://timesofindia.indiatimes.com/india/2GscamEDquestionsUnitechonfundtransfers/ articleshow/6940321.cms 96 Authority for Advance Rulings (AAR) No.826 of 2009, dated March 22 2010 available at http://rulings.co.in/itrulings/uploads/pdf/1269340941_etrade.pdf. DTAC stands for Double Tax Avoidance Convention.
95 97

ibid.

59

Earlier, the Comptroller and Auditor General of India in its report on direct taxes System Appraisals for the year 200304 emphasised that: ... a holistic study of DTAAs be conducted to ascertain the benefits accruing to the nation, especially as these are not placed before Parliament. A welldesigned and periodical cost benefit analysis would also need to be put in place. Shortcomings in DTAAs, especially those relating to definition and operation of permanent establishment, limitation of treaty benefits and disallowing treaty shopping needed to be removed so as to curtail misplaced incentives and ensure that the benefits of DTAAs are availed by bonafide assessees. 98 In view of the evidence proffered above and press reports indicating the deployment of tax havens by Indians themselves, there is a need to rethink on the issue, especially since the economic conditions to which the Supreme Court alluded to do not exist any longer and even the world at large has recognised the need to restrict the abuse of tax havens. 99 Should this facility, which works as a tax incentive, be extended to all sectors and all

types of investors? Instead, can such tax incentives be offered directly to both domestic and foreign investors in selected sectors? Portfolio investment which does not come through the stock market may not be as volatile as that which comes through it. The recent crisis has, however, shown that the former could be less reliable as the flows, even if they cannot be withdrawn, can dwindle and affect the economies which rely on them to meet the current account gap. On the other hand, there is nothing which suggests that such investments by themselves enhance the capabilities of investee companies to contribute to bridge the current account gap. Taking advantage of the liberal FDI definition, which does not distinguish between the nature of the investor, portfolio investors may adopt the FDI route more in the event of capital controls being introduced on portfolio investments. As has been mentioned earlier, the RBI is now concerned about the fall in FDI inflows during the current financial year (201011) in the context of higher level of current account deficit and dominance of volatile portfolio capital flows. Besides the environmentally sensitive policies pursued, it identified the sectors responsible for the slow down as construction, real estate, business and financial services.100 It is evident
Comptroller and Auditor General of India, Report No. 13 of 2005, Direct Taxes. See the relevant chapter of the report available at http://saiindia.gov.in/cag/file/overview310. 99 Apart from the controversies surrounding the financing of IPL franchisees and the leaked contents of Radia tapes and investigations, we did come across, in this study, companies funded by an alleged arms dealer. Interestingly, press reports also corroborate this observation. For instance, the Times of India suggests that the person concerned was an accused in several cases filed by the CBI for manipulation and bribery in defence purchases and that he was not seen in India since 2006. The paper also reveals that In India too, the family has several companies, to which investments have come from firms in tax havens. See: Arms dealer wanted in India major funder of UK Liberal Democrats, Times of India, May 6, 2010. 100 See, RBI, Macroeconomic and Monetary Developments: Third Quarter Review, 201011 Chapter III on The External Economy, at http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/ 04MD240111F.pdf 60
98

that except for IT and ITES, these services would not be directly contributing to foreign earning earnings. We have seen in the foregoing that inflows into the Construction and Real Estate sector are dominated by PE/VC/HF investors and Roundtripping investments which cannot be equated with FDI. Not long ago it was reported that RBI, which has been consistently cautious over the FDI flow into the realty sector, has warned that such massive flows could lead to speculation and overheating of the real estate sector.101 RBI also seems to have wanted to take property market out of the sectors which allows FDI through the automatic route. It wants inflows routes such as participatory notes and private equity contained. 102 Indeed, FDI into the sector is subject to threeyear lockin. The present change in attitude seems to have been driven by the need to meet current account deficits and the belief that FDI inflows are longerterm commitments. The primary role of FDI has thus been reduced to a foreign exchange management tool and probably reflects a change in the global approach towards FDI. The shift in the perception of FDI where the attributes other than capital are pushed to the background can be seen from an IMF publication which when describing that FDI is favoured over other capital flows by emerging markets, explained that: FDI is not debt creating, is less volatile than portfolio flows, and relatively resistant during financial crises (). FDI has also been associated with positive spillovers through technology transfer and training to local industry (), and may lead to enhanced export performance and growth (). (emphasis added) 103 Thus, even the IMF is not sure of the developmental impact of FDI. FDIs contribution to enhancing host countrys export potential and thus contributing to its ability to earn foreign exchange is also not guaranteed. No wonder, India is seeing FDI as a means of bridging the current account gap with stable inflows without reference to its quality.

Apart from the policies related to environment, RBIs suggestion to address other problem areas like procedural delays, land acquisition issues and availability of quality infrastructure is more generic in nature and by itself may not ensure directing capital flows to India. There is every possibility that the fall in inflows would be used to push further opening up of the sectors which have hitherto been partially open to FDI. The need to maintain a steady stream of foreign capital is shrinking the policy space even when certain policies are not working to Indias advantage. 4.2 A Case for Selective Approach towards FDI Before seeking to benefit from FDI it is essential to clearly identify the same. Thus going back to the definitional aspect of FDI, one finds that the essential criterion followed for
See: RBI raises alarm over FDI buildup in realty, http://economictimes.indiatimes.com/ markets/realestate/ realtytrends/rbiraisesalarmoverfdibuildupinrealty/articleshow/1129254.cms 102 See: RBI Asks Govt to ban automatic FDI in Real Estate, http://www.indianrealtynews.com/fdiindia/rbiasksgovt tobanautomaticfdiinrealestate.html 103 IMF, India: Selected Issues, supra note 9. 61
101

identifying an FDI enterprise is control/influence. While unambiguous control is generally seen in owning majority share in equity, significant influence is expected to exist when there is an equity share between 10% and 50%. It is also believed that one can have control with less than 10% share and not have control even with shares higher than 10%. The primary criteria itself is a matter of debate and FDI is open to subjective interpretation and judgment. Other items like reinvested earnings, other capital, etc. only follow from this first level identification. The whole edifice is thus built on what is well acknowledged as an arbitrary cutoff point of 10%, vaguely defined lasting interest and significant influence.104 Indeed, it is difficult to understand the full meaning of IMF BPM6 when it says: Because there is control or a significant degree of influence, direct investment tends to have different motivations and to behave in different ways from other forms of investment. As well as equity (which is associated with voting power), the direct investor may also supply other types of finance, as well as knowhow . Direct investment

tends to involve a lasting relationship, although it may be a shortterm relationship in some cases. Another feature of direct investment is that decisions by enterprises may be made for the group as a whole. (emphasis added)105
On one hand, it implies that direct investment is much more than a share in equity and involves supply of other types of finance and knowhow and decisions are made for the group as a whole. This is more akin to investments by TNCs. However, the difficult part in this is about the lasting relationship of a shortterm nature. Obviously, the lower limit of 10% which is neutral to the nature of the foreign investor would bring far more crossborder investments, including cases that are typically portfolio investments, into the ambit of FDI than a higher cutoff point would do. And indeed, this has been the case as Indias experience described in the foregoing had demonstrated. Foreign control by itself may be important when it comes to ascertaining liabilities of various sorts or in strategic sectors. This is irrespective of whether a particular company is categorised as an FDI one or not. The two should be treated separately. This is as far as the need to clearly identify FDI within the global and individual host countrys capital flows before one can plan to use it to ones advantage. On the other hand, there is considerable body of literature which does not offer unqualified endorsement of positive impact of FDI on host countries and which implies a calibrated

approach towards it. The situation is well summed up in the following: We know that there is a lot we still do not know about FDI and MNCs, but not exactly what or how much. ... Few undisputed insights exist on which policy makers can definitely rely. The economic effects of FDI do not allow for easy
Supra note 33. See also: Jimmy J. Zhan, FDI Statistics: A Critical Review and Policy Implications, paper prepared for the World Association of Investment Promotion Agencies (WAIPA), Geneva, October 2006. 105 IMF, Balance of Payment and International Investment Position Manual , Sixth Edition, 2009, p. 101. 62
104

generalizations. Empirical studies on the growth impact of FDI have come up with conflicting results.106 And, After resolving many statistical problems plaguing past macroeconomic studies and confirming our results using two new databases on international capital flows, we find that FDI inflows do not exert an independent influence on economic growth. Thus, while sound economic policies may spur both growth and FDI, the results are inconsistent with the view that FDI exerts a positive impact on growth that is independent of other growth determinants. 107 Following such evidence it is logical for adopting a selective approach towards FDI. For instance, it is said: The experience of many recent development successes supports our call for a more interventionist approach towards TNCs which policymakers and academics from various parts of the world are embracing. Countries such as Korea, Taiwan, Singapore and China were able to incorporate TNCs within their national projects in their own terms and under their own conditions. Even Singapore, which actively promoted FDI inflows, protected strategic sectors from foreign competition and implemented different measures to promote domestic upgrading. While international agreements may prohibit some of the measures that Korea, Taiwan and Singapore implemented, there is still some policy space available for a more restrictive approach to TNCs. To summarise, countries which manage their FDI are likely to benefit more than those which are managed by their FDI . (emphasis added)108 Similarly, ... there are good reasons to believe that an industrialized strategy based on laissez faire attitude towards TNCs may not be as successful in the long run as a more selective, strategic approach, as seen in the examples of countries like Korea and Taiwan.109 At one time the expectations from FDI were rather clear; and even now the most widely accepted view is that it is much more than capital transfer. And probably that was the reason why developing countries could be convinced of the need to attract FDI. (See Box)
Stephen D. Cohen, Multinational Corporations and Foreign Direct Investment: Avoiding Simplicity, Embracing Complexity, Oxford University Press, 2007, p. 356.
106

Maria Carkovic and Ross Levine, Does foreign direct investment accelerate economic growth?, in Theodore H. Moran, Edward M. Graham and Magnus Blomstrm, Does Foreign Direct Inevstemnt Promote Development?, Institute for International Economics, 2005, p. 219. 108 Eric Rugraff, Diego SnchezAncochea, Andy Sumner (eds.), Transnational Corporations and Development Policy: Critical Perspectives, Palgrave Macmillan, 2009, pp. 305306. 109 Hajoon Chang, Globalization, transnational corporations, and economic development: can the developing countries pursue strategic industrial policy in a globalizing world economy?, in Dean Baker, Gerald Epstein and Robert Pollin (eds.), Globalization and Progressive Economic Policy, Cambridge University Press, 1998, pp. 97116. 63
107

Box FDI comprises a package of resources

Extracts from UNCTAD, World Investment Report: Foreign Direct Investment and the Challenge of Development, 1999.

Most developing countries today consider FDI an important channel for obtaining access to resources for development. However, the economic effects of FDI are almost impossible to measure with precision. Each TNC represents a complex package of firmlevel attributes that are dispersed in varying quantities and quality from one host country to another. These attributes are difficult to separate and quantify. Where their presence has widespread effects, measurement is even more difficult. ... the assessment of the development effects of FDI has to resort either to an econometric analysis of the relationships between inward FDI and various measures of economic performance, the results of which are often inconclusive, or to a qualitative analysis of particular aspects of the contribution of TNCs to development, without any attempt at measuring costs and benefits quantitatively. FDI comprises a bundle of assets, some proprietary to the investor. The proprietary assets, the ownership advantages of TNCs, can be obtained only from the firms that create them. They can be copied or reproduced by others, but the cost of doing that can be very high, particularly in developing countries and where advanced technologies are involved. Nonproprietary assetsfinance, many capital goods, intermediate inputs and the likecan usually be obtained from the market also. The most prized proprietary asset is probably technology. Others are brand names, specialized skills, and the ability to organize and integrate production across countries, to establish marketing networks, or to have privileged access to the market for nonproprietary assets (e.g. funds, equipment). Taken together, these advantages mean that TNCs can contribute significantly to economic development in host countriesif the host country can induce them to transfer their advantages in appropriate forms and has the capacity to make good use of them. (p. 25) The development impact of FDI, however, also depends on the dynamics of the transfer of technology and skills by TNCs: how much upgrading of local capabilities takes place over time, how far local linkages deepen, and how closely affiliates integrate themselves in the local learning system. TNCs may simply exploit the existing advantages of a host economy and move on as those advantages erode. Static advantages may not automatically transmute into dynamic advantages. This possibility looms particularly large where a host economys main advantage is lowcost unskilled labour, and the main TNC export activity is lowtechnology assembly. The extent to which TNCs dynamically upgrade their technology and skills transfer and raise local capabilities and linkages depends on the interaction of the trade and competition policy regime, government policies on the operations of foreign affiliates, the corporate strategies and resources of TNCs, and the state of development and responsiveness of local factor markets, firms and institutions. (p. 30)
64

Even today in spite of a variety of foreign investors coming into play and with increasing dominance of financial investors about whose impact on host countries one is not sure of, international bodies continue to present the prospect that: Unlike portfolio equity and bond investments, FDI decisions are made with longterm horizons in view. They express the intention to build productive manufacturing facilities, exploit natural resources, or diversify export bases. Thus, FDI flows are less likely to be liquidated or reversed in times of crisis.110 (emphasis added) Notwithstanding the clarity in objectives and expectations from FDI the broader definition of FDI that has prevailed blurred the boundaries between portfolio and direct investments. A situation has been reached when FDI is referred to for its developmental impact even while the widely available measurement is that of BOP based FDI resulting in a wide gap between what is meant and what is measured as FDI. 111 Instead of representing capital flow with clear developmental connotation, it has turned into generic capital flow. Recent developments are consistent with these observations. For instance, substantial decrease in M&As (a good part of which is financed by private

equity) and a sharp fall in FDI by private equity funds rather than a slowdown in greenfield operations explain most of the drop in FDI in 2008 and 2009. 112 It is apparent that the characteristics of portfolio investments got reflected in the behaviour of globally measured FDI. Indeed a critic of UNCTAD had said:
World Bank, Global Development Finance, Charting a Global Recovery, I: Review, Analysis, and Outlook, 2009, p. 3. In the context of rising current account deficit and falling FDI inflows, the Economic Times said in its editorial: ADRs do make some investible resources available to domestic industry, but is devoid of the specific benefits associated with FDI, namely, strategic vision for business growth in the country, technological knowhow and managerial expertise. If the government is seriously concerned about our rising current account deficit, estimated at about 3.5% of GDP, an issue that the Reserve Bank of India has also flagged, it needs to look for ways to increase genuine, rather than sham, FDI flows. FDI, unlike foreign institutional investment (FII) flows that are easycomeeasygo, is not only sticky but also has huge positive externalities in the form of ancillary industries and employment opportunities. Today, it is hard to think of, say, Suzuki exiting India, certainly not with the ease of some foreign institutional investor. All the more reason why the government should try to reverse the recent trend in overseas capital flows characterised by a decline (in) direct investment and a rise in portfolio flows. (emphasis added) ADRs no substitute for FDI, Economic Times, January 31, 2011. On its part a Business Standard editorial said on January 3, 2011 that: It is the composition of capital flows into India in recent times that is a cause of greater concern. Indias current account deficit is being financed by shortterm capital flows which, as the Financial Stability document of RBI has pointed out, is a cause for serious concern. Shortterm capital flows, which increase both shortterm debt and vulnerability, are notoriously foot loose and could exit at the first sign of trouble or better opportunity elsewhere, leaving India dangerously vulnerable. A healthy capital inflow mix would include a greater share of FDI, which is not only more stable, but brings with it a
110 111

basket of benefits such as technology transfer, access to export markets, best management practices among others
which can have economywide benefits, with the right policy mix in place. (emphasis added) http://www.businessstandard.com/india/news/theexternalconstraint/420434/ 112 UNCTAD, World Investment Report, 2010. 65

For, despite the eclectic nature of its presentation (where it sometimes criticizes speculative capital), UNCTAD/WIRs leave the overall impression that all the figures that it provides for FDI are indeed genuine FDI which plays a significant role in the development of Third World countries. This is, to say the least, highly misleading and improper.113 While Indias FDI data did reveal some major deviations and specific features one does not know the extent of such anomalies in respect of FDI data of other countries. It is also necessary to underline here that a number of companies which are reported as recipients of FDI do not appear among the foreign affiliates in India reported on the ITCUNCTAD database www.investmentmap.org. The information for the database is provided by Dun & Bradstreetworlds leading corporate information provider. 114 One is not sure about other countries. The aggregate FDI data reported by UNCTAD needs to be understood with many a qualification. For instance, while UNCTAD in its Global and Regional FDI Trends in 2010 reported that global capital flows stagnated during 2010 compared to 2009, the details show that (I)mproved economic performance in many parts of the world and increased profits of foreign affiliates, especially in developing countries, lifted reinvested earnings to nearly double their 2009 level. 115 A look at the accompanying graph clearly suggests that actual crossborder flows would have fallen considerably during 2010 thus giving scope to a completely different interpretation of the global situation. The difference between FPI and FDI having been minimised through the propagation of a liberal BOPbased definition, an environment of competition among countries for
Yash Tandon, FDI, globalization, UNCTAD and human development, available at http://www.twnside.org.sg/title/fdi.htm. Mr. Tandon was former Executive Director, South Centre, Geneva.
113

In fact, it is difficult to reconcile how the number of foreign affiliates are arrived at. For instance, according to the database, there are 59 affiliates under the category Publishing, printing and reproduction of recorded media. But a closer examination reveals that there are no more than 33 affiliates and the higher number is explained by the fact that offices of the same affiliate in different cities are counted as affiliates. That is how Scholastic Corp of USA is shown to have 13 affiliates in India while in actuality only one affiliate Scholastic India Pvt Ltd is shown with 13 entries: two each in Bangalore, Chennai, Gurgaon, Kolkata, Mumbai, Pune and one in Delhi. Employment data is reported only against its Gurgaon office. The registered office of the company is in Gurgaon. The rest may be branches or offices of citybased educational coordinators. Similarly, Cadbury UKs some of the eight affiliates in India are either regional offices/factories/sales offices of Cadbury India Ltd in different locations. Incidentally, some of the factories (Himachal Pradesh, Pune and Gwalior) do not appear among the eleven. Surprisingly, Cadbury Indias starting year is reported as 1990 whereas the company started its operations in India in 1948, which fact is also confirmed by the MCA website. On the other hand, Unilever Plc is reported to have 11 affiliates. One, however, finds only four unique companies in the details section with Hindustan lever Ltd appearing six times and Lever India Exports Ltd three times. The remaining are Diversey Lever and Vashisti Detergents Ltd. Surprisingly except for Lever India Exports Ltd none of the Hindustan Unilevers other nine subsidiaries, or its joint ventures HiTech Surfactants Ltd or Kimberly Clark Lever Pvt Ltd. find a place among the affiliates. Further, if we go by UNCTAD the number of foreign affiliates in China declined from 42,753 in 2004 to 25,267 whereas for India they increased from 518 to 3,891. 115 Supra note 59. 66
114

attracting FDI has emerged fuelled by indicators like FDI Confidence Index, Inward FDI Attractiveness index, Inward FDI Performance Index, etc. Developing countries vie among themselves for larger volumes of FDI. It was indeed argued against such comparisons: India has the potential for attracting increased volumes of FDI. She can do so with a set of policies which are in the interests of not only foreign investors but also domestic investors. It is though a bit farfetched to argue that FDI is a panacea for the

development problem and India should throw all doors wide open to FDI. It would also be a folly to woo FDI if only because China attracts relatively high volumes of FDI . 116 (emphasis
added) FDI policies need not have to be unidirectional. Just as they are liberalized, they could also be tightened if the situation so warrants. it would be foolish to have either uniformly restrictive or uniformly liberal policies towards TNCs across different industries. This also means that the same industry may, and indeed should, become more or less open to FDI over time, depending on the changes in various internal and external conditions that affect it. 117 After almost twenty years of trying to attract FDI probably the time has come to review Indias FDI policy, not from the view point of maximizing the inflows but from the perspective of bridging the gaps and gaining from it. 4.3 Need for a Relevant Data System While it may be necessary to follow the international criteria for balance of payment purposes, a detailed breakup of the foreign capital inflows is unavoidable for a proper assessment of their developmental impact, the raison detre for FDI. Also required is a reliable data system which enables analysis of operations of a representative set of Indian companies, including FDI companies. Unfortunately, by switching over to the new definition of FDI companies and abandoning what was probably the more appropriate category of FCRCs by the RBI, the representative character of the studies on foreign companies in India has become even more debatable. The control aspect underlying the definition of FCRCs more closely reflected provisions of the Companies Act. In fact, thanks to the poor information base of the Indian corporate sector itself, today the role
See: V.N. Balasubramanyam and Vidya Mahambare, Foreign Direct Investment in India, paper presented at a workshop on Foreign Direct Investment in Developing Countries held at the Lake District, September 1314, 2002. This was in response to Nirupam Bajpai and Jeffrey D. Sachs, Foreign Direct Investment in India: Issues and Problems, Development Discussion Paper No. 759, Harvard Institute for International
116

Development, March 2000 wherein it was posed: Why is it that India, which provides the largest market after China in the developing world is unable to attract substantial volume of FDI? Further, when it comes to comparing China and India, why can India not match or even outpace China in attracting FDI given Indias superior conditions regarding the rule of law, democracy, and the widely spoken English language? 117 Supra note 109. 67

and place of FDI in the economy is not known with any reasonable degree of accuracy. Consequently, studies are often based upon small sets of foreign companies identified from databases which have lost much of their relevance in this respect notwithstanding the fact that they do try to cover some unlisted companies as well. 118 With the importance of financial investors and Roundtripping investments in Indias FDI inflows, there is a need to classify the investments according to the nature of foreign investors. Even OECD suggested that when the Roundtripping phenomenon becomes significant these should be indicated as separate supplementary breakdowns. 119 Both at the global level and at the national level in India considerable time and other resources are being invested to promote FDI. To assess its contribution the need for a proper information base on the activities of FDI companies is well accepted. It is worth referring to UNCTAD when it said: FDI data alone are not enough to assess the importance and impact of FDI in host economies. They should be complemented with statistical information on the activities of TNCs and their foreign affiliates (e.g. sales, employment, trade, research and development (R&D)).120 It is also relevant to refer to Lipsey when he said: One would need an unusual type of FDI data to explain the role of such an investment and such an affiliate on the host economy, but the value of the investment stock or the corresponding flows, and the value of assets, sales, and value added are uninformative on the subject. Only host country data collection on establishment and firm bases, including real inputs such as labor and physical capital, and R&D, and financial flows such as tax payments, can begin to reveal host country impacts.121 India and probably many other countries are nowhere near having such a data system. Important components of the reported FDI inflows like reinvested earnings and other capital are simple estimates the veracity of which one cannot vouch for. It is time the
While many new foreign companies are not getting listed on the Indian stock exchanges, some of the important existing ones had even got delisted and more have plans to exit. The then Finance Minister, for instance, reported that: Between 19971998 and 20022003 we have a total of 62 companies that have been actually delisted. Out of these 62 companies, 41 are Indian companies and 21 are categorised as multinational companies. Reply to Lok Sabha Starred Question No. 64 dated February 21, 2003. Some of the prominent delisted ones are: Avery, Bosch Rexroth, Cadbury, Carrier Aircon, Digital Globalsoft., Hoganas India, iGATE Global Solutions, ITW Signode India, Kodak, Ondeo Nalco, Otis, Panasonic AVC, Philips, Ray Ban, Reckitt Benckiser, Sandvik, Syngenta, Tektronix, Vickers Systems, Wartsila and Yokogawa India. See also: http://ahmedsk00.blogspot.com/2007/06/mncslikelytodelistnamesincludei.html 119 OECD, Benchmark Definition of Foreign Direct Investment: Fourth Edition , 2008, p. 159. 120 UNCTAD, World Investment Report, 2006, p. 13. 121 Robert E. Lipsey, What do users of FDI data want to learn from them and do the data tell them the truth?, paper presented at the UNCTAD Expert Meeting on Capacity Building in the Area of FDI: Data Compilation and Policy Formulation in Developing Countries, 1214 December 2005. 68
118

Indian policymakers start making a clear distinction between different types of foreign investors which could help them in their own assessment of the situation on the one hand and enable assessment of benefits/costs by others, on the other. 122 In the absence of such an analysis, success of the FDI policy would only be measured in terms of attracting

larger and larger amount of inflows to achieve which, beyond a point, one has no option but to open up more and more. And there is a limit to it. There are multiple official agencies like RBI, Ministry of Commerce & Industry, Ministry of Finance, Foreign Investment Implementation Authority (FIIA), FIPB, SEBI, Central Statistical Organisation (CSO), National Manufacturing Competitiveness Council, Investment Commission, Competition Commission, PublicPrivate Partnerships with industry bodies and finally the Ministry of Corporate Affairs itself in dealing with foreign entities. What is required is an open mind and commonality in approach to unravel the FDI phenomenon and to maximise the benefits from it.
The inflows data received by RBI regional offices being offered as proxy for statewise distribution of FDI reflects poorly on the existing information base on FDI in India. As noted above, one cannot take even UNCTADs reporting of foreign affiliates in the country at its face value. 69
122

AnnexureA Illustrative Cases of FDI Inflows which involve Acquisition of Companies in India
Route, Month & Year Indian Company Foreign Investor Country Inflow (` Cr.)
R1208 Ambuja Cement India Ltd Holderind Investments Ltd Mauritius 810.03

A0407 Anchor Electricals Pvt Ltd Matsushita Electric Works Ltd Acquisition of Share 1,440.83
R0807 Anchor Electricals Pvt Ltd Matsushita Electrical Japan 425.67

A0108 Anchor Electricals Pvt Ltd Matsushita Electric Works Ltd Japan 104.99
R4906 Astrix Laboratories Ltd Aspen Pharmacare Holding Ltd South Africa 164.28 R0508 Balaji Telefilms Ltd Asian Broadcasting FZLLC U.A.E. 123.25 R0608 Bhukhanvala Diamond Systems Pvt Ltd Hilti Far East Pvt Ltd Singapore 23.74

A0507 Bombay Stock Exchange Atticus Mauritius Mauritius 160.62 A0507 Bombay Stock Exchange Callwell Asset Management Acquisition of Share 160.62 A0507 Bombay Stock Exchange Katriel Investment Ltd Acquisition of Share 160.62
F0607 Bombay Stock Exchange Deutsche Boerse AG Germany 200.78 F0607 Bombay Stock Exchange Singapore Stock Exchange Singapore 200.78 R0608 Centum Frequency Products Pvt Ltd Rakon (Mauritius) Ltd. Mauritius 26.29 R0705 Dabur Pharma Ltd International Finance Corp U.S.A. 65.58 F0505 DCM Benetton India Ltd Luxembourg 22.50 F0505 Emergent Genetics India Pvt Ltd Cayman Island 64.80 R1208 Fresh & Honest Cafe Ltd Lavazza Netherlands BV Netherlands 30.00 R0608 Karnavati Rasayan Ltd Cabb Holding Gmbh Germany 22.20 R0908 MTR Foods Ltd Orkla Asia Pacific Pte Ltd Singapore 50.00 R0908 MTR Foods Ltd Orkla Asia Pacific Pte Ltd Singapore 50.00 R1006 Mysore Cements Ltd (Now Heidelberg Cement India) Cementrum 1 BV Netherlands 359.10

A1006 Mysore Cements Ltd (Now Heidelberg Cement India) Cementrum 1 BV Netherlands 203.00 A0307 Mysore Cements Ltd (Now Heidelberg Cement India)

Cementrum 1 BV Netherlands 77.72 A0708 My Home Industries Ltd CRH India 1,170.53
R0708 My Home Industries Ltd CRH India Investments BV Netherlands 517.36 F0107 Parryware Roca Pvt Ltd Roca Sanitario S A Spain 173.98

A0808 Parryware Roca Pvt Ltd Roca Bathroom Investments Acquisition of Share 747.39
R1208 Shyamtelelink Ltd Sistema Joint Stock Financial Corp Russia 1,482.00 R0608 SJK Steel Plant Ltd Corporaction Sidenor Say Cia Src Spain 79.12 F1008 SKF Technologies Pvt Ltd Aktiebolaget SKF Sweden 35.04

A0208 Sky Gourmet Catering Pvt Ltd IHC Mauritius Corp Mauritius 72.21
R1108 Sky Gourmet Catering Pvt Ltd IHC Mauritius Corp Mauritius 74.51 R0607 Solvay Specialities India Pvt Ltd Solyay Holding Netherland BV Netherlands 225.00 R1007 UTV Software Communication Ltd Walt Disney Co Singapore 65.45 R0105 Vijay Industries & Projects Ltd U.K. 47.79 Note: R: RBI Automatic Route; F: FIPB Approval; A: Acquisition Route. The latter have been included to show the contradictory classification of the inflows from the same foreign investor in the same Indian company. 70

AnnexureB Illustrative Cases of Large FDI Inflows where the Indian Investee Company/Promoters Appears to have Direct Relationship with the Foreign Investor (in ` Million)
Indian Investee Company Entry Route Source Country Foreign Investor Inflow
Adani Energy Ltd Acquisition Acquisition of Shares Opal Travels Ltd 571 Asrani Inns and Resorts Pvt Ltd Automatic British Virginia Global Technology & Trademarks Ltd. 838 Ballarpur Industries Ltd Acquisition Unindicated Country Ballarpur Industries Ltd. 2,785 BILT Graphic Paper Products Ltd Acquisition Acquisition of Shares Ballarpur Paper Holding Bv 6,379 BILT Paper Holdings Ltd Automatic Mauritius NQC Global (Mauritius) Ltd 765 Cox & Kings (India) Pvt Ltd Acquisition Mauritius Kuber Investments (Mauritius) Pvt Ltd 431 Deeksha Holdings Ltd FIPB U.K. Richmond Enterprises Sa 792 Dimexon (India) Holding Pvt Ltd FIPB Netherlands Dimexon Int l Holding B.V. 499 Essar Bulk Terminal Ltd Automatic Cyprus Essar Shipping & Logistics Ltd. 820 Essar Bulk Terminal Ltd Automatic Cyprus Essar Shipping & Logistics Ltd. 445 Essar Construction Ltd Acquisition Mauritius Essar Projects 1,333 Essar Construction Ltd Automatic U.A.E. Essar Projects Ltd 905 Essar Power Acquisition Mauritius Essar Infrastructure 716 Essar Projects Acquisition Unindicated Country Essar Investment Ltd 4,092 Essar Steel (Hazira) Ltd Automatic Mauritius Essar Steel Holdings Ltd 2,230 Essar Steel Ltd Acquisition U.S.A. Essar Logistics Holdings Ltd 19,039 ETHL Global Capital Ltd FIPB Mauritius Hazira Steel 2 2,250 Geetanjali Effective Realty Sol. Pvt Ltd Automatic Mauritius SEZ Developers Ltd 428 Genext Hardware & Parks Pvt Ltd Automatic Mauritius 1 Company (Mauritius) Ltd 625 GTL Infrastructure Ltd Automatic Mauritius Technology Infrastructure 862 GVK Power And Infrastructure Ltd

Automatic Mauritius Transoceanic Projects 1,177 Hazira Plate Ltd Automatic Mauritius Essar Steel Holdings Ltd 1,154 Hazira Plate Ltd Automatic Mauritius Essar Steel Holdings Ltd 996 Hazira Plate Ltd Automatic Mauritius Essar Steel Holdings Ltd 495 Hutchison Essar Ltd FIPB Mauritius Essar Com Ltd 1,091 Ispat Industries Ltd Acquisition Unindicated Country Ispat Industries Ltd. 624 Jindal Stainless Ltd Automatic Cayman Island Jindal Overseas Holdings Ltd. 700 Jm Financial Ltd FIPB Mauritius JM Financial Property Fund 593 Jubilant Off Shore Drilling Pvt Ltd Automatic Cyprus Jubilant Energy India Ltd 715 Jubilant Off Shore Drilling Pvt Ltd Automatic Cyprus Jubilant Energy India Ltd 429 Jubilant Oil & Gas Pvt Ltd Automatic Cyprus Jubilant Oil And Gas (I) Ltd 715 Jubilant Oil & Gas Pvt Ltd Automatic Cyprus Jubilant Oil And Gas (I) Ltd 592 Kingfisher Airlines Ltd Automatic British Virginia UB Overseas Ltd. 502 Magna Warehousing & Distribution Pvt Ltd Automatic Mauritius I4 Company (Mauritius) Ltd 465 71

Indian Investee Company Entry Route Source Country Foreign Investor Inflow
Newfound Properties & Leasing Ltd Acquisition Acquisition of Shares Newfound Properties & Leasing Ltd 1,640 Orient Green Power Co Ltd Automatic Singapore Orient Green Power Pte Ltd 757 Ozone Projects Pvt Ltd Acquisition Mauritius Urban Infrastructure Real Estate Fund 844 PVP Ventures Pvt Ltd Automatic Mauritius Platex Ltd 3,777 PVP Ventures Pvt Ltd Automatic Mauritius Platex Ltd 3,758 PVP Ventures Pvt Ltd Automatic Mauritius Platex Ltd 1,329 Rakindo Kovai Township FIPB Mauritius Rakeen P. Ltd 1,274 Reliance Gas Transportation Infrastructu Automatic Singapore Biometrix Marketing Pvt. Ltd. 8,756 Reliance Gas Transportation Infrastructu Automatic Singapore Biometrix Marketing Pvt. Ltd. 7,864 Reliance Gas Transportation Infrastructu Automatic Singapore Biometrix Marketing Pvt. Ltd. 7,665 Reliance Gas Transportation Infrastructu Automatic Singapore Biometrix Marketing Pvt. Ltd. 7,000 Reliance Ports & Terminals Ltd Automatic Singapore Biometrix Marketing Pvt. Ltd. 8,303 Reliance Utilities Ltd Automatic Singapore Biometrix Marketing Pvt. Ltd. 7,000 Relogistics Infrastructure Pvt Ltd Automatic Singapore Biometrix Marketing Pvt. Ltd. 18,519 Ritambara Agents Pvt Ltd Automatic Mauritius Ispat Teleco. Holdings Ltd. 3,741 Seaview Developers Ltd Automatic Mauritius Dotterl Estate Ltd 1,875 Serene Properties Pvt Ltd Automatic Mauritius I3 Company (Mauritius) Ltd 832 Shantineketan Properties Ltd Automatic Mauritius Acacia Properties 1,111 Shashwat International Ltd Automatic Mauritius Orind South Asia Ltd 536 Shashwat International Ltd Automatic Mauritius Orind South Asia Ltd 536 Solaris Biochemicals Ltd Automatic Mauritius NQC International Mauritius 590 Solaris Chem Tech Ltd Automatic Mauritius NQC International Mauritius 1,492 Steel Corporation Of Gujarat Ltd Automatic Mauritius Gujarat Steel Holdings Ltd. 1,168 Teesta Urja Ltd Automatic Singapore Athena Projects Pte Ltd 1,642 Unitech Developers & Projects Ltd Automatic Mauritius Gladioys Realty Inc 3,266 Unitech Hitech Structures Ltd Automatic Mauritius Myna Holdings Ltd 3,228

Unitech Infra Com Ltd Automatic Mauritius Sparrow Properties Ltd 1,932 Unitech Reality Projects Ltd Acquisition Mauritius Tulipa Investments Inc, Mauritius 5,092 United Breweries (Holding) Ltd Acquisition British Virginia Firstart Inc 862 Vadinar Oil Terminal Ltd Automatic Cyprus Essar Shipping & Logistics Ltd. 897 Vedanta Alumina Ltd Automatic Mauritius Twinstar Holdings Ltd 4,421 Vedanta Alumina Ltd Automatic Mauritius Twinstar Holdings Ltd 3,143 72

AnnexureC1 Corporate structure of Ishaan Real Estate plc.

Source: Ishaan Real Estate plc., AIM Admission Document. AIM is Alternative Investment Market of the London Stock
Exchange and is significantly less regulated. 73

AnnexureC2 Corporate Structure of Unitech Corporate Parks plc.

Source: UNITECH Corporate Parks plc. AIM Admission Document. AIM is Alternative Investment Market of the London Stock
Exchange and is significantly less regulated 74

AnnexureC3 Vedanta Groups Organisational Chart# as on February 28, 2010

Note: (1) It was explained that We also own certain other nonoperating subsidiaries that are not material and are
not shown in the organisational chart . (2) Volcan Investments Ltd owns 162,250,000 Ordinary Shares, or approximately 59.88% of the issued ordinary share capital of Vedanta. Volcan is owned and controlled by the Anil Agarwal Discretionary Trust (Trust). Onclave PTC Ltd (Onclave) is the trustee of the Trust and controls all voting and investment decisions of the Trust. As a result, shares beneficially owned by Volcan may be deemed to be beneficially owned by the Trust and, in turn, by Onclave. Mr. Anil Agarwal, the Executive Chairman of Vedanta (), may be deemed to have beneficial ownership of shares that may be owned or deemed to be beneficially owned by Onclave. (3) Shading indicates operating companies. Source: Offering Circular dated March 26, 2010 available at http://www.vedantaresources.com/uploads/ offeringcircular42017bond.pdf 75

Annexure D Educational Qualifications and Past Experience of Indians* Working with General Atlantic, a Leading USBased PE Firm
Name Position Educational Qualifications Previous Employment
Havaldar, Abhay Managing Director 1. Univ. of Bombay, Bachelor Degree (Electrical Engineering); 2. London Business School, Masters in Management Partner at Draper International & ConnectCapital Pandit, Ranjit Managing Director 1. University of Bombay, BE (Elect. Engg); 2. Wharton School, MBA Managing Director, McKinsey & Co Rai, Raul R. Managing Director 1. Boston University, B.A. in Computer Science and Economics; 2. Harvard Business School, MBA 1. Vizzavi Ltd., London, Corporate Strategy & Planning Director.

2. Vice President in the Communication, Media & Technology group at Goldman Sachs; 3. UBS: Managing Director and Global CoHead of Software Investment Banking Sharma, Sunish Managing Director 1. IIT Delhi, MTech; 2. Harvard Business School; MBA 1. Program Associate, Bill & Melinda Gates Foundation 2. Business Analyst, McKinsey & Co Agrawal, Abhishek # Vice President Harvard Business School, MBA; Wharton School, BS in Economics 1. Lazards investment banking group and 2. Lazard Technology Partners, a venture capital firm. Mittal, Nishant Vice President 1. Delhi College of Engineering; B.E.; 2. University of California Irvine; M.S. in Biomedical Engg; 3. Stanford Graduate School of Business; MBA Business Analyst, McKinsey & Co Sharma, Nishant Vice President 1. IIT Delhi, M.Tech; 2. Harvard Business School, MBA 1. Business Analyst, McKinsey & Co; 2. Bill & Melinda Gates Foundation Soni, Amit # Vice President 1. B.Tech, IIT Delhi; 2. Wharton School, MBA 1. Associate Director, 3i Plc; 2. Bill & Melinda Gates Foundation; 3. McKinsey & Co Ahmed, Tariq Senior Associate Ross School of Business, University of Michigan, BBA 1. Morgan Stanley, Analyst; 2. AEA Investors, Senior Associate; 3. Blue River Capital, Vice President Mehta, Parin Senior Associate 1. Mumbai University, BE.; 2. Sydenham Institute of Mgt Studies, MBA. 1. Research Analyst, McKinsey & Co; 2. Senior Consultant, Capgemini Consulting. Sood, Rajat # Senior Associate 1. IIT Delhi, B.Tech. (Elect. Engg); 2. IIM Calcutta, MBA Associate, McKinsey & Co Marathe,

Nikhil Associate 1. Karnataka University; B Com; 2. Institute of Chartered Accountants of India 1. Merrill Lynch; 2. Morgan Stanley Advantage Services, Associate Jain, Pratik Analyst 1. Lucknow University, B.Com; 2. IMT Ghaziabad, MBA 1. First Global Finance; Research Analyst; 2. JPMorgan Services India, Analyst * Identified on the basis of individuals names. # Based in New York and the remaining, in Mumbai. 76

The PE Firms Senior Management

Name Position Educational Qualifications Previous Employment
Steven A Denning Chairman Stanford Business School, MBA; Naval Postgraduate School, MS Consultant, McKinsey & Co. William E Ford CEO Stanford Graduate School of Business; MBA Morgan Stanley & Co. as an investment banker. John Bernstein Managing Director Downing College, Cambridge University; M.A. Partner, Advent International Mark F. Dzialga Managing Director Columbia University Graduate School of Business; MBA, Cohead of Merger Technology Group, Goldman Sachs Group, Inc William O. Grabe Managing Director UCLA Graduate School of Business; MBA, 1963 and New York University; BS, 1958 IBM Vice President, General Manager, Marketing and Services, IBM United States Abhay Havaldar Managing Director London Business School; MA, 1994 and Degree in Electrical Engineering from University of Bombay. Partner, ConnectCapital David C. Hodgson Managing Director

Stanford Graduate School of Business; MBA, 1982 and Dartmouth College; BA President, New England Software Rene M. Kern Managing Director Wharton School and School of the Arts & Sciences, MBA/MA Vice President, Morgan Stanley & Co. was a management consultant with Bain & Company in Boston, MA Jonathan Korngold Managing Director Harvard Business School; MBA and Harvard University; BA Goldman Sachs and Company Chris Lanning Managing Director University of Virginia; JD, 1995 and University of Virginia; BA, 1991 Senior Corporate Associate, Hunton & Williams, a Law Firm Jeff Leng Managing Director Wharton School of Business, University of Pennsylvania; MBA Managing Director, Warburg Pincus Anton Levy Managing Director Columbia University Graduate School of Business; MBA Financial Analyst, Morgan Stanley Adrianna C. Ma Managing Director Harvard Business School; MBA, 2000 and Massachusetts Institute of Technology; MEng and BS Vice President, Morgan Stanley & Co Marc F. McMorris Managing Director Wharton School, University of Pennsylvania; MBA Vice President, Goldman Sachs Group Thomas Murphy Managing Director Stern School of Business, New York University; MBA Senior Accountant, Deloitte & Touche Fernando

Marques Oliveira Managing Director BS; Fundao Getulio Vargas, So Paulo Director, Grupo Icatu Ranjit Pandit Managing Director Wharton School, University of Pennsylvania; MBA Managing Director, McKinsey & Co Drew Pearson Managing School of the Arts & Sciences, Business Analyst, McKinsey & Co 77

Name Position Educational Qualifications Previous Employment

Director University of Pennsylvania; MA/BA, 1994 and The Wharton School, University of Pennsylvania; BS Raul R. Rai Managing Director Harvard Business School; MBA, 1996 Managing Director, UBS Goldman Sachs in New York and London, as Vice President in the Communications, Media & Technology group David Rosenstein Managing Director New York University School of Law; JD, 1993 Associate at the New York law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Sunish Sharma Managing Director Indian Institute of Management, MBA, 1997; Indian Institute of Cost and Work Accountants, Cost & Work Accountant Engagement Manager, McKinsey & Co Tom Tinsley Managing Director Stanford Graduate School of Business; MBA, 1978 and University of Notre Dame; BA, 1975 Chairman and CEO, Baan Company N.V. and Director, McKinsey & Co Philip P. Trahanas Managing Director Wharton School, University of Pennsylvania; MBA, 1996, The Moore School, University of Pennsylvania Senior Associate, Morgan Stanley

Florian Wendelstadt Managing Director EAP ESCP; Masters and Dipl Kfm, 1993 and University of Passau; BA, 1990 Consultant, Bain Consulting Source: Based on the details given at the companys website : http://www.generalatlantic.com The shaded entries are common to the first list. 78

Annexure E Table E.1 Industry/Financing Stagewise Distribution of PE/VC Investment (20042008)

Sector Share in Total Investment (%) 2004 2005 2006 2007 2008
IT & ITES 42.66 12.32 23.86 6.50 11.67 ComputerHardware 2.75 1.90 0.67 1.13 1.63 Healthcare 11.10 15.77 5.83 3.40 6.02 Manufacturing 15.20 18.50 11.71 7.56 9.19 Engineering & Construction 12.21 6.77 12.05 13.37 27.52 Telecom & Media 3.91 4.49 14.84 21.34 14.96 Transportation & Logistics 0.26 3.48 5.13 4.23 4.92 Financial Services 3.89 13.53 16.45 35.07 10.97 NonFinancial Services 3.23 12.23 6.04 5.41 7.63 Others 4.78 11.02 3.41 1.98 5.50 Financing Stage Early 4.55 5.16 7.59 12.47 3.04 Growth 11.31 8.42 16.82 20.41 12.08 Late 20.00 27.68 31.81 24.82 62.51 PreIPO 4.76 1.99 3.63 4.63 PIPE 34.38 41.97 21.11 33.61 16.11 Buyout 29.76 12.00 20.67 5.07 1.63 Total Investment ($ mn.) 1,759.85 2,108.90 10,095.19 22,014.06 8,117.91 Source: Based on Thillai Rajan A. and Ashish Deshmukh, India Venture Capital and Private Equity Report, Department of Management Studies, Indian Institute of Technology Madras, 2009.

Table E.2 Stagewise Distribution of PE/VC Investments in Various Sectors (200408)

Sector Shares of Different Financing Stags in Percentages Total Investment Early Growth Late PreIPO PIPE Buyout ($ mn.)
IT & ITES 10.53 16.90 18.39 1.25 10.26 42.66 5,797 ComputerHardware 10.96 44.57 21.86 6.18 11.79 4.65 538 Healthcare 5.16 17.98 47.02 2.35 26.09 1.40 2,353 Manufacturing 0.69 8.72 39.48 1.24 44.82 5.05 4,249 Engineering & Construction 10.46 23.71 40.08 6.03 17.98 1.74 6,751 Telecom & Media 1.11 8.29 58.15 1.77 29.15 1.53 7,575 Transportation & Logistics 9.55 7.89 41.38 7.73 22.68 10.76 1,927 Financial services 17.11 22.51 14.47 1.69 40.93 3.29 10,626 NonFinancial services 11.98 23.82 32.80 4.21 14.89 12.31 2,735 Others 0.51 7.11 24.24 17.96 34.60 15.57 1,544 All 8.95 17.12 33.30 3.35 27.96 9.33 44,096 Source: See Table E.1.

Table E.3 Financing Stage wise Distribution of Investment in 2007 in Different Regions and India
in % Financing Stage India Asia North America Europe
Early 12.50 8.00 6.00 3.00 Expansion (Growth + Late) 45.30 20.00 11.00 13.00 Other (PIPE+PreIPO) 37.20 24.00 12.00 5.00 Buyout 5.00 48.00 71.00 79.00 All 100.00 100.00 100.00 100.00 Source: See Table E.1.

79

List of ISID Working Papers

WP2010/12 On the Sustainability of Indias NonInclusive High Growth, Surajit Mazumdar WP2010/11 Operation of FDI Caps in India and Corporate Control Mechanisms, K.S.

Chalapati Rao & Biswajit Dhar.

WP2010/10 Indian Capitalism: A Case That Doesnt Fit?, Surajit Mazumdar. WP2010/09 Big Business and Economic Nationalism in India, Surajit Mazumdar WP2010/08 Aligning with both the Soviet Union and with the Pharmaceutical Transnationals: Dilemmas attendant on initiating Drug Production in India,

Nasir Tyabji.
WP2010/07 The Arduous Route to ensuring some Minimum Public Shareholding in Listed Companies, K.S. Chalapati Rao. WP2010/06 Managing Finance in Emerging Economies: The Case of India, Sunanda Sen. WP2010/05 Social Science Research in Globalising India: Historical Development and Recent Trends, T.S. Papola. WP2010/04 Private Industry and the Second Five Year Plan: The Mundhra Episode as exemplar of Capitalist Myopia, Nasir Tyabji. WP2010/03 Trading in Indias Commodity Future Markets, Sunanda Sen and Mahua Paul. WP2010/02 Industry and Services in Growth and Structural Change in India: Some Unexplored Features, Surajit Mazumdar. WP2010/01 Does the Current Global Crisis remind us of the Great Depression?, Sunanda Sen. WP2009/02 Footwear Cluster in Kolkata: A Case of Selfexploitative Fragmentation, Satyaki

Roy.
WP2009/01 Garments Industry in India: Lessons from Two Clusters, Satyaki Roy. WP2008/12: Global Financial Crisis: A Classic Ponzi Affair?, Sunanda Sen. WP2008/11: The Analysis of Business Groups: Some Observations with reference to India,

Surajit Mazumdar.
WP2008/10: Outward FDI and Knowledge Flows: A Study of the Indian Automotive Sector,

Jaya Prakash Pradhan.

WP2008/09: SouthSouth Investment in Infrastructure: The Operation of Indian Firms in Developing Countries, Jaya Prakash Pradhan. WP2008/08 Indian Direct Investment in Developing Countries: Emerging Trends and Development Impacts, Jaya Prakash Pradhan. WP2008/07 Investment and Growth in India under Liberalization: Asymmetries and Instabilities, Surajit Mazumdar. WP2008/06 Media the Key Driver of Consumerism: MacroMicro Linkage and Policy DimensionA Case Study of FM Radio, Abhilasha Kumari.
* Already Published. Most of the working papers are downloadable from the institutes website: http://isidev.nic.in/ or http://isid.org.in/

Institute for Studies in Industrial Development

4, Institutional Area, Vasant Kunj, New Delhi - 110 070, India Phone: +91 11 2676 1600; Fax: +91 11 2676 1631 E-mail: info@isid.org.in; Website: http://isid.org.in

About the ISID

The Institute for Studies in Industrial Development (ISID), successor to the Corporate Studies Group (CSG), is a national-level policy research organization in the public domain and is affi liated to the Indian Council of Social Science Research (ICSSR). Developing on the initial strength of studying Indias industrial regulations, ISID has gained varied expertise in the analysis of the issues thrown up by the changing policy environment. The Institutes research and academic activities are organized under the following broad thematic areas: Industrial Development: Complementarity and performance of different sectors (public, private, FDI, cooperative, SMEs, etc.); trends, structures and performance of Indian industries in the context of globalisation; locational aspects of industry in the context of balanced regional development. Corporate Sector: Ownership structures; fi nance; mergers and acquisitions; effi cacy of regulatory systems and other means of policy intervention; trends and changes in the Indian corporate

sector in the background of global developments in corporate governance, integration and competitiveness. Trade, Investment and Technology: Trade policy reforms, WTO, composition and direction of trade, import intensity of exports, regional and bilateral trade, foreign investment, technology imports, R&D and patents. Employment, Labour and Social Sector: Growth and structure of employment; impact of economic reforms and globalisation; trade and employment, labour regulation, social protection, health, education, etc. Media Studies: Use of modern multimedia techniques for effective, wider and focused dissemination of social science research and promote public debates. ISID has developed databases on various aspects of the Indian economy, particularly concerning industry and the corporate sector. It has created On-line Indexes of 175 Indian Social Science Journals (OLI) and 15 daily English Newspapers. More than one million scanned images of Press Clippings on diverse social science subjects are available online to scholars and researchers. These databases have been widely acclaimed as valuable sources of information for researchers studying Indias socio-economic development.

ISID

Institute for Studies in Industrial Development

4, Institutional Area, Vasant Kunj New Delhi - 110 070, India Research and Information System for Developming Countries Zone IV-B, Fourth Floor, India Habitat Centre Lodhi Road, New Delhi-110 003, India

A REPORT ON Foreign direct investment (FDI) and foreign institutional investors (FII) in India
Submitted By: Nitin Kansal
Enrollment No: 07BS2683 Mobile no. 9861888252, 9238822258 E-mail Id- nitinkansal25633049@yahoo.co.in 1|Page

A REPORT ON Foreign direct investment (FDI) and foreign institutional investors (FII) in India
Submitted By: Nitin Kansal
Enrollment No: 07BS2683 Mobile no. 9861888252, 9238822258 E-mail Id- nitinkansal25633049@yahoo.co.in

A report submitted in partial fulfillment of the requirements of MBA program

Distribution list: Dr. Jyotirmayee Kar.

ACKNOWLEDGEMENTS
2|Page

Any accomplishment requires the effort of many people and this work is no different. I take this opportunity to thank Dr. Jyotirmayee Kar (Faculty Guide of ICFAI Business School) for providing me valuable product training and guidance at various stages of my project. I will also remain highly indebted to Dr. Pradeep Kumar Samanta (MRP Co-coordinator) for giving me the opportunity to work for this MRP. Lastly I am thankful to all my colleagues who have given time to help me during completion of the report.
3|Page

Table of contents
Abstract .....06 1. Introduction ......07 1.1 Objective of project .08 1.2 Methodology. ..08 1.3 Limitation 09 2. Main text (FDI) 09 2.1 About foreign direct investment .10 2.2 FDI Indian scenario .10 2.3 FDI in India approval route 11 2.4 Analysis of sector specific policy of FDI

12 2.5 Analysis of share of top ten investing countries in India .16 2.6 Analysis of sectors attracting highest FDI equity in flows 18 3. Main text (FII) ..19 3.1 Introduction to FII.. .19 3.2 Market design in India for FIIs.. .23 4|Page 3.3 Registration process of FIIs. ..23 3.4 Prohibition on investment .25 3.5 Trends of FIIs in India .25 3.6 Analysis of trends in FIIs investment ..26 3.7 Details of indices taken .28 3.8 Framing of hypothesis ..29 3.9 Recording of observation ...29 4. Key findings ..31 5. Conclusion .. .32 6. Appendices 1.. .33 7. Reference ...38 7.1 Internet sites ...38 7.2 Journal ..38 7.3 Books. ...38

List of illustrations- list of tables.

5|Page Table no. Table name Page no. 1. Sector-specific policy for FDI. 12 2. Share of top investing countries FDI equity inflows. 16 3. Sectors attracting highest FDI equity inflows. 18

4. SEBI Registered FIIs in India. 25 5. Trends in FII Investment. 26 6. Indices period of study and observations. 28 7. Key finding for objective 2. 31 8. Data of monthly closing indices of various Nifty indexes. 33

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) Net foreign direct investment (FDI) flows into India reached 70630 crore in Indias 2006 07 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 6|Page 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
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. 7|Page 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). 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 8|Page 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. 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. 9|Page

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. 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. 10 | P a g e 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 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. 11 | P a g e

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 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. Sector/Activity FDI Cap /Equity Entry/Route A) AGRICULTURE 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) INDUSTRY B) 1 MINING 3. Mining covering exploration and mining of diamonds & precious stones; gold, silver and minerals. 100% Automatic 4. Coal & Lignite mining for captive consumption by power projects, and iron & steel, cement production and other eligible activities permitted under the Coal Mines (Nationalization) 100% Automatic 5. Mining and mineral separation of titanium bearing minerals and ores, its

100% FIPB 12 | P a g e
value addition and integrated activities B) 2. MANUFACTURING 6. Alcohol- Distillation & Brewing 100% Automatic 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. 100% Automatic 11. Industrial explosives - Manufacture 100% Automatic 12. Drugs & Pharmaceuticals including those involving use of recombinant DNA technology 100% Automatic B) 3. POWER 13. Power including generation (Except Atomic energy); transmission, distribution and Power Trading. 100% Automatic C) SERVICES 14. CIVIL AVIATION SECTOR i. Airportsa. Greenfield projects 100% Automatic b. Existing projects 100% FIPB

Beyond 74% ii. Air Transport Services including Domestic Scheduled Passenger Airlines; NonSchedules 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 Automatic 13 | P a g e
NRIs investment g. Maintenance and Repair organizations; flying training institutes; and technical training institutions 100% Automatic 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

20%
FIPB d. Setting up hardware facilities such as uplinking, HUB, etc 49% (FDI+FII) FIPB e. Up-linking a News & Current Affairs

TV Channel
26% FDI+FII FIPB f. Up-linking a Non- news & Current Affairs TV Channel 100% FIPB 18. Commodity Exchanges 49% (FDI+FII)

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

14 | P a g e 22. Industrial Parks both setting up and

in established Industrial Parks 100% Automatic 23. Insurance 26% Automatic 24. Investing companies in infrastructure / services sector (except telecom sector) 100% FIPB 25. Non Banking Finance Companies 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

xviii) Rural credit 100% Automatic 26. Petroleum & Natural Gas sector a. Refining 49% in case of PSUs
100% in case of Private

companies
Automatic (in case of private companies)

FIPB (in case of

PSUs b. Other than Refining and including market

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

sector. 100% Automatic 27. Print Media a. Publishing of newspaper and

periodicals dealing with news and current affairs 26% FIPB b. Publishing of scientific magazines/ specialty journals/ periodicals 100% FIPB 28. Telecommunications a. Basic and cellular, Unified Access Services, National/ International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global 74% (Including FDI, FII, NRI, FCCBs, ADRs, GDRs, convertible preference Automatic up to 49%. FIPB beyond 49%.

15 | P a g e
Mobile Personal Communications Services (GMPCS) and other value added telecom services shares, and proportionate foreign equity in Indian promoters/ Investing Company) b. ISP with gateways, radio- paging, endtoend

bandwidth. 74% Automatic up to 49%.

FIPB beyond 49%. c. a) ISP without gateway, (b) infrastructure provider providing dark fibre, right of way,duct space,tower (Category I); (c) electronic mail and voice mail 100% Automatic up to 49%. FIPB beyond 49%. d. Manufacture of telecom equipments 100% Automatic

29. Trading
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

100% Automatic 30. Satellites - Establishment and

operation 74% FIPB 31. Special Economic Zones and Free Trade Warehousing Zones covering setting up of these Zones and setting up units in the Zones

100% Automatic

2.5 Analysis of share of top ten investing countries FDI equity in flows Table no. 2: Share of top investing countries FDI equity inflows. (Source: http://dipp.nic.in/fdi_statistics/india_fdi_index.htm)
Cumulative amount of FDI inflows (From Aug. 1991 to march 2007): Rs. 2,32,041 crore and US$ 54,628 million. Ranks Country Cumulative inflows (from Aug. 1991 to march 2007) Amount Rupees in crore. %age with total inflows (in terms of rupees) 1. Mauritius 79162 34.11 2. U.S.A. 24536 10.57 3. U.K 16660 7.17 4. Netherlands 11402 4.91 5. Japan 9313 4.01 6. Germany 7060 3.04 16 | P a g e 7. Singapore 7050 3.03 8. France 3803 1.63 9. South Korea 3234 1.39 10. Switzerland 2879 1.24
TOTAL FDI INFLOWS

232041 Foreign investors have begun to take a more active role in the Indian economy in recent years. By

country, the largest direct investor in India is Mauritius; largely because of the IndiaMauritius double-taxation treaty. Firms based in Mauritius invested 79162 crores in India between Aug. 1991 and March 2007, equal to 34.11 percent of total FDI inflows. The second largest investor in India is the United States, with total capital flows of 24536 crore during the 19912007 periods, followed by the United Kingdom, the Netherlands, and Japan. Mauritius According to Indian government statistics, Mauritius accounts for the largest share of cumulative FDI inflows to India from 1991 to 2007, nearly 34.11 percent. Many companies based outside of India utilize Mauritian holding companies to take advantage of the India- Mauritius Double Taxation Avoidance Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains taxes, and may allow some India-based firms to avoid paying certain taxes through a process known as round tripping. The extent of round tripping by Indian companies through Mauritius is unknown. However, the Indian government is concerned enough about this problem to have asked the government of Mauritius to set up a joint monitoring mechanism to study these investment flows. The potential loss of tax revenue is of particular concern to the Indian government. The existence of the treaty makes it difficult to clearly understand the pattern of FDI flows, and likely leads to reduced tax revenues collected by the Indian government. United States The United States is the second largest source of FDI in India (10.57 % of the total), valued at 24536 crore in cumulative inflows between August 1991 and March 2007. According to the Indian government, the top sectors attracting FDI from the United States to India during 1991 2007 (latest available) are fuel (36 percent), telecommunications (11 percent), electrical equipment (10 percent), food processing (9 percent), and services (8 percent). According to the available M&A data, the two top sectors attracting FDI inflows from the United States are computer systems design and programming and manufacturing.

Since 2002, many of the major U.S. software and computer brands, such as Microsoft, Honeywell, Cisco Systems, Adobe Systems, McAfee, and Intel have established R&D operations in India, primarily in Hyderabad or Bangalore. The majority of U.S. electronics companies that have announced greenfield projects in India are concentrated in the semiconductor sector. By far the largest such project is AMDs chip manufacturing facility in Hyderabad, Andhra Pradesh. The largest share (36 percent) was found in the manufacturing sector, most prominently in the machinery, chemicals, and transportation equipment manufacturing segments. Other important categories of employment are professional, scientific, and technical services; and wholesale trade, with 29 percent and 18 percent of U.S. affiliate employment, respectively. 17 | P a g e European Union Within the European Union, the largest country investors were the United Kingdom and the Netherlands, with 16660 crore and 11402 crore, respectively, of cumulative FDI inflows between Aug. 1991 and March 2007. The United Kingdom, the Netherlands, and Germany together accounted for almost 75 percent of all FDI flows from the EU to India. All EU countries together accounted for approximately 25 percent of all FDI inflows to India between August 1991 and March 2007. FDI from the EU to India is primarily concentrated in the power/energy, telecommunications, and transportation sectors. The top sectors attracting FDI from the European Union are similar to FDI from the United States. Manufacturing; information services; and professional, scientific, and technical services have attracted the largest shares of FDI inflows from the EU to India since 2000. Unilever, Reuters Group, P&O Ports Ltd, Vodafone, and Barclays are examples of EU companies investing in India by means of mergers and acquisitions. European companies accounted for 31 percent of the total number and 43 percent of the total value for all reported Greenfield FDI projects. The number of EU Greenfield projects was distributed among four major clusters: ICT (17 percent), heavy industry (16 percent),

business and financial services (15 percent), and transport (11 percent). However, the heavy industry cluster accounted for the majority (68 percent) of the total value of these projects. Japan Japan was the Fifth largest source of cumulative FDI inflows in India between August 1991 and March 2007, i.e. the cumulative flow is 9313 crore and it is 4.01% of total inflow. FDI inflows to India from most other principal source countries have steadily increased since 2000, but inflows from Japan to India have decreased during this time period. There does not appear to be a single factor that explains the recent decline in FDI inflows from Japan to India. India is, however, one of the largest recipients of Japanese Official Development Assistance (ODA), through which Japan has assisted India in building infrastructure, including electricity generation, transportation, and water supply. It is possible that this Japanese government assistance may crowd out some private sector Japanese investment. The top sectors attracting FDI inflows from Japan to India are transportation (54 percent), electrical equipment (7 percent), telecommunications, and services (3 percent). The available M&A data corresponds with the overall FDI trends in sectors attracting inflows from Japan to India. Companies dealing in the transportation industry, specifically automobiles, and the auto component/peripheral industries dominate M&A activity from Japan to India, including Yamaha Motors, Toyota, Kirloskar Auto Parts Ltd., and Mitsubishi Heavy Industries Ltd. Japanese companies have also invested in an estimated 148 Greenfield FDI projects valued at least at $3.7 billion between 2002 and 2006. In April 2007, Japanese and Indian officials announced a major new collaboration between the two countries to build a new Delhi-Mumbai industrial corridor, to be funded through a public-private partnership and private-sector FDI, primarily from Japanese companies. The project was begun in January 2008 with initial investment of $2 billion from the two countries. The corridor will cross 6 states and extend for 1,483 km, in an area inhabited by 180 million people. At completion in 2015, the corridor is expected to include total FDI of $4550 billion. A large share of that total is

destined for infrastructure, including a 4,000 MW power plant, 3 ports, and 6 airports, along with additional connections to existing ports. Private investment is expected to fund 10-12 new industrial zones, upgrade 56 existing airports, and set up 10 logistics parks. The Indian government expects that by 2020, the industrial corridor will contribute to employment growth of 15 percent in the region, 28 percent growth in industrial output, and 38 percent growth in exports. 18 | P a g e

2.6 Analysis of sectors attracting highest FDI equity inflows Table no. 3: Sectors attracting highest FDI equity inflows :( source: http://dipp.nic.in/fdi_statistics/india_fdi_index.htm)
Ranks Sector Cumulative Inflows (from August 1991 to March 2007) Amount in rupees in crore %age with total inflows 1. Electrical Equipments (including computer software & electronics) 36,034 18.77 2. Services Sector (financial & non-financial) 34,238 17.84 3. Telecommunications (radio paging, cellular mobile, basic telephone services) 16,691 8.7 4 Transportation Industry 15,427 8.04 5. Fuels (power + oil refinery) 12,105 6.31 6. Chemicals (other than fertilizers) 9,510 4.95 7. Construction activities (including roads & highways) 6,396 3.33 8. Drugs & Pharmaceuticals 5,281 2.75 9. Food Processing Industries 5,143 2.68 10. Cement and Gypsum Products 4,329 2.26 TOTAL FDI INFLOWS 2,32,041

The sectors receiving the largest shares of total FDI inflows between August 1991 and March 2007 were the electrical equipment sector and the services sector, each accounting for 18.77 and 17.84

percent respectively. These were followed by the telecommunications, transportation, fuels, and chemicals 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. ICT and electronics have been the largest industry recipients of Greenfield FDI into India in recent years, but have seen the number of new Greenfield projects plateau since 2004. Rather, the size of the projects in these industries has increased substantially. For example, global semiconductor manufacturers Advanced Micro Devices (AMD - United States) and Flextronics (Singapore) have entered into separate joint ventures with SemIndia to build semiconductor manufacturing facilities in Hyderabad. The $3 billion AMD-SemIndia joint venture will produce semiconductor chips which can then be used to manufacture electronic products in the Flextronics-SemIndia $3 billion joint venture. The chip fabrication facility will manufacture chips for cell phones, set-top boxes, personal computers, and similar products. The heavy industry and transport equipment sectors together attracted over FDI of 15427 crore in Greenfield FDI projects during 1991 to 2007. The cluster with the highest reported value during 19 | P a g e 200206 is heavy industry. Projects in this sector tend to be highly capital intensive, with single projects frequently requiring upwards of $6 billion in startup investment costs. The largest recent examples include the POSCO and Arcelor-Mittal Steel projects, and Vedanta Resources (United Kingdom) aluminum smelter project, all planned for the state of Orissa.

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 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. 20 | P a g e 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 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); 21 | P a g e 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. 9) There would be no restriction on the volume of investment minimum or maximum-for the purpose of entry of FIIs, in the primary/secondary market. Also, there would be no lockin period prescribed for the purposes of such investments made by FIIs. It was expected that the differential in the rates of taxation of the long term capital gains and short term capital gains would automatically induce the FIIs to retain their investments as long term investments. 10) Portfolio investments in primary or secondary markets were subject to a ceiling of 30% of issued share capital for the total holdings of all registered FIIs, in any one company. The

ceiling was made applicable to all holdings taking into account the conversions out of the fully and partly convertible debentures issued by the company. The holding of a single FII in any company would also be subject to a ceiling of 10% of total issued capital. For this purpose, the holdings of an FII group would be counted as holdings of a single FII. 11) The maximum holdings of 24% for all non-resident portfolio investments, including those of the registered FIIs, were to include NRI corporate and non-corporate investments, but did not include the following: a. Foreign investments under financial collaborations (direct foreign investments), which are permitted up to 51% in all priority areas. b. Investments by FIIs through the following alternative routes: i. Offshore single/regional funds; ii. Global Depository Receipts; iii. Euro convertibles. 12) Disinvestment would be allowed only through stock exchange in India, including the OTC Exchange. In exceptional cases, SEBI may permit sales other than through stock exchanges, provided the sale price is not significantly different from the stock market quotations, where available. 13) All secondary market operations would be only through the recognized intermediaries on the Indian Stock Exchange, including OTC Exchange of India. A registered FII would be expected not to engage in any short selling in securities and to take delivery of purchased and give delivery of sold securities. 14)A registered FII can appoint as Custodian an agency approved by SEBI to act as custodian of Securities and for confirmation of transactions in Securities, settlement of purchase and sale, and for information reporting. Such custodian should establish separate accounts for detailing on a daily basis the investment capital utilization and securities held by each FII for which it is acting as custodian. The custodian was supposing to report to the RBI and SEBI semiannually as part of its disclosure and reporting guidelines. 22 | P a g e 15) The RBI should make available to the designated bank branches a list of companies where no

investment will be allowed on the basis of the upper prescribed ceiling of 30% having been reached under the portfolio investment scheme. 16) Reserve Bank of India may at any time request by an order a registered FII to submit information regarding the records of utilization of the inward remittances of investment capital and the statement of securities transactions. Reserve Bank of India and/or SEBI may also at any time conduct a direct inspection of the records and accounting books of a registered FII. 17) FIIs investing under this scheme will benefit from a concessional tax regime of a flat rate tax of 20% on dividend and interest income and a tax rate of 10% on long term (one year or more) capital gains. These guidelines were suitably incorporated under the SEBI (FIIs) Regulations, 1995. These regulations continue to maintain the link with the government guidelines through an inserted clause that the investment by FIIs should also be subject to Government guidelines. This linkage has allowed the Government to indicate various investment limits including in specific sectors.

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 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 23 | P a g e 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 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:24 | P a g e (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 subaccounts, 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:

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).

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. 25 | P a g e 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. Table no. 4: 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

3.6 Analysis of trends in FII investment

Table no. 5: Trends in FII Investment Year Gross Purchases (a) (Rs.crore) Gross Sales (b) (Rs.crore) Net Investment (a-b) (Rs.crore) % increase 1992-93 17 4 13 1993-94 5593 466 5127 39338.46154 1994-95 7631 2835 4796 -6.456017164 1995-96 9694 2752 6942 44.74562135 1996-97 15554 6979 8575 23.52348027 26 | P a g e 1997-98 18695 12737 5958 -30.51895044 1998-99 16115 17699 -1584 -126.5861027 1999-00 56856 46734 10122 739.0151515 2000-01 74051 64116 9935 -1.847460976 2001-02 49920 41165 8755 -11.87720181 2002-03 47061 44373 2688 -69.29754426 2003-04 144858 99094 45764 1602.529762 2004-05 216953 171072 45881 0.25565947 2005-06 346978 305512 41466 -9.622719644 2006-07 520508 489667 30841 -25.62340231 During the initial year 1992-93, the FII flows started in September, 1992 which amounted to Rs. 13

crore because at this moment government was framing policy guidelines for FIIs. However, within a year, the FIIs rose 39338.46% of 1992-93 during 1993-94 because government had opened door for investment in India. Thereafter, the FII inflows witnessed a dip of 6.45%. The year 19951996 witnessed a turnaround, gliding up the contribution of FII to a massive of Rs. 6942 crore. Investment by FIIs during 1996-1997 rose a little i.e. 23.52% of the preceding year. This period was ripe enough for FII Investments because at that time where international capital markets were in the phase of overheating; the Indian economy posted strong fundamentals, stable exchange rate expectations and offered investment incentives and congenial climate for investment of these funds in India. During 1997-98, FII inflows posted a fall of 30.51%. This slack in investments by FIIs was primarily due to the South-East Asian Crisis and the period of volatility experienced between November 1997 and February 1998. The net investment flows by FIIs have always been positive from the year of their entry. Only in the year 1998-99, an outflow to the tune of Rs. 17699 crore was witnessed for the first time. This was primarily because of the economic sanctions imposed on India by the US, Japan and other industrialized economies. These economic sanctions were the result of the testing of series of nuclear bombs by India in May 1998. Thereafter, the FII portfolios investments quickly recovered and showed positive net investments for all the subsequent years. FIIs investments declined from Rs. 10122 crore during 1999-2000 to Rs. 9935 crore during 2000-01. FII investment posted a year-on-year decline of 1.8 % in 2000-01, 11.87 % in 2001-02 and 69.29 % in 2002-03. Investments by FII posted a fall of 80 % in 2002-03 as compared with investments in the period of 1999-00. Investments by FIIs rebounded from depressed levels from the year 2003-04 and witnessed an unprecedented surge. FIIs flows were recycled to India following readjustment of global portfolios of institutional investors, triggered by robust growth in Indian economy and attractive valuations in the Indian equity market as compared with other emerging market economies in Asia.

The slowdown in 2004-05 was on account of global uncertainties caused by hardening of crude oil prices and the upturn in the interest rate cycle. The resumption in the net FII inflows to India from August 2004 continued till end 2004-05. The inflows of FIIs during the year 2004-05 was Rs. 45881 crore. During 2006-07 the foreign institutional investors continued to invest large funds in Indian securities market. However, due to global developments like meltdown in global commodities markets and equity market during the three month period between May 2006 to July 2006, fall in Asian Equity markets, tightening of capital controls in Thailand and its spillover effects, there was a slack in FII investments. 27 | P a g e As I had discussed FIIs environment in India like what is FII in India, policy framework for FIIs, market design in India for foreign institutional investors, registration process in India, Trends of Foreign Institutional Investments in India. Now to fulfill the objective of this project i.e. influence of FII on movement of Indian stock exchange (national stock exchange of India) during the post liberalization period that is 1991 to 2007, the following research methodology is designed. This project, in a way, reveals the influence of FIIs investment on movement of Indian stock exchange (national stock exchange of India) during the post liberalization period that is 1991 to 2007. I have applied a simple linear model to estimate the effect of FII on the stock index. The data analysis tools used in the research is correlation and regression. I have taken six indices to study the impact of FII on Indian bourses. One of these indices is Nifty while other five are some specific index of NSE. These six indices give the close picture of Indian stock exchanges. I have taken average monthly data of FIIs and monthly closing index of all the indices. There may be many other factors on which a stock index may depend i.e. Government policies, budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar

exchange rate etc. But for my study I have selected only one independent variable i.e. FII and dependent variable is indices of nifty. This study uses the concept of correlation and regression to study the relationship between FII and stock index. The FII started investing in Indian capital market from September 1992 when the Indian economy was opened up in the same year. Their investments include equity only. The sample data of FIIs investments consists of monthly average from April 1992 to March 2007 and indices value consist monthly closing value with period of study and various observations which is given below in table. Table no. 6: indices period of study and observations.
Indices Period of study Observation S&P CNX NIFTY 30/Apr/91- 30/Mar/07 180 BANK NIFTY 31/Jan/00- 30/Mar/07 87 CNX 100 31/Jan/03- 30/Mar/07 51 CNX IT 31/Jan/96- 30/Mar/07 135 CNX NIFTY JUNIOR 31/Oct/95- 30/Mar/07 138 S&P CNX 500 30/Jun/99- 30/Mar/07 94

3.7 Details of indices taken:

The CNX 100 tracks the behavior of combined portfolio of two indices viz. S&P CNX Nifty and CNX Nifty Junior. It includes 100 of the 935 companies currently listed on the NSE. CNX 100 is computed using market capitalisation weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock 28 | P a g e splits, rights, etc without affecting the index value. The CNX 100 Index has a base date of Jan 1, 2003 and a base value of 1000. The S&P CNX 500 is India's first broad-based benchmark of the Indian capital market for comparing portfolio returns vis--vis market returns. The S&P CNX 500 represents about 92.66% of total market capitalization and about 86.44% of the total turnover on the NSE. The S&P CNX 500 Equity Index is desegregated into 72 Industry sectors, which are separately maintained by IISL. These industry indices are derived out of the S&P CNX 500 and care is taken to see that the industry representation

in the entire universe of securities is reflected in the S&P CNX 500. e.g., if in the entire universe of securities, banking sector has a 5% weightage then the Banking sector (as determined by the Banking stocks in S&P CNX 500) would have a 5% weightage in the S&P CNX 500. The Banking sector index would be derived out of the Banking stocks in the S&P CNX 500. The changes to the weightage of various sectors in the S&P CNX 500 would dynamically reflect the changes in the entire universe of securities. The calendar year 1994 has been selected as the base year for S&PCNX 500. The base value of the index is set at 1000. The CNX Bank Index is an index comprised of the most liquid and large capitalized Indian Banking stocks. It provides investors and market intermediaries with a benchmark that captures the capital market performance of Indian Banks. The Index has 12 stocks from the banking sector, which trade on the National Stock Exchange. The CNX Bank Index has a base date of Jan 1, 2000 and base value of 1000. The CNX IT Companies in this index are those that have more than 50% of their turnover from IT related activities like software development, hardware manufacture, vending, support and maintenance. The CNX IT Index constituents represent about 12.80% of the total market capitalization as on September 1, 2006. The CNX IT Index has a base date of Jan 1, 1996 and a base value of 1000. The Base Value of the index was revised from 1000 to 100 w.e.f. May 28, 2004. The CNX Nifty Junior Index comprises of the next rung of liquid securities after those forming part of S&P CNX Nifty. It may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as making up the 100 most liquid stocks in India. CNX Nifty Junior represents about 8.98% of the total market capitalization as on September 1, 2006. The average traded value for the last six months of all Junior Nifty stocks is approximately 9.17% of the traded value of all stocks on the NSE. Impact cost for CNX Nifty Junior for a portfolio size of RS.2.50 million is 0.15%. The CNX Nifty Junior was introduced on January 1, 1997, with base date and base value being November 03, 1996 and 1000

respectively and a base capital of Rs.0.43 trillion. The S&P CNX Nifty is a well-diversified 50 stock index accounting for 22 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. S&P CNX Nifty is based upon solid economic research and is well respected internationally as a pioneering effort in better understanding how to make a stock market index. The average total traded value for the last six months of all S&P CNX Nifty stocks is approximately 56.31 % of the traded value of all stocks on the NSE. S&P CNX Nifty stocks represent about 59.91 % of the total market capitalization as on September 1, 2006. The base period selected for S&P CNX Nifty index is the close of prices on November 3, 1995, which marks the completion of one year of 29 | P a g e operations of NSE's Capital Market Segment. The base value of the index has been set at 1000 and a base capital of RS.2.06 trillion.

3.8 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.

3.9 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 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). 30 | P a g e

4. KEY FINDING:
For objective 1
a) Net FDI in India was valued at $4.7 billion in the 200506 Indian fiscal year, and more than tripled, to $15.7 billion, in the 200607 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 IndiaMauritius 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 observatio n S&P CNX NIFTY 0.651 0.651 0.423 575.658 180

31 | P a g e
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 coefficient 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 31January03- 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.

5. 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 32 | P a g e 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.

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.

6 APPENDICES 1
Table no. 8: DATA OF MONTHLY CLOSING INDICES OF VARIOUS NIFTY INDEX . S&P CNX NIFTY MAIN BANK NIFTY CNX 100 CNX IT CNX NIFTY JUNIOR S&P CNX 500 Date Monthly closing Monthly closing Monthly closing Monthly closing Monthly closing Monthly closing 30-Apr-91 389.01 _ _ _ _ _ 31-May-91 403.18 _ _ _ _ _ 28-Jun-91 391.96 _ _ _ _ _ 31-Jul-91 498.71 _ _ _ _ _ 30-Aug-91 531.97 _ _ _ _ _ 30-Sep-91 553.79 _ _ _ _ _ 31-Oct-91 554.4 _ _ _ _ _ 29-Nov-91 563.17 _ _ _ _ _ 24-Dec-91 558.63 _ _ _ _ _ 31-Jan-92 684.93 _ _ _ _ _ 29-Feb-92 889.3 _ _ _ _ _ 31-Mar-92 1261.65 _ _ _ _ _ 33 | P a g e 30-Apr-92 1105.55 _ _ _ _ _ 29-May-92 826.16 _ _ _ _ _ 26-Jun-92 855.84 _ _ _ _ _ 31-Jul-92 767.94 _ _ _ _ _ 28-Aug-92 850.86 _ _ _ _ _

30-Sep-92 938.14 _ _ _ _ _ 30-Oct-92 809.87 _ _ _ _ _ 30-Nov-92 726.38 _ _ _ _ _ 24-Dec-92 761.31 _ _ _ _ _ 29-Jan-93 785.28 _ _ _ _ _ 27-Feb-93 774.18 _ _ _ _ _ 31-Mar-93 660.51 _ _ _ _ _ 30-Apr-93 622.42 _ _ _ _ _ 31-May-93 656.16 _ _ _ _ _ 30-Jun-93 667.5 _ _ _ _ _ 30-Jul-93 706.83 _ _ _ _ _ 30-Aug-93 799.65 _ _ _ _ _ 30-Sep-93 827.13 _ _ _ _ _ 29-Oct-93 817.18 _ _ _ _ _ 26-Nov-93 988.88 _ _ _ _ _ 24-Dec-93 1042.59 _ _ _ _ _ 31-Jan-94 1246.59 _ _ _ _ _ 28-Feb-94 1349.49 _ _ _ _ _ 31-Mar-94 1177.11 _ _ _ _ _ 29-Apr-94 1150.66 _ _ _ _ _ 31-May-94 1187.19 _ _ _ _ _ 30-Jun-94 1249.44 _ _ _ _ _ 29-Jul-94 1278.54 _ _ _ _ _ 31-Aug-94 1373.29 _ _ _ _ _ 30-Sep-94 1290.53 _ _ _ _ _ 31-Oct-94 1267.21 _ _ _ _ _ 30-Nov-94 1245.75 _ _ _ _ _ 23-Dec-94 1182.28 _ _ _ _ _ 31-Jan-95 1071.23 _ _ _ _ _ 28-Feb-95 1014.72 _ _ _ _ _ 31-Mar-95 990.24 _ _ _ _ _ 28-Apr-95 941.83 _ _ _ _ _ 31-May-95 997.4 _ _ _ _ _ 30-Jun-95 961.23 _ _ _ _ _ 31-Jul-95 994.25 _ _ _ _ _ 31-Aug-95 971.74 _ _ _ _ _ 29-Sep-95 1011.97 _ _ _ _ _ 31-Oct-95 988.26 _ _ _ 1167.18 _ 30-Nov-95 862.1 _ _ _ 991.7 _ 29-Dec-95 908.53 _ _ _ 1057.86 _ 31-Jan-96 848.42 _ _ 922.44 989 _ 29-Feb-96 992.51 _ _ 1023.85 1152.08 _ 29-Mar-96 985.3 _ _ 1012.78 1151.15 _ 34 | P a g e 30-Apr-96 1114.36 _ _ 1144.16 1273.72 _ 31-May-96 1089.92 _ _ 1068.8 1238.8 _

28-Jun-96 1122 _ _ 1122.31 1297.27 _ 31-Jul-96 1042.81 _ _ 980.02 1198.72 _ 30-Aug-96 1029 _ _ 973.15 1155.67 _ 30-Sep-96 943.96 _ _ 878.9 1041.61 _ 31-Oct-96 909.29 _ _ 849.73 1018.7 _ 29-Nov-96 830.32 _ _ 811.14 960.45 _ 31-Dec-96 899.1 _ _ 835.01 1035.07 _ 31-Jan-97 972.65 _ _ 922.71 1067.8 _ 28-Feb-97 998.65 _ _ 1046.02 1053.11 _ 31-Mar-97 968.3 _ _ 1049.07 1032.95 _ 30-Apr-97 1079.85 _ _ 1324.93 1104.65 _ 30-May-97 1050.9 _ _ 1330.07 1116.15 _ 30-Jun-97 1192.4 _ _ 1574.84 1163.9 _ 31-Jul-97 1221.5 _ _ 2017.48 1322 _ 29-Aug-97 1105 _ _ 2171.41 1255.15 _ 30-Sep-97 1123.8 _ _ 2680.7 1261.55 _ 30-Oct-97 1085.25 _ _ 2646.56 1246 _ 28-Nov-97 1023.95 _ _ 2447.39 1159.2 _ 31-Dec-97 1079.4 _ _ 2399.71 1189 _ 30-Jan-98 963.45 _ _ 2324.85 1106.3 _ 27-Feb-98 1060.75 _ _ 2755.26 1213.15 _ 31-Mar-98 1116.9 _ _ 3422.16 1339.4 _ 30-Apr-98 1159.35 _ _ 5383.9 1588.9 _ 29-May-98 1063.15 _ _ 6919.05 1620.2 _ 30-Jun-98 941.65 _ _ 5989.93 1342.2 _ 31-Jul-98 931.4 _ _ 6513.97 1450.45 _ 31-Aug-98 852.8 _ _ 6589.55 1483.65 _ 30-Sep-98 904.95 _ _ 6581.99 1538.5 _ 31-Oct-98 824 _ _ 6404.64 1419.75 _ 30-Nov-98 817.75 _ _ 5894.12 1379.5 _ 31-Dec-98 884.25 _ _ 7051.82 1519 _ 29-Jan-99 966.2 _ _ 11244.07 1692.5 _ 27-Feb-99 981.3 _ _ 12545.26 1773.45 _ 31-Mar-99 1078.05 _ _ 14081.01 2069.2 _ 30-Apr-99 978.2 _ _ 11357.5 1809 _ 31-May-99 1132.3 _ _ 13318.37 1968.45 _ 30-Jun-99 1187.7 _ _ 13575.23 1955.6 806.1 30-Jul-99 1310.15 _ _ 16489.64 2227.65 905.05 31-Aug-99 1412 _ _ 17911.89 2524.4 999.65 30-Sep-99 1413.1 _ _ 22528.22 2763.6 1025.1 29-Oct-99 1325.45 _ _ 20330.09 2588.55 972.6 30-Nov-99 1376.15 _ _ 25468.88 3057.45 1039.1 30-Dec-99 1480.45 _ _ 41742.03 3983.8 1205 31-Jan-00 1546.2 1148.89 _ 50705.62 4351.9 1316.25 29-Feb-00 1654.8 1075.15 _ 74537.88 4447.25 1486.65 31-Mar-00 1528.45 1106.83 _ 65240.55 3695.75 1322.9

35 | P a g e 28-Apr-00 1406.55 1056.2 _ 45085.8 2788.65 1067.6 31-May-00 1380.45 1001.24 _ 32394.06 2448.7 967.6 30-Jun-00 1471.45 1087.18 _ 42411.04 2672.45 1073.7 31-Jul-00 1332.85 993.58 _ 34587.23 2464.95 959.7 31-Aug-00 1394.1 1003.07 _ 42979.41 2548.25 1026.45 29-Sep-00 1271.65 907.53 _ 36285.95 2369.3 925.4 31-Oct-00 1172.75 861.27 _ 32309.49 2234.3 851.05 30-Nov-00 1268.15 941.08 _ 33382.18 2477.25 920.9 29-Dec-00 1263.55 971.73 _ 29383.46 2426.05 912.85 31-Jan-01 1371.7 1094.09 _ 33896.98 2407.7 981.2 28-Feb-01 1351.4 1171.65 _ 30116.65 2141.45 950.53 30-Mar-01 1148.2 991.51 _ 17468.25 1601.8 754.2 30-Apr-01 1125.25 992.76 _ 17267.4 1525.2 746.2 31-May-01 1167.9 1034.54 _ 18982.64 1627.15 791 29-Jun-01 1107.9 986.95 _ 16302.17 1415.4 725.85 31-Jul-01 1072.85 960.83 _ 15972.81 1342.55 697.05 31-Aug-01 1053.75 939.57 _ 15724.37 1277.35 684.2 28-Sep-01 913.85 797.97 _ 10902.19 1084.4 583.55 31-Oct-01 971.9 875.15 _ 12139.67 1174.2 622.2 29-Nov-01 1067.15 928.1 _ 16778.78 1334.15 703.2 31-Dec-01 1059.05 868.61 _ 18282.17 1298.3 700.6 31-Jan-02 1075.4 917.79 _ 18362.8 1348.55 714.5 28-Feb-02 1142.05 1028.48 _ 17554.44 1495.55 767.6 28-Mar-02 1129.55 1033.58 _ 18557.8 1566.95 775.5 30-Apr-02 1084.5 1044.13 _ 17936.8 1607.75 771.3 31-May-02 1028.8 1039.46 _ 16828.27 1497.1 739.55 28-Jun-02 1057.8 1094.7 _ 16561.81 1617.4 772.85 31-Jul-02 958.9 1055.87 _ 13652.87 1455.85 706.65 30-Aug-02 1010.6 1073.63 _ 15543.52 1452.6 737.15 30-Sep-02 963.15 1045.23 _ 15273 1257.85 691 31-Oct-02 951.4 1011.86 _ 15702.7 1255.3 691.95 29-Nov-02 1050.15 1094.95 _ 18909.9 1337.1 741.55 31-Dec-02 1093.5 1226.5 _ 19073.4 1413.05 772.85 31-Jan-03 1041.85 1273.62 963.55 16624.71 1376.85 749.1 28-Feb-03 1063.4 1306.02 982.26 17109.16 1387.1 762 31-Mar-03 978.2 1265.19 902.42 14966.88 1259.55 701.35 30-Apr-03 934.05 1314.71 872.71 11351.13 1339.75 697.2 30-May-03 1006.8 1630.94 959.99 10993.4 1664.15 807.2 30-Jun-03 1134.15 1657.56 1073.41 13002.4 1783.7 894.5 31-Jul-03 1185.85 1807.94 1135.3 13675.94 2012.3 938.55 29-Aug-03 1356.55 1940.75 1296.31 15056.3 2275.25 1100.45 30-Sep-03 1417.1 2029.28 1361.52 17315.55 2456.95 1138.55 31-Oct-03 1555.9 2294.55 1491.08 18550.6 2656.15 1218.3 28-Nov-03 1615.25 2202.46 1551.99 20644.8 2801.2 1285.4 31-Dec-03 1879.75 2588.78 1819.59 23542.25 3405.7 1531.35

30-Jan-04 1809.75 2639.88 1760.02 21370.45 3367.65 1459.8 27-Feb-04 1800.3 2603.97 1749.02 20599.2 3330.6 1442.8 31-Mar-04 1771.9 2813.7 1731.29 19372.9 3392.05 1457.5 36 | P a g e 30-Apr-04 1796.1 3059.79 1770.36 20687 3639.8 1507.55 31-May-04 1483.6 2243.9 1450.66 2042.15 2846.9 1226.55 30-Jun-04 1505.6 2256.12 1473.22 2115.2 2903.35 1248 30-Jul-04 1632.3 2332.29 1592.43 2269.2 3082.1 1351.45 31-Aug-04 1631.75 2345.16 1600.42 2340.15 3199 1377.2 30-Sep-04 1745.5 2505.7 1717.99 2496.2 3504.25 1478.75 29-Oct-04 1786.9 2466.96 1751.04 2667.15 3481.55 1502.05 30-Nov-04 1958.8 2997.66 1924.45 2996.5 3884.55 1653.2 31-Dec-04 2080.5 3497.36 2067.62 2936.9 4453.3 1804.9 31-Jan-05 2057.6 3429.6 2033.62 2849.4 4247.8 1768.25 28-Feb-05 2103.25 3676.5 2082.2 2919.05 4388.2 1827.4 31-Mar-05 2035.65 3536.64 2017.21 2923.15 4275.15 1772.85 29-Apr-05 1902.5 3162.21 1887.3 2539.75 4024.4 1688.65 31-May-05 2087.55 3467.72 2067.26 2933 4364.55 1834.85 30-Jun-05 2220.6 3638.4 2181.42 3072.1 4393.25 1906.2 29-Jul-05 2312.3 4361.15 2295.81 2985.95 4919.1 2027.4 31-Aug-05 2384.65 4062.6 2366.23 3177.15 5053 2126.35 30-Sep-05 2601.4 4622.1 2566.58 3296.5 5303.5 2274 31-Oct-05 2370.95 4003.85 2330.81 3211.95 4714.45 2067.8 30-Nov-05 2652.25 4298.2 2647.93 3533.95 5242 2306.15 30-Dec-05 2836.55 4534.2 2781.55 3906.9 5541.45 2459.2 31-Jan-06 3001.1 4617.6 2944.15 4010.3 5882.9 2585.95 28-Feb-06 3074.7 4579.05 3011.8 3972.9 5966.65 2658.95 31-Mar-06 3402.55 4661.5 3318.45 4352.9 6412.1 2910.35 29-Apr-06 3557.6 4549.8 3481.3 4341.85 6856 3064.7 31-May-06 3071.05 4123.55 2998.25 3869.65 5827.4 2635.25 30-Jun-06 3128.2 3708.9 3003.15 3957.55 5264.3 2562.5 31-Jul-06 3143.2 4078.8 3020.85 4113.55 5335.1 2562.55 31-Aug-06 3413.9 4594.85 3291.7 4445.6 5940.5 2807.95 29-Sep-06 3588.4 5276.25 3479.75 4540.5 6510.4 2988.25 31-Oct-06 3744.1 5588.7 3633.1 4888.95 6823.15 3114.55 30-Nov-06 3954.5 6198.3 3818.55 5267.85 6967.25 3280.45 29-Dec-06 3966.4 6008.75 3839.3 5432.25 7106.35 3295.05 31-Jan-07 4082.7 5953.95 3948.25 5535 7268.05 3393.1 28-Feb-07 3745.3 5240.3 3626.2 5129.6 6722.1 3107.75 30-Mar-07 3821.55 5308.5 3701.55 5180.7 6878.05 3145.35 37 | P a g e

7 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 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 2008. 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. 38 | P a g e 39 | P a g e