PREFACE

PROLOGUE
EXECUTIVE SUMMARY
OBJECTIVE
RESEARCH METHODOLOGY

1
 PROLOGUE

F oreign Investment refers to investments made by inhabitants of a country in financial

assets and production process of another country. It can affect the factor productivity of the
recipient country and can also affect the balance of payments. In developing countries there
was a great need of foreign capital, not only to increase their productivity of labor but also
helps to build the foreign exchange reserves to meet the trade deficit.

It can come in two forms: Foreign Direct Investment (FDI) and Foreign Portfolio
Investment (FPI).Foreign Direct Investment involves in the direct production activity and
also of medium to long-term nature. But the Foreign Portfolio Investment is a short-term
investment mostly in the financial markets and it consists of Foreign Institutional Investment
(FII).

India, being a capital scarce country, has taken lot of measures to attract foreign investment
since the beginning of reforms in 1991. Till the end of January 2003 it could attract a total
foreign investment of around US$ 48 billions out of which US$ 23 billions is in the form of
FPI. FII consists of around US$ 12 billions in the total foreign investments. This shows the
importance of FII in the overall foreign investment program.

As India is in the process of liberalizing the capital account, it would have significant impact
on the foreign investments and particularly on the FII, as this would affect short-term
stability in the financial markets. Hence, there is a need to determine the push and pull
factors behind any change in the FII, so that we can frame our policies to influence the
variables which drive-in foreign investment. Also FII has been subject of intense discussion,
as it is held responsible for intensifying currency crisis in 1990’s elsewhere.

India opened its stock markets to foreign investors in September 1992 and has, since 1993,
received considerable amount of portfolio investment from foreigners in the form of Foreign
Institutional Investments (FII) in equities. In order to trade in Indian equity markets, foreign
corporations need to register with the SEBI as Foreign Institutional Investors (FII).

“SEBI’s definition of FIIs presently includes foreign pension funds, mutual funds,
charitable/endowment/university funds etc. as well as asset management companies and
other money managers operating on their behalf.”

The FIIs registered with SEBI come from as many as 28 countries (including money
management companies operating in India on behalf of foreign investors). It is, however,
instructive to bear in mind that these national affiliations do not necessarily mean that the
actual investor funds come from these particular countries. Given the significant financial
flows among the industrial countries, national affiliations are very rough indicators of the
‘home’ of the FII investments. In particular institutions operating from Luxembourg,

2
Cayman Islands or Channel Islands or even those based at Singapore or Hong Kong are
likely to be investing funds largely on behalf of residents in other countries. Nevertheless,
the regional breakdown of the FIIs does provide an idea of the relative importance of
different regions of the world in the FII flows.

Foreign Direct Investment (FDI) has the potential of enhancing economic activity and
employment in the country by complementing and supplementing domestic investment.
Additional investments brought in through FDI, over and above investments possible with
the available domestic resources; assist in providing additional employment opportunities.
FDI also plays a vital role in the upgradation of technology, skills and managerial
capabilities.

The Indian government has put in place a liberal and investor-friendly policy on FDI under
which FDI up to 100% is permitted on the automatic route in most sectors or activities,
including infrastructure and Research and Development (R&D). Due to the aforesaid
unperturbed policies of Indian government the FDI equity inflow in India increased to US $
27.31 billion in the financial year 2008-09 from US $ 5.5 billion in fiscal 2005-06.

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 EXECUTIVE SUMMARY

T he project title which is taken by me with the help of my Faculty and industry
Guide mainly focused on foreign institutional investment and its impact on Indian
stock market. The main focus of my project is to gain knowledge about the core areas
in which foreign investment works. It is natural that within a time period of two
months I can’t learn all the nuances of stock market but it give me vital knowledge or
a deep overview of FIIs and Indian stock markets functions and the prominent areas.
This research work starts with the general introduction of the Foreign Institutional
Investors in India after LPG (Liberalization, Privatization and Globalization) in 1991.
Rules & regulation through which FII enter into Indian market & finally what impact
it leaves on our sensex, also provides the advantage & disadvantage of FII in India.
Foreign Institutional Investors feel affection with India. They are betting big time on
Dalal Street. The amount of investment that has poured into India in last 3 Years is
more than total investment they made in the country since India got
Independence. The total investment that Foreign Investors (FIIs) have made in India
currently stands at 220,000 crore rupees or $52 Billion. These figures were as of
April 2007. In first 4 months of this year itself FIIs have put in around 15000 crores
One of the reason which pulls the Sensex to a life time high 15000,in July 2007 is
none other than FIIs only

By joining India Infoline Limited for summer internship program I really had a
great learning experience basically related with the Indian stock market and the how
various components like, equities, stocks, IPOs, derivatives (Future and options),
Commodities and the Mutual Funds. These all are important aspects of stock market.
Other thing which I had learned that the stock market is divided into two segments:
Primary market & Secondary market. In the Primary market those companies who are
unlisted and who want capital from the public they issue their shares for the first time
in the market which is called Primary Market. Secondary market includes Equity
shares, Right issues, Bonus shares, and Preference shares, Cumulative Preference
Shares, Cumulative Convertible Preference Shares and Bonds. The share market
which I had seen the guidance of my Industry Guide is the most volatile market. So,
the whole project was directed towards foreign institutional investment and its impact
on stock markets in India

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OBJECTIVE

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B efore starting a project, we should keep in mind the clear objective of the
project because in the absence of the objective one can’t reach the conclusion or the
end result of the project. Research objective answer the question “Why this study is
being conducted” For every problem there is a research. As all the research is based
on some objective, our research has also some objectives which are as follows:

Primary objective:

The primary objective of this study is to analyze the Role of Foreign Investors and its
impact on the Indian Stock Market. It determine the factors that influences the
dependency of Indian stock market on foreign investors

Secondary Objective:

• To analyze graphically, the stock market returns of Net purchases and sales of by
FIIs in the sampling period.
• To analyze the stock market returns of indices and determine FII's percentage
change in investment.
• To analyze the Trends in FII Investment in India in the sampling period.
• To analyze the market capitalization of the listed companies in BSE due to the
impact of FIIs.

RESEARCH METHODOLOGY

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A research design is the framework or plan, which guides the collection of the
data and analysis of the data. Research Design is a blueprint that outlines each
procedure from the hypothesis to the analysis. The purpose of the research design is
to ensure that the data collected is accurate and relevant. Any research work requires
clarity of objectives and a set pattern, so that the objectives can be achieved
efficiently. Research Design is the conceptual structure within which research is
conducted. It constitutes the blueprint for collection, measurement, & analysis of the
data. The design used for carrying out this research is Exploratory & Experienced
based and Descriptive study
This type of research is tentative and it is qualitative in nature. Exploration is
particularly useful when researchers lack a clear idea of the problems. The approach
used in the study was both qualitative as well as quantitative as only theoretical
aspects are not considered but their practicality is also been observed.

Source of Data Collection:

The whole study of the foreign investments and its impact on Indian stock market and
is based on the given sources of information:
 Web based sources.
 Website of India Infoline Ltd.
 Official websites of RBI, SEBI.
 Official websites of Indian stock exchanges (NSE & BSE).
 Text books and news bulletins.
 Reports and Manuals of Department of Industrial Policy & Promotion.
 Websites related to Stock market and financial news.
Scope of the study:
The scope of the study extends up to the analysis of analysis of stock market returns
of dependent factors like investments through FDI and FII in a country. The foreign
investment policies and guidelines which are imposed by Government of India are
also taken under the scope of study.

ABOUT
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INDIA INFOLINE LTD

CORPORATE PROFILE
COMPETITIVE ADVANTAGE
PRODUCT AND SERVICES
BUSINESS & OPERATIONS
INFRASTRUCTURE
MANAGEMENT TEAM

CORPORATE PROFILE

8
I ndia Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock
Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of
both the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory
Services and Portfolio Management Services. It offers broking services in the Cash and
Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered
with NSDL as well as CDSL as a depository participant, providing a one-stop solution for
clients trading in the equities market. It has recently launched its Investment banking and
Institutional Broking business.

INDIA INFOLINE GROUP

The India Infoline group, comprising the holding company, India Infoline Limited and its
wholly-owned subsidiaries, straddle the entire financial services space with offerings
ranging from Equity research, Equities and derivatives trading, Commodities trading,
Portfolio Management Services, Mutual Funds, Life Insurance, Fixed deposits, GoI bonds
and other small savings instruments to loan products and Investment banking. India Infoline
also owns and manages the websites www.indiainfoline.com and www.5paisa.com

The company has a network of 976 business locations (branches and sub-brokers) spread
across 365 cities and towns. It has more than 800,000 customers.

INDIA INFOLINE LTD

India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock
Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of
both the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory
Services and Portfolio Management Services. It offers broking services in the Cash and
Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered
with NSDL as well as CDSL as a depository participant, providing a one-stop solution for
clients trading in the equities market. It has recently launched its Investment banking and
Institutional Broking business.

A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to clients.

These services are offered to clients as different schemes, which are based on differing
investment strategies made to reflect the varied risk-return preferences of clients.

9
Source: www.indiainfoline.com

INDIA INFOLINE MEDIA & RESEARCH SERVICES LIMITED.

The content services represent a strong support that drives the broking, commodities, mutual
fund and portfolio management services businesses. Revenue generation is through the sale
of content to financial and media houses, Indian as well as global.

It undertakes equities research which is acknowledged by none other than Forbes as 'Best of
the Web' and '…a must read for investors in Asia'. India Infoline's research is available not
just over the internet but also on international wire services like Bloomberg (Code: IILL),
Thomson First Call and Internet Securities where India Infoline is amongst the most read
Indian brokers.

INDIA INFOLINE COMMODITIES LIMITED.

India Infoline Commodities Pvt. Limited is engaged in the business of commodities broking.
Our experience in securities broking empowered us with the requisite skills and technologies
to allow us offer commodities broking as a contra-cyclical alternative to equities broking.
We enjoy memberships with the MCX and NCDEX, two leading Indian commodities
exchanges, and recently acquired membership of DGCX. We have a multi-channel delivery
model, making it among the select few to offer online as well as offline trading facilities.

10
INDIA INFOLINE MARKETING & SERVICES
India Infoline Marketing and Services Limited is the holding company of India Infoline
Insurance Services Limited and India Infoline Insurance Brokers Limited.

(a) India Infoline Insurance Services Limited is a registered Corporate Agent with the
Insurance Regulatory and Development Authority (IRDA). It is the largest Corporate Agent
for ICICI Prudential Life Insurance Co Limited, which is India's largest private Life
Insurance Company. India Infoline was the first corporate agent to get licensed by IRDA in
early 2001.

(b) India Infoline Insurance Brokers Limited India Infoline Insurance Brokers Limited is a
newly formed subsidiary which will carry out the business of Insurance broking. We have
applied to IRDA for the insurance broking license and the clearance for the same is awaited.
Post the grant of license, we propose to also commence the general insurance distribution
business.

INDIA INFOLINE INVESTMENT SERVICES LIMITED

Consolidated shareholdings of all the subsidiary companies engaged in loans and financing
activities under one subsidiary. Recently, Orient Global, a Singapore-based investment
institution invested USD 76.7 million for a 22.5% stake in India Infoline Investment
Services. This will help focused expansion and capital raising in the said subsidiaries for
various lending businesses like loans against securities, SME financing, distribution of retail
loan products, consumer finance business and housing finance business. India Infoline
Investment Services Private Limited consists of the following step-down subsidiaries.

(a) India Infoline Distribution Company Limited (distribution of retail loan products)

(b) Moneyline Credit Limited (consumer finance)

(c) India Infoline Housing Finance Limited (housing finance)

IIFL (ASIA) PTE LIMITED

IIFL (Asia) Pte Limited is wholly owned subsidiary which has been incorporated in
Singapore to pursue financial sector activities in other Asian markets. Further to obtaining
the necessary regulatory approvals, the company has been initially capitalized at 1 million
Singapore dollars.

COMPETITIVE ADVANTAGE OF INDIA INFOLINE

11
I ndia Infoline has many competitive advantages which attracts customers and
motivate its clients. Some of the facts which lead the India Infoline in the market are
as follows:
Participant on the country’s premier exchange:
India Infoline Ltd is a member of the country’s premier stock exchange – The National
Stock Exchange of India (NSE).

Clearing membership on Capital & Derivatives segments:

India Infoline Ltd. It has clearing memberships on both the Capital Market and Derivatives
segment of the exchange. We are also authorized to trade the retail debt market.

Depository Participants with NSDL & CDSL:

India Infoline Ltd is depository participants with the country’s premier depository service -
National Securities Depository Limited (NSDL), as well as with the only other depository
with a countrywide reach Central Depository Services Limited (CDSL).

Leading private sector bank as partner:

Banking partners are HDFC Bank, ICICI Bank, Citi Bank, Bank of Baroda – The foremost
private sector banks in the country, which has the most technologically advanced
infrastructure in the country, with Internet banking allowing access to information 24 X 7.

Research Capabilities:
India Infoline has a dedicated team of analysts in our Bombay office – They provide
fundamental analysis of stocks and markets, which are fundamentally strong, and provide
above market returns to investors, but over a slightly longer time frame – Typically 6
months and above.

Technical Analysis:
A daily technical newsletter is published by our in-house technical analyst, who is a
recognized leading practitioner of the science. He tracks the progress of the calls on a real-
time basis, and advises of any change in the profit points or stop loss levels. All Services
under one roof: India has moved to a T+2 settlement system, where all trades and settled on
a rolling basis. However this gives the clients no time to arrange deliveries to their broker,
through a separate depository participant. India Infoline Ltd, being a trading-clearing
member, as well as a depository participant, allows seamless transfer of securities under the
same roof, with minimum delay and constant monitoring

PRODUCTS AND SERVICES

12
I ndia Infoline is a one-stop financial services shop, most respected for quality of its advice,
personalized service and cutting-edge expertise. It provide a bouquet of products:

EQUITIES
India Infoline provided the prospect of researched investing to its clients, which was hitherto
restricted only to the institutions. Research for the retail investor did not exist prior to India
Infoline leveraged technology to bring the convenience of trading to the investor’s location
of preference (residence or office) through computerized access. India Infoline made it
possible for clients to view transaction costs and ledger updates in real time. Over the last
five years, India Infoline sharpened its competitive edge through the following initiatives:

MULTI-CHANNEL DELIVERY MODEL

The Company is among the few financial intermediaries in India to offer a complement of
online and offline broking. The Company’s network of branches also allows customers to
place orders on phone or visit our branches for trading.

INTEGRATED MIDDLE AND BACK OFFICE

The customer can trade on the BSE and NSE, in the cash as well as the derivatives segment
all through the available multiple options of Internet, phone or branch presence.

MULTIPLE-TRADING OPTIONS
The Company harnessed technology to offer services at among the lowest rates in the
business membership: The Company widened client reach in trading on the domestic and
international exchanges.

TECHNOLOGY
The Company provides a prudent mix of proprietary and outsourced technologies, which
facilitate business growth without a corresponding increase in costs.

SERVICE
Clients can access the customer service team through various media like toll-free lines,
emails and Internet- messenger chat for instant query resolution. The Company’s customer
service executives proactively contact customers to inform them of key changes and
initiatives taken by the Company. Business World rated the Company’s customer service as
‘Best’ in their survey of online trading sites carried out in December 2003.

KEY FEATURES

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• Membership on the Bombay Stock Exchange Limited (BSE ) and the National Stock
Exchange (NSE)
• Registered with the NSDL and CDSL as a depository participant
• Broking services in cash and derivative segments, online as well as offline.
• Presence across 350 cities and towns with a network of over 850 business locations
Equity client base of over 500,000 clients
• Provision of free and world-class research to all clients

PMS (PORTFOLIO MANAGEMENT SERVICE)

India Infoline Ltd. offers PMS to address varying investment preferences. As a focused
service, PMS pays attention to details, and portfolios are customized to suit the unique
requirements of investors.

Our Portfolio Management Service is a product wherein an equity investment portfolio is

created to suit the investment objectives of a client. We at India Infoline invest your
resources into stocks from different sectors, depending on your risk-return profile. This
service is particularly advisable for investors who cannot afford to give time or don't have
that expertise for day-to-day management of their equity portfolio.

RESEARCH
Sound investment decisions depend upon reliable fundamental data and stock selection
techniques. India Infoline Equity Research is proud of its reputation for, and we want you to
find the facts that you need. Equity investment professionals routinely use our research and
models as integral tools in their work. They choose Ford Equity Research when they can
clear your doubts.

COMMODITIES
India Infoline’s extension into commodities trading reconciles its strategic intent to emerge
as a one-stop solutions financial intermediary. The Company’s commodities business
provides a contra-cyclical alternative to equities broking. The Company was among the first
to offer the facility of commodities trading in India’s young commodities market. Average
monthly turnover on the commodity exchanges increased from Rs 0.34 to Rs 20.02 billion.
The commodities market has several products with different and non-correlated cycles. On
the whole, the business is fairly insulated against cyclical gyrations in the business.

MORTGAGES

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During the year under review, India Infoline acquired a 75% stake in Moneytree
Consultancy Services to mark its foray into the business of mortgages and other loan
products distribution. The Company brings on board expertise in the loans business coupled
with existing relationships across a number of principals in the mortgage and personal loans
businesses. India Infoline now has plans to roll the business out across its pan-Indian
network to provide it with a truly national scale in operations.

HOME LOANS AND PERSONAL LOANS

India Infoline Ltd provides finance services in the form of loans against residential and
commercial property. The company also provides personal loans as per the requirement,
with tremendous features like easy documentation, quick processing and disbursal.

ONLINE INVESTMENT
India Infoline has made investing in Mutual funds and primary market so effortless. All have
to do is register with us and that’s all. No paperwork no queues and No registration charges.

INVEST IN MUTUAL FUNDS

India Infoline offers a host of mutual fund choices under one roof, backed by in-depth
research and advice from research house and tools configured as investor friendly.

ONLINE APPLICATION IN INITIAL PUBLIC OFFERS (IPO)

Client could also invest in Initial Public Offers (IPO’s) online without going through the
hassles of filling ANY application form/ paperwork.

STOCK MESSAGING SERVICE (SMS)

Stay connected to the market remotely. The trader of today, you are constantly on the move.
But how to stay connected to the market while on the move? Simple, subscribe to India
Infoline's Stock Messaging Service and get Market on the Mobile of client! There are three
products under SMS Service. They are:
• Market on the move.
• Best of the lot.
• VAS (Value Added Service)

INSURANCE

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An entry into this segment helped complete the client’s product basket; concurrently, it
graduated the Company into a one-stop retail financial solutions provider. To ensure
maximum reach to customers across India, we have employed a multi pronged approach and
reach out to customers via our Network, Direct and Affiliate channels. Following the
opening of the sector in 1999-2000, a number of private sector insurance service providers
commenced operations aggressively and helped grow the market.
The Company’s entry into the insurance sector derisked the Company from a predominant
dependence on broking and equity-linked revenues. The annuity based income generated
from insurance intermediation result in solid core revenues across the tenure of the policy.

WEALTH MANGEMENT SERVICE

Imagine a financial firm with the heart and soul of a two-person organization. A world-
leading wealth management company that sits down with you to understand your needs and
goals. We offer you a dedicated group for giving you the most personal attention at every
level.

NEWSLETTERS
The Daily Market Strategy is your morning dose on the health of the markets. Five intra-day
ideas, unless the markets are really choppy coupled with a brief on the global markets and
any other cues, which could impact the market. Occasionally an investment idea from the
research team and a crisp round up of the previous day's top stories. That's not all. As a
subscriber to the Daily Market Strategy, you even get research reports of India Infoline
research team on a priority basis.

The India Infoline Weekly Newsletter is your flashback for the week gone by. A weekly
outlook coupled with the best of the web stories from India Infoline and links to important
investment ideas, Leader Speak and features is delivered in your inbox every Friday
evening.

Presence on the world wide web through www.indiainfoline.com

16
BUSINESS & OPERATIONS

17
BUSINESS
Over a period of time RSL has recorded a healthy growth rate both in business volumes and
profitability as it is one of the major players in this line of business. The business thrust has
been maily in the development of business from Financial Institutions, Mutual Funds and
Corporate.
OPERATIONS
The operations of the company are broadly organized along the following functions:

RESEARCH & ANALYSIS

This group is focused on doing daily stock picks and periodical scrip segment specific
research. They provide the best of analysis in the industry and are valued by both our
Institutional and Retail clientele.

MARKETING
This group is focused on tracking potential business opportunities and converting them into
business relationships. Evaluating the needs of the clients and tailoring products to meet
their specific requirements helps the company to build lasting relationships

DEALING
Enabling the clients to procure the best rates on their transactions is the core function of this
group.

INFRASTRUCTURE

18
ADMINISTRATIVE CENTER

The company has offices located at prime locations in Mumbai, New Delhi, Kolkata and Chennai.
The offices are centrally located to cater to the requirements of institutional and corporate clients
and retails clients, and for ease of operations due to proximity to stock exchanges and banks.

BACK OFFICE
This group ensures timely deliveries of securities traded, liaison with stock exchange
authorities on operational matters, statutory compliance, handling tasks like pay-in, pay-out,
etc. This section is fully automated to enable the staff to focus on the technicalities of
securities trading and is manned by professionals having long experience in the field

COMMUNICATIONS
The company has its efficient network of advance communication system and intends to
install CRM facility; besides this it is implementing interactive client information
dissemination system which enables clients to view their latest client information on web. It
has an installed multiple WAN to interconnect the branches to communicate on real time
basis.

The company is equipped with most advanced systems to facilitate smooth functioning of
operations. It has installed its major application on IBM machines and uses latest state of art
financial software.

MANAGEMENT TEAM

19
Mr. Nirmal Jain

Chairman & Managing Director

India Infoline Ltd.

Nirmal Jain, MBA (IIM, Ahmedabad) and a Chartered and Cost Accountant, founded India’s
leading financial services company India Infoline Ltd. in 1995, providing globally acclaimed
financial services in equities and commodities broking, life insurance and mutual funds
distribution, among others. Mr. Jain began his career in 1989 with Hindustan Lever’s
commodity export business, contributing tremendously to its growth. He was also associated
with Inquire-Indian Equity Research, which he co-founded in 1994 to set new standards in
equity research in India.

Mr. R Venkataraman

Executive Director

India Infoline Ltd.

R Venkataraman, co-promoter and Executive Director of India Infoline Ltd., is a B. Tech

(Electronics and Electrical Communications Engineering, IIT Kharagpur) and an MBA (IIM
Bangalore). He joined the India Infoline board in July 1999. He previously held senior
managerial positions in ICICI Limited, including ICICI Securities Limited, their investment
banking joint venture with J P Morgan of USA and with BZW and Taib Capital Corporation
Limited. He was also Assistant Vice President with G E Capital Services India Limited in their
private equity division, possessing a varied experience of more than 16 years in the financial
services sector.

The Board of Directors

20
 Mr Nilesh Vikamsey

Independent Director

India Infoline Ltd.

Mr. Vikamsey, Board member since February 2005 - a practising Chartered Accountant and
partner (Khimji Kunverji & Co., Chartered Accountants), a member firm of HLB
International, headed the audit department till 1990 and thereafter also handles financial
services, consultancy, investigations, mergers and acquisitions, valuations etc; an ICAI study
group member for Proposed Accounting Standard — 30 on Financial Instruments
Recognition and Management, Finance Committee of The Chamber of Tax Consultants
(CTC), Law Review, Reforms and Rationalization Committee and Infotainment and Media
Committee of Indian Merchants’ Chamber (IMC) and Insurance Committee and Legal
Affairs Committee of Bombay Chamber of Commerce and Industry (BCCI). Mr. Vikamsey
is a director of Miloni Consultants Private Limited, HLB Technologies (Mumbai) Private
Limited and Chairman of HLB India.

Mr Sat Pal Khattar

Non Executive Director

India Infoline Ltd.

Mr Sat Pal Khattar, - Board member since April 2001 - Presidential Council of Minority Rights
member, Chairman of the Board of Trustee of Singapore Business Federation, is also a life
trustee of SINDA, a non profit body, helping the under-privileged Indians in Singapore. He
joined the India Infoline board in April 2001. Mr Khattar is a Director of public and private
companies in Singapore, India and Hong Kong; Chairman of Guocoland Limited listed in
Singapore and its parent Guoco Group Ltd listed in Hong Kong, a leading property company of
Singapore, China and Malaysia. A Board member of India Infoline Ltd, Gateway Distriparks
Ltd — both listed — and a number of other companies he is also the Chairman of the Khattar
Holding Group of Companies with investments in Singapore, India, UK and across the world

Mr Kranti Sinha

Independent Director

India Infoline Ltd.

Mr. Kranti Sinha — Board member since January 2005 — completed his masters from the Agra
University and started his career as a Class I officer with Life Insurance Corporation of India. He served
as the Director and Chief Executive of LIC Housing Finance Limited from August 1998 to December
2002 and concurrently as the Managing Director of LICHFL Care Homes (a wholly owned subsidiary
of LIC Housing Finance Limited). He retired from the permanent cadre of the Executive Director of
LIC; served as the Deputy President of the Governing Council of Insurance Institute of India and as a
member of the Governing Council of National Insurance Academy, Pune apart from various other such
bodies. Mr. Sinha is also on the Board of Directors of Hindustan Motors Limited, Larsen & Toubro

21
 Limited, LICHFL Care Homes Limited, Gremach Infrastructure Equipments and Projects Limited and
Cinemax (India) Limited.

Mr Arun K. Purvar

Independent Director

India Infoline Ltd.

Mr. A.K. Purvar – Board member since March 2008 – completed his Masters degree in commerce from
Allahabad University in 1966 and a diploma in Business Administration in 1967. Mr. Purwar joined the
State Bank of India as a probationary officer in 1968, where he held several important and critical
positions in retail, corporate and international banking, covering almost the entire range of commercial
banking operations in his illustrious career. He also played a key role in co-coordinating the work for
the Bank's entry into the field of insurance. After retiring from the Bank at end May 2006, Mr. Purwar
is now working as Member of Board of Governors of IIM-Lucknow, joined IIM–Indore as a visiting
professor, joined as a Hon.-Professor in NMIMS and he is also a member of Advisory Board for
Institute of Indian Economic Studies (IIES), Waseda University, Tokyo, Japan. He has now taken over
as Chairman of IndiaVenture Advisors Pvt. Ltd., as well as IL & FS Renewable Energy Limited. He is
also working as Independent Director in leading companies in Telecom, Steel, Textiles, Autoparts,
Engineering and Consultancy.

Shabnam Bano

Branch Manager, Kota Branch

India Infoline Ltd.

Ms. Shabnam Bano, Branch Manager, India Infoline Limited, Kota Branch. She started her career from ICICI Personal
Loans DST as a Sales Executive, After that she joined India Bulls Securities Ltd. As Assistant Relationship Manager. In
Jan 2007, she joins India Infoline Ltd. as Relationship Manager. Then she promoted as Branch Manager for Kota Branch
of India Infoline Ltd. She had diploma in Civil Engineering, and MBA in Finance. She is an excellent Team Manager for
her team. She is Mentor and guide in this project.

Pramod Vijay

Senior Relationship Manager,

India Infoline Ltd. Kota

22
Mr. Pramod Vijay Senior Relation Manager, working at Kota Branch of India Infoline Ltd. He
joins India Infoline as Marketing Executive in the year of 2006. After joining the company he
constantly keeps upgrading himself and got promoted to the designation of Senior Relation Manager.
He got his graduation from Maharshi Dayanand Saraswati University Ajmer, Rajasthan with flying
colors. He always ready to lend a hand to his colleagues and team members. He provides excellent
guidance in the accomplishment of the project report.

FOREIGN
INVESTMENTS
23
ABSTRACT
DESCRIPTION OF FII
GLOBAL PLAYERS IN INDIA
REASON FOR GROWTH IN FII
NEED OF FOREIGN INVESTMENTS
POLICY AND GUIDELINES

ABSTRACT

F oreign 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

24
long-term nature. But foreign institutional investment is a short-term investment, mostly in
the financial markets. FII, given its short-term nature, can have bidirectional causation with
the returns of other domestic financial markets such as money markets, stock markets, and
foreign exchange markets. Hence, understanding the determinants of FII is very important
for any emerging economy as FII exerts a larger impact on the domestic financial markets in
the short run and a real impact in the long run. India, being a capital scarce country, has
taken many measures to attract foreign investment since the beginning of reforms in 1991.

India is the second largest country in the world, with a population of over 1 billion people.
As a developing country, India’s economy is characterized by wage rates that are
significantly lower than those in most developed countries. These two traits combine to
make India a natural destination for 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

25
of foreign direct investment (FDI) and foreign institutional investment (FII), it has bought
about a number of changes in its economic policies and has put in its practice a liberal and
more transparent foreign direct investment (FDI) and foreign institutional investment (FII)
policy with a view to attract more foreign direct investment (FDI) and foreign institutional
investment (FII) inflows into its economy. These changes have heralded the liberalization
era of the foreign direct investment (FDI) and foreign institutional investment (FII) policy
regime into India and have brought about a structural breakthrough in the volume of foreign
direct investment (FDI) and foreign institutional investment (FII) inflows in the economy. In
this context, this report is going to analyze the trends and patterns of foreign direct
investment (FDI) and foreign institutional investment (FII) flows into India during the post
liberalization period that is 1991 to 2007 year.

“Institutional investors are a permanent feature of the financial landscape, and

their growth will continue at a similar and perhaps faster pace. The factors
that underpin their development are far from transitory and in many cases
have only just started having an impact. The behavioral characteristics of
institutional investors, therefore, will be an increasingly important determinant
of domestic and international financial market conditions, and the implications
for financial market stability warrant serious consideration"
Bank for International Settlements, Annual Report 1998, p95.

INSTITUTIONAL INVESTOR:
An institutional investor is an investor, such as a bank, insurance company, retirement fund,
hedge fund, or mutual fund that is financially sophisticated and makes large investments,
often held in very large portfolios of investments. Because of their sophistication,
institutional investors may often participate in private placements of securities, in which
certain aspects of the securities laws may be inapplicable.

TYPES OF INSTITUTIONAL INVESTORS

26
 Institutional
Investors

FOREIGN DOMESTIC
INSTITUTIONAL INSTITUTIONAL
INVESTOR (FII) INVESTOR

Developmental
Financial Asset
Insurance
Institution Banks Management
Companies Companies

FOREIGN INSTITUTIONAL INVESTOR (FII)

Foreign Institutional Investor is used to denote an investor - mostly of the form of an

institution or entity, which invests money in the financial markets of a country different
from the one where in the institution or entity was originally incorporated.FII investment is
frequently referred to as hot money for the reason that it can leave the country at the same
speed at which it comes in. In countries like India, statutory agencies like SEBI have
prescribed norms to register FIIs and also to regulate such investments flowing in through
FIIs.
 P ension Funds
Mutual Funds
Investment Trust
Insurance or reinsurance companies
Endowment Funds
University Funds
Foundations or Charitable Trusts or Charitable Societies
Asset Management Companies
Nominee Companies
Institutional Portfolio Managers
Trustees
Power of Attorney Holders
Bank

DOMESTIC INSTITUTIONAL INVESTOR

27
Domestic Institutional Investor is used to denote an investor - mostly of the form of an
institution or entity, which invests money in the financial markets of its own country where
the institution or entity was originally incorporated. In India, there are broadly four types of
institutional investors.

1 DEVELOPMENTAL FINANCIAL INSTITUTION

Developmental Financial Institutions like Industrial Finance Corporation of India (IFCI),

Industrial Credit and Investment Corporation of India (ICICI), Industrial Development Bank
of India (IDBI), the State Financial Corporations, etc. The role played by these financial
institutions (FIs) is to extend funds to the companies for both long term financing and (more
recently) working capital financing. The financial institutions extend both debt and equity
financing to their nominee directors in the companies.

2 INSURANCE COMPANIES

Insurance Companies like the Life Insurance Corporation (LIC), General Insurance
Corporation (GIC), and their subsidiaries, provide insurance to their customer in lieu of
premium paid.

3 BANKS

Earlier banks used to finance only the working capital of the companies. But now they are
also extending long-term finance to the companies.

4 ASSET MANAGEMENT COMPANIES

Asset management companies include all the working in the sector of mutual funds. The
mutual funds collect funds from both individuals and corporate to invest in the financial
assets of other companies. In India, the mutual funds participate largely in the equity capital
of the companies. The mutual fund industry which is the major institutional investors in
India started in 1963 with the formation of Unit Trust of India, at the initiative of the
Government of India and Reserve Bank.

28
 PORTRAYAL

F oreign Institutional Investors (FIIs) are allowed to invest in the primary and secondary
capital markets in India through the portfolio investment scheme (PIS) administered by the
Reserve Bank of India (RBI). Under this scheme, FIIs can acquire shares/debentures of
Indian companies through the stock exchanges in India. The ceiling for overall investment
by FIIs is 24 per cent of the paid up capital of the Indian company (20 per cent 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 subject to (i) approval by the company’s board and the passing of a
special shareholder resolution to that effect (ii) certain sector caps imposed by RBI and the
Government of India. The RBI monitors the ceilings on FII investments in Indian companies
on a daily basis and publishes a list of companies allowed to attract investments from FIIs
with their respective ceilings. Figure 4 illustrates the dramatic increase in net portfolio
equity flows to India over the period 2002-2007, and especially over the bull rally that
climaxed in January 2008 when the Sensex reached a lifetime high of 21,206.77 points. FIIs
invested US$17 billion in Indian stocks in 2007. However, the onset of the current global
economic crisis saw FIIs pulling out a record $13 billion (Rs 67,470) in 2008, the largest
outflows since India opened its doors to FIIs 15 years ago. In 2009 so far, FIIs have sold
another US$2.1 billion worth of Indian stocks. The Children’s Investment Fund
Management (TCI) (a UK-based hedge fund) accounts for about 10 per cent of this sum,
making it the single-largest seller of Indian stocks among FIIs. The hedge fund registered its
biggest annual loss in 2008 and is liquidating its investments in India at a steep discount to
the prices at which it bought the stocks last year. FII ownership in Indian stocks has now
fallen to 15.5 per cent, a level last seen in December 2003 in the early days of the bull
market. Citi analysts estimate the value of FII ownership in Indian stocks to be about US$94
billion (Rs 484 crore). Deutsche Bank AG has shown the most confidence in Indian firms
during the difficult conditions of 2008. The bank remained the top holder of Indian stocks
among FIIs in 2008. Though the value of its investment fell sharply due to the massive
decline in stock prices, it actually invested in more firms in 2008 than 2007. Deutsche Bank
and its affiliates hold Rs 16,344.77 crore (US$3.4 billion) in Indian equities. HSBC and
Citigroup own the second and third largest portfolios (Table 6). Deutsche Bank is the only
FII that has increased its number of firms in its portfolio - from 84 in 2007 to 88 in 2008.

Top 3 FIIs in India by AUM at the end of 2008 (source: www.livemint.com)

FII PRI signatory Equity Holdings No. of companies in
portfolio
Rs crore US$ million 2008 2007
Deutsche Bank  16,345 3,356 88 84
HSBC  10,400 2,135 92 126
Citigroup 8,337 1,712 112 180
TOTAL 35,082 7,203

29
ADRs issued by BRIC companies (data as of March 16, 2009)
Econom No. of companies issuing Ownership value USD % of BRIC
y ADRs million total
Brazil 101 72,242 39%
Russia 115 64,709 35%
India 143 13,557 7%
China 158 35,741 19%
TOTAL 186,249
Source: www.adr.com

These ‘top 3’ FIIs have total equity holdings of approximately US$7.2 billion, or about 8 per
cent of the US$94 billion total stock of FII investment estimated by Citi. Other leading FIIs
include Morgan Stanley, Merrill Lynch Capital Markets, CLSA Asia-Pacific, Goldman
Sachs Investments Mauritius, JPMorgan Chase, UBS Securities Asia and Fortis
Investment Management. International investors can also invest in Indian companies
through American Depository Receipts (ADRs) that are traded on the NYSE or other US
markets. 143 Indian companies issue ADRs, with a total ownership value of US$13.6 billion
(Table 7). The 25 largest such ADRs are listed in Table 8 and have a total value of US$11
billion: the leading issuers of ADRs include Infosys, ICICI and HDFC. Seven companies in
this list are in the current S&P ESG India Index portfolio. Table 9 identifies some of the
main US and non-US investors that hold the ADRs of Indian companies. Investors include:

Key investors in Indian ADRs (source: adr.com)

TOP 10 HOLDERS OF INDIAN Value

% of portfolio Filing date
ADRs (US$ m)
Barclays Global Investors, N.A. US 1,424.22 0.29 Jan-31-2009
100.0
Modi (Yogendra Kumar ) UK 1,332.83 Oct-07-2008
0
L P Jaiswal & Sons Pvt. Ltd. India 301.86 97.13 Mar-31-2008
J.P. Morgan Investment
US 271.76 0.34 Dec-31-2008
Management Inc.
Fidelity Management & Research US 239.87 0.06 Jan-31-2009
Jennison Associates LLC US 219.61 0.57 Jan-31-2009
LIC Mutual Fund Asset
India 201.15 1.02 Mar-31-2008
Management Company
Tata Sons, Ltd. India 200.5 25.43 Mar-31-2008
China International Fund
China 185.78 2.93 Jun-30-2008
Management Co., Ltd.
OppenheimerFunds, Inc. US 182.85 0.28 Dec-31-2008
TOTAL 4,560.43

Top 10 Us Mutual Fund Holders Of Value

% of portfolio Filing date
Indian ADRs (US$ m)

30
iShares MSCI Emerging Markets
US 1,131.24 6.38 Jan-31-2009
Index Fund
Oppenheimer Developing Markets
US 109.53 2.41 Nov-30-2008
Fund
Dodge & Cox International Stock
US 82.78 0.34 Dec-31-2008
Fund
Artisan International Fund US 58.76 0.76 Dec-31-2008
Harbor Capital Appreciation Fund US 56.43 1.00 Dec-31-2008
Fidelity Diversified International
US 46.48 0.19 Jan-31-2009
Fund
iShares MSCI All Country Asia Ex
US 46.09 9.92 Dec-31-2008
Japan Ind Fund
Janus Contrarian Fund US 42.11 1.14 Oct-31-2008
Vanguard Emerging Markets Stock
US 40.84 0.33 Oct-31-2008
Index Fund
DFA Emerging Markets Value
US 40.83 1.05 Oct-31-2008
Fund Inc.
TOTAL 1,655.09

TOP 10 NON-US MUTUAL FUND Value

% of portfolio Filing date
HOLDERS OF INDIAN ADRs (US$ m)
China International Asia Pacific
China 185.78 7.62 Jun-30-2008
Advantage Stock F
Hong
JPMorgan Funds - JF India Fund 150.84 6.49 Jun-30-2008
Kong
Raiffeisen Euroasien Aktien Austria 141.31 13.44 Jul-31-2008
HSBC Global Investment Fund
Singapore 132.47 3.64 Sep-30-2008
Indian Equity Fund
DIT Fonds EEE Germany 93.25 5.20 May-31-2008
iShares MSCI Emerging Markets UK 88.00 6.65 Feb-29-2008
JPMorgan Investment Fd JF Asia
Singapore 83.89 8.01 Jun-30-2008
ex-Japan Fund
Blackrock India Stock Fund Japan 79.71 7.16 Dec-10-2007
JPMorgan Funds - Emerging
UK 69.21 1.06 Jun-30-2008
Markets Equity Fund
ING J.P. Morgan Emerging
UK 69.04 10.60 Dec-31-2008
Markets Equity
TOTAL 1,093.5

31
SOURCES OF FII IN INDIA:
The sources of these FII flows are varied. The FIIs registered with SEBI come from as many
as 28 countries (including money management companies operating in India on behalf of
foreign investors). US-based institutions accounted for slightly over 41%; those from the
UK constitute about 20% with other Western European countries hosting another 17% of the
FIIs. It is, however, instructive to bear in mind that these national affiliations do not
necessarily mean that the actual investor funds come from these particular countries. Given
the significant financial flows among the industrial countries, national affiliations are very
rough indicators of the ‘home’ of the FII investments. In particular institutions operating
from Luxembourg, Cayman Islands or Channel Islands, or even those based at Singapore or
Hong Kong are likely to be investing funds largely on behalf of residents in other countries.
Nevertheless, the regional breakdown of the FIIs does provide an idea of the relative
importance of different regions of the world in the FII flows.

32
FII REGISTERED IN INDIA:

India opened its stock markets to foreign investors in September 1992 and has, since 1993,
received considerable amount of portfolio investment from foreigners in the form of Foreign
Institutional Investor’s (FII) investment in equities. This has become one of the main
channels of portfolio investment in India for foreigners. In order to trade in Indian equity
markets, foreign corporations need to register with the SEBI as Foreign Institutional Investor
(FII). SEBI’s definition of FIIs presently includes foreign pension funds, mutual funds,
charitable, endowment university fund’s etc. as well as asset management companies and
other money managers operating on their behalf
The sources of these FII flows are varied .The FIIs registered with SEBI come from as many
as 28 countries(including money management companies operating in India on behalf of
foreign investors).US based institutions accounted for slightly over 41% those from the U.K
constitute about 20% with other Western European countries hosting another 17% of the
FIIs. Portfolio investment flows from industrial countries have become increasingly
important for developing countries in recent years. The Indian situation has been no
different. A significant part of these portfolio flows to India comes in the form of FII’s
investments, mostly in equities. Ever since the opening of the Indian equity markets to
foreigners, FII investments have steadily grown from about Rs.2600 crores in 1993 to over
Rs.272165 crores till the end of Feb 2008.

Let’s look at some of the data to get an idea about the trend of FIIs in India, and also to see
the future direction of their movement. India had 528 FIIs were registered with SEBI by end
of 2001 and by end of Feb-2008 the number increased to1303. The trend in the number of
registered FIIs has been consistently on the rise as can be seen from the table; showing the
significant amount of confidence that Indian Capital market has developed in the last few
years. Not only has been the number increasing on a consistent basis, but the amount of
inflow into Indian market has also seen a manifold increased. The gross purchase, sales and
net investment figure on an annual basis gives a fair idea about the consistency of their
investments in our country.

As we can see in the investment trends table, except for 1998, the net investment by the FIIs
in the Indian market has always been positive since liberalization which to a large extent
tells about the consistency of their presence in Indian market. This is also evident from the
fact that the number of FII registering in India is increasing in spite of the fact that SEBI has
declined to issue any further PN notes and also asked them to get registered.
This shows that India still remains the hot spot for the foreign investors in the coming years.

33
NEED OF FOREIGN INSTITUTIONAL INVESTMENT
1
1. INFRASTRUCTURE RENEWAL

To keep the Indian economy growing the infrastructure sector like power, transport, mining
& metallurgy, textiles, housing, retail, social welfare, medical etc. has to be upgraded. After
the Enron fiasco, it is difficult to persuade anybody in the west to take interest in any of
these sectors. Hence India is left to its own devices to raise money and build this sector.
Borrowing abroad supplemented with Indian resources is the only way open to India. This
upgrade is needed prior or in step with the industrial and service exports sector growth. It
has to be placed on a higher priority. Only recently a suggestion to use a small portion of
India’s foreign reserves met with howl of protests. The protestors in the Indian Parliament
did not understand the proposal. Hence the government is stuck to steam roller its proposal
through the legislative process or succumb to political pressure and do nothing. The latter is
not acceptable.
If India finds its own $4 Billion a year for infrastructure then foreign investors will kick in
another similar portion. The resulting money will very quickly rebuild the now cumbersome
infrastructure.

2. BRIDGE THE TECHNOLOGICAL GAP

34
Developing countries has a very low level of technology. Their technology is not up to the
standards and they lack in modern technology. Developing countries possess a strong urge
for industrialization to develop their economies and to wriggle out of the low-level
equilibrium trap in which they are caught. This raises the necessity for importing
technologies from advanced countries. Such technology usually comes with foreign capital.

3. OPTIMUM UTILIZATION OF RESOURCES

A number of developing countries possess huge mineral resources which are4 untapped and
unexploited. Due to lack of technology these countries are not able to use their resources to
the fullest. As a result they have to depend on the foreign investment with the help of which
technology of the country and that will ultimately lead to the optimum utilization of the
resources. India has very huge reserves of mineral resources and to optimize their use or
rather for extracting them efficiently and effectively modern technology is required which is
possible through foreign investment.

4. BALANCING THE BALANCE OF PAYMENT POSITION

In the initial phase of economic development, the under developing countries need much
larger imports. As a result the balance of payment position generally turns adverse. This
creates gap between earnings and foreign exchange. The foreign capital presents short run
solution to the problem. So in order to balance the Balance Of Payment Foreign Investment
is needed.

5. DEVELOP THE DIVERSE MARKET

The Indian market is widely diverse. The country has 17 official languages, 6 major
religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ
greatly among sections of consumers.

Therefore, it is advisable to develop a good understanding of the Indian market and overall
economy before taking the plunge. Research firms in India can provide the information to
determine how, when and where to enter the market. There are also companies which can
guide the foreign firm through the entry process from beginning to end --performing the
requisite research, assisting with configuration of the project, helping develop Indian
partners and financing, finding the land or ready premises, and pushing through the
paperwork required.

MAJOR GLOBAL PLAYERS IN INDIA

35
DEUTSCHE GROUP:

DWS Investments part of Deutsche Asset Management, was founded in 1956 in

Frankfurt/Main. With fund assets under management of euro 267 billion, the company is one
of the Top 10 companies worldwide. In Europe, DWS is one of the leading mutual fund
companies and currently manages euro 173 billion. After having of more than euro 147
billion assets under management, DWS represents 22, 3% of the fund market in Germany,
making it the unchallenged number one. The International nature of its business
differentiates DWS significantly from its domestic and international competitors. DWS
Investments’ activities span all the key European markets. In the USA, DWS is represented
by DWS Scudder and manages assets of euro 86 bn. In spring 2006, it launched its first
funds as well as the DWS brand in Singapore and India, continuing its successful expansion
in the Asia-Pacific region. Thereafter, more funds were registered in other countries in Asia-
Pacific.
CITIGROUP:

36
The formation of Citigroup in 1998 created a new model of financial services organization
to serve its clients’ financial needs. As the company continues to grow and evolve, it’s
increasingly evident that such a large, complex grouping of businesses can indeed succeed.
With 275,000 employees working in more than 100 countries and territories, Citigroup’s
globality and diversity contribute to its continued success.

HSBC GLOBAL INVESTMENTS:

HSBC Investments is one of the world's premier fund management organizations. It has
established a strong reputation with institutional investors including corporations,
governments, insurance companies and charities the world over for delivering consistently
superior returns. In India we offer fund management services for institutional as well as
retail investors. Our array of products includes Equity Funds Income /Debt Funds.

MORGAN STANLEY &CO INTERNATIONAL LTD:

Morgan Stanley is a global financial services firm and a market leader in securities,
investment management and credit services. It has more than 600 offices in 27 countries and
manages $421 billion in assets for institutional and individual clients around the world.
Stanley Investment Management (MSIM), the asset management company of Morgan
Stanley was established in 1975. Morgan Stanley entered Indian market in 1989 with the
launch of India Magnum Fund. In 1994, Morgan Stanley launched Morgan Stanley Growth
Fund (MSGF). It is one of the largest private sector schemes investing in equities.

DSP MERRILL LYNCH:

37
DSP Merrill Lynch Mutual Funds are managed by DSP Merrill Lynch Fund Managers. DSP
Merrill Lynch Ltd. (DSPML) is a premier financial services provider and Merrill Lynch
(ML) holds 90% stake in DSPML. DSPML was originally called DSP Financial Consultants
Ltd. The firm traces its origins to D. S. Purbhoodas & Co., a securities and brokerage firm
with over 140 years of experience in the Indian market. Merrill Lynch is one of the world's
leading wealth management, capital markets and advisory companies with offices in 37
countries and territories and total client assets of approximately $1.5 trillion.

THE GOLDMAN SACHS GROUP, INC

The Goldman Sachs Group, Inc. is a bank holding company that engages in investment
banking, securities dealing, investment management and other financial services primarily
with institutional clients. Goldman Sachs was founded in 1869, and is headquartered in the
Lower Manhattan area of New York City at 85 Broad Street and has its secondary office at
30 Hudson Street, Jersey City, New Jersey. The firm has offices in some financial centers
and acts as a financial advisor and money manager for corporations, governments, and
wealthy families around the world. Goldman is a major dealer in securities, offers its clients
mergers & acquisitions advice, underwriting services, asset management, and engages in
proprietary trading, and private equity deals. It is a primary dealer in the U.S. Treasury
securities market.

REASON FOR GROWTH IN FII

38
Global liquidity is, of course, the primary cause of the recent surge in Asian markets
including India. Also low interest rate regime has led foreign investors to look for fresh
avenues to invest. This has resulted in most emerging markets seeing heavy inflows. FII’s
see India as a good destination to invest in and make money. They are happy with the Indian
government's commitment to economic reforms. They are also looking closely at sectors
(and companies within these sectors) which they think have potential. Infact, the growing
competitiveness of Indian companies is an enticing factor.

LONG-TERM CAPITAL GAINS TAX:

The tax an investor has to pays when he sells his shares after more than a year has been
abolished; so one can sell his shares without having to pay the government any kind of tax.

RUPEE APPRECIATION:
The dollar has been falling in value vis-à-vis other currencies. As a result, FIIs don’t find the
thought of investing in the US market all that attractive. They know they will make more
money if they invest elsewhere.

ECONOMIC GROWTH:
As mentioned earlier we witnessed a GDP growth rate of about 8.5% last year. Our
industries like Telecom, Banking etc are doing relatively well. All these make our country
very attractive to invest in. The sheer size of India and the relative stability the country
offers are other obvious plus points. Whatever the case may be, a perception is gaining
momentum that foreign investors are here to stay at least in the short-term.

FII: A COST BENEFIT ANALYSIS

39
The role of foreign investment over the years can’t be ignored. It certainly has had an
impact on the Indian stock market with a lot of benefits but along with these benefits there
are a few costs attached with it. Therefore it is useful to summarize the benefits and costs for
India of having foreign inflows.

BENIFITS
A) REDUCED COST OF EQUITY

FII inflows augment the sources of funds in the Indian capital markets. FII investment
reduces the required rate of return for equity, enhances stock prices, and fosters investment
by Indian firms in the country. The impact of FIIs upon the cost of equity capital may be
visualized by asking what stock prices would be if there were no FIIs operating in India.
B) STABILITY IN THE BALANCE OF PAYMENT

For promoting growth in a developing country such as India, there is need to augment
domestic investment, over and beyond domestic saving, through capital flows. The excess of
domestic investment over domestic savings result in a current account deficit and this deficit
is financed by capital flows in the balance of payments. Prior to 1991, debt flows and
official development assistance dominated these capital flows. This mechanism of funding
the current account deficit is widely believed to have played a role in the emergence of
balance of payments difficulties in 1981 and 1991. Portfolio flows in the equity markets, and
FDI, as opposed to debt-creating flows, are important as safer and more sustainable
mechanisms for funding the current account deficit.

C) KNOWLEDGE FLOWS

The activities of international institutional investors help strengthen Indian finance. FIIs
advocate modern ideas in market design, promote innovation, development of sophisticated
products such as financial derivatives, enhance competition in financial intermediation, and
lead to spillovers of human capital by exposing Indian participants to modern financial
techniques, and international best practices and systems.

D) STRENGTHENING CORPORATE GOVERNANCE

Domestic institutional and individual investors, used as they are to the ongoing practices of
Indian corporate, often accept such practices, even when these do not measure up to the
international benchmarks of best practices. FIIs, with their vast experience with modern
corporate governance practices, are less tolerant of malpractice by corporate managers and
owners (dominant shareholder). FII participation in domestic capital markets often lead to
vigorous advocacy of sound corporate governance practices, improved efficiency and better
shareholder value.

E) IMPROVING MARKET EFFICIENCY

40
A significant presence of FIIs in India can improve market efficiency through two channels.

First, when adverse macroeconomic news, such as a bad monsoon, unsettles many domestic
investors, it may be easier for a globally diversified portfolio manager to be more
dispassionate about India's prospects, and engage in stabilizing trades.

Second, at the level of individual stocks and industries, FIIs may act as a channel through
which knowledge and ideas about valuation of a firm or an industry can more rapidly
propagate into India. For example, foreign investors were rapidly able to assess the potential
of firms like Infosys, which are primarily export-oriented, applying valuation principles that
prevailed outside India for software services companies.

COSTS
A) HEDGING AND POSITIVE FEEDBACK TRAINING

There are concerns that foreign investors are chronically ill informed about india, and this
lack of sound information may generate herding (a large number of FIIs buying or selling
together) and positive feedback (buying after positive returns, selling after negative
returns).These Kinds of behavior can exacerbate volatility ,and push prices away from fair
values.

B) BALANCE OF PAYMENT VULNERABILITY

There are concerns that in an extreme event, there can be a massive flight of foreign capital
out of India, triggering difficulties in the balance of payments front. India's experience with
FIIs so far, however, suggests that across episodes like the Pokhran blasts, or the 2001 stock
market scandal, no capital flight has taken place. A billion or more of US dollars of portfolio
capital has never left India within the period of one month. When juxtaposed with India's
enormous current account and capital account flows, this suggests that there is little
vulnerability so far.

C) POSSIBILITY OF TAKEOVERS

While FIIs are normally seen as pure portfolio investors, without interest in control,
portfolio investors can occasionally behave like FDI investors, and seek control of
companies that they have a substantial shareholding in. Such outcomes, however, may not
be inconsistent with India's quest for greater FDI. Furthermore, SEBI's takeover code is in
place, and has functioned fairly well, ensuring that all investors benefit equally in the event
of a takeover.

DETERMINANTS OF FIIs

41
After the initiation of economic reforms in the early 1990s, the movement of foreign capital
flow increased very substantially. There are a lot of factors that determine the nature and
cause of foreign institutional investment in a country a few of them being inflation exchange
rate equity returns, government policies, price earring ratio and risk. Now if we try to
analyze the relation of each of these factors with the level of foreign inflow in the country,
we might have a better understanding. let us broadly classify the factors into inflation, risk
and stock market returns and understand the basic principle behind the inflows.

A) EQUITY RETURNS
An increase in the return in the foreign market will induce investors to withdraw from the
Indian (domestic) stock market to invest in the foreign market. Investors are believed to
follow a higher return, hence when the return in the domestic market increases, FII flows to
the domestic market. While the flows are highly correlated with equity returns in India, they
are more likely to be the effect than the cause of these returns. . It is assumed that the equity
returns have a positive impact on the FII inflow but foreign investors can also get involved
in profit booking. They can buy financial assets when the prices are declining, there by
jacking-up the asset prices and sell when the asset prices are increasing and hence be the
cause of such returns so making it more of a bi-directional relationship.

B) RISK
Investors are considered to be risk averse, hence when risk in the domestic market increases
they will withdraw from the domestic market, when risk in the foreign market increases,
investors will withdraw from the foreign market and invest in the Indian (domestic) market.
Investments, either domestic or foreign, depend heavily on risk factors. Hence, while
studying the behavior of FII, it is important to consider the risk variable. Risk can be divided
into ex-ante and unexpected risk. While the ex-ante risk certainly has an inverse relation
with the foreign investment nothing can be clearly said about the unexpected risk.

C) INFLATION

The inflation no doubt has an inverse relation with the foreign investment inflow as the
investor would keep in mind the purchasing power of the funds invested and as inflation
increase i.e. the purchasing power declines the investor is most likely to withdraw his
money.

When inflation in the domestic country increases, the purchasing power of the funds
invested declines, hence investors will withdraw from the domestic market. Similarly, when
inflation in the foreign country increases, the purchasing power of funds invested in the
foreign country declines, causing institutional investors to withdraw from the foreign market
and make investment in the domestic (Indian) market.

D) EXCHANGE RATE

42
When the value of the home currency is stronger the FII investments will also increase as the
percentage of returns the FII get automatically increases and visa versa So it can be said that
the inflation and risk in the domestic country and return in the foreign country adversely
affect the FII flowing to the domestic country, whereas inflation and risk in the foreign
country and return in the domestic country have a favorable effect on the flow of FII.

ROLE OF FII IN CAPITAL MARKET IN INDIA

43
As the Indian capital market opened its gates for the foreign institutional investors with
time there has been an increasing trends of there participating in the capital market. With
there increasing participation there has been a lot of effect on many parameters of the Indian
capital market. The major effect of the increasing participation of the institutional investors
has been observed in the following areas.

LIQUIDITY:
Market liquidity is a business, economics or investment term that refers to an asset's ability
to be easily converted through an act of buying or selling without causing a significant
movement in the price and with minimum loss of value. An act of exchange of a less liquid
asset with a more liquid asset is called liquidation.
Liquidity also refers both to that quality of a business which enables it to meet its payment
obligations, in terms of possessing sufficient liquid assets; and to such assets themselves.
A liquid asset has some or more of the following features.
It can be sold (1) rapidly, (2) with minimal loss of value, (3) anytime within market hours.
The essential characteristic of a liquid market is that there are ready and willing buyers and
sellers at all times. An elegant definition of liquidity is also the probability that the next
trade is executed at a price equal to the last one. A market may be considered deeply liquid
if there are ready and willing buyers and sellers in large quantities. This is related to a
market depth, where sometimes orders cannot strongly influence prices. The liquidity of a
product can be measured as how often it is bought and sold; this is known as volume. Often
investments in liquid markets such as the stock exchange or futures markets are considered
to be more liquid than investments such as real estate, based on their ability to be converted
quickly.

PRICE BUILDING MECHANISM:

With the increasing participation of the institutional investors in the capital market, it has
also helped the different companies to raise funds for there use through the capital market in
India. Earlier the companies use to go for debt financing which a cost has attached to it and
also in those days the cost of issuing an IPO was higher as compared to the funds that were
being generated by the companies. With the help of FII the market has become more
competitive fair value of their.

ROLE OF SPECULATION:
Generally people transact for three reasons hedging speculating and arbitraging Hedgers are
those to intend to hedge their risk. Speculation may be defined as the purchase or sale of a
good with a view to resale or repurchase at a later date, where the motive behind such action
is the expectation of changes in the prices.
Speculation is one of the most watched activity in any capital market its importance varies in
different countries in countries like in US it forms an integral part of the market whereas in
developing countries like India its taken as a threat. It is often believe that speculators even
out the price fluctuation by due to change in demand and supply condition but the concerns
about the adverse effects of speculation come from two sources. First, the possibility that

44
speculation, instead of evening out price fluctuations, may end up exacerbating such
fluctuations. Second, is the problem of speculation destabilizing rather than stabilizing
prices and hence affecting resource allocation. Through speculation, future expected price
not only depends on, but also has an impact on the spot price.
The market for shares is subject to much larger fluctuations than the market for bonds or
even commodities. Shares represent a share in the expected future profits of a company.
When fortunes of companies – both in the short run as well as in the medium to long run –
fluctuate, so do share prices. Uncertainty regarding the future leads to heavy discounting of
future profits, and to focus on short-period expectations about capital value rather than long-
period prospects of the company. The effect of foreign speculative activity in emerging
markets can be particularly beneficial if in the emerging market, liquidity is poor
First, the potential of market manipulation is acute in small emerging markets and liquidity
is often poor. Although there are many policy initiatives that could increase liquidity and
reduce the degree of collusion among large traders, there may not be a sufficient mass of
domestic speculators to ensure market liquidity and efficiency. Second, opening the market
to foreign speculators may increase the valuation of local companies, thereby reducing the
cost of equity capital.

VOLATILITY:
Volatility most frequently refers to the standard deviation of the change in value of a
financial instrument with a specific time horizon. It is often used to quantify the risk of the
instrument over that time period. Volatility is typically expressed in annualized terms, and it
may either be an absolute number ($5) or a fraction of the mean (5%).
Volatility is often viewed as a negative in that it represents uncertainty and risk. However,
volatility can be good in that if one shorts on the peaks, and buys on the lows one can make
money, with greater money coming with greater volatility. The possibility for money to be
made via volatile markets is how short term market players like day traders hope to make
money, and is in contrast to the long term investment view of buy and hold. In today's
markets, it is also possible to trade volatility directly, through the use of derivative securities
such as options and variance swaps. Foreign institutional investment is certainly volatile in
nature and its volatility has certainly posed some threats to the Indian stock market
considering its influence on the market. Given the presence of foreign institutional investors
in Sensex companies and their active trading behavior, small and periodic shifts in their
behavior lead to market volatility. Such volatility is an inevitable result of the structure of
India’s financial markets as well. Markets in developing countries like India are thin or
shallow in at least three senses. First, only stocks of a few companies are actively traded in
the market. Thus, although there are more than 8,000 companies listed on the stock
exchange, the BSE Sensex incorporates just 30 companies, trading in whose shares is seen
as indicative of market activity. Second, of these stocks there is only a small proportion that
is routinely available for trading, with the rest being held by promoters, the financial
institutions and others interested in corporate control or influence. And, third the number of
players trading these stocks is also small.
In such a scenario investment by the foreign institutional investors leads to a sharp price
increase this provides incentives to FII investment and enhances investment and when the
correction in the stock prices begins it would have to be a pull out by the FII and can result
in sharp decline in the prices. The other reason for volatility is that the foreign institutional

45
investors are attracted to a market by the expectation of price increase that tend to be
automatically realized, the inflow of foreign capital can result in an appreciation of the rupee
vis-à-vis the dollar This increases the return earned in foreign exchange, when rupee assets
are sold and the revenue converted into dollars. As a result, the investments turn even more
attractive triggering an investment spiral that would imply a sharper fall when any correction
begins. Apart from that the growing realization by the FIIs of the power they wield in what
are shallow markets, encourages speculative investment aimed at pushing the market up and
choosing an appropriate moment to exit. This manipulation of the market would certainly
enhance the volatility and in volatile markets even the domestic investors try to manipulate
the market when the prices are really high. Overall the foreign institutional investors have
been bullish on the Indian stocks but the problem is that this bullish nature might be a result
of the activities outside the Indian market it might be due to the performance of their equity
market or their non equity returns. Therefore they seek out for best returns and diversified
geographical portfolio in order to hedge their risk and when they make some adjustments in
their portfolio and make shifts in favor or against a country it borings about sharp changes.

46
POLICY &
GUIDELINES
POLICY FRAMEWORK
DESCRIPTION OF FII
GLOBAL PLAYERS IN INDIA
REASON FOR GROWTH IN FII
NEED OF FOREIGN INVESTMENTS

POLICY FRAMEWORK

47
The policy framework for permitting FII investment was provided
under the Government of India guidelines vide Press Note date
September 14, 1992. The guidelines formulated in this regard were as
follows:

1) Foreign Institutional Investors (FIIs) including institutions such as Pension

Funds, Mutual Funds, Investment Trusts, Asset Management Companies,
Nominee Companies and Incorporated/Institutional Portfolio Managers or their
power of attorney holders (providing discretionary and non-discretionary
portfolio management services) would be welcome to make investments under
these guidelines.

2) FIIs would be welcome to invest in all the securities traded on the Primary
and Secondary markets, including the equity and other securities/instruments
of companies which are listed/to be listed on the Stock Exchanges in India
including the OTC Exchange of India. These would include shares, debentures,
warrants, and the schemes floated by domestic Mutual Funds. Government
would even like to add further categories of securities later from time to time.

3) FIIs would be required to obtain an initial registration with Securities and

Exchange Board of India (SEBI), the nodal regulatory agency for securities
markets, before any investment is made by them in the Securities of
companies listed on the Stock Exchanges in India, in accordance with these
guidelines. Nominee companies, affiliates and subsidiary companies of a FII
would be treated as separate FIIs for registration, and may seek separate
registration with SEBI.

4) Since there were foreign exchange controls in force, for various permissions
under exchange control, along with their application for initial registration, FIIs
were also supposed to file with SEBI another application addressed to RBI for
seeking various permissions under FERA, in a format that would be specified by
RBI for the purpose. RBI's general permission would be obtained by SEBI before
granting initial registration and RBI's FERA permission together by SEBI, under
a single window approach.

5) For granting registration to the FII, SEBI should take into account the track
record of the FII, its professional competence, financial soundness, experience
and such other criteria that may 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

48
recognized stock exchanges through a designated bank branch, and to appoint
a domestic Custodian for custody of investments held.

8) This General Permission from RBI would also enable the FII to:

a. Open foreign currency denominated accounts in a designated bank. (There

could even be more than one account in the same bank branch each
designated in different foreign currencies, if it is so required by FII for its
operational purposes);

b. Open a special non-resident rupee account to which could be credited all

receipts from the capital inflows, sale proceeds of shares, dividends and
interests;

c. Transfer sums from the foreign currency accounts to the rupee account and
vice versa, at the market rate of exchange;

d. Make investments in the securities in India out of the balances in the rupee
account;

e. Transfer repairable (after tax) proceeds from the rupee account to the
foreign currency account(s);

f. Repatriate the capital, capital gains, dividends, incomes received by way of

interest, etc. and any compensation received towards sale/renouncement of
rights offerings of shares subject to the designated branch of a bank/the
custodian being authorized to deduct withholding tax on capital gains and
arranging to pay such tax and remitting the net proceeds at market rates of
exchange;

g. Register FII's holdings without any further clearance under FERA.

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 lock-in 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.

49
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 semi-
annually as part of its disclosure and reporting guidelines.

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.

50
 FII in the Indian Stock Exchanges
In November 1995, SEBI notified the Foreign Institutional Investors Regulations which were largely
based on the earlier guidelines issued in 1992. The regulations require FIIs to register with SEBI and to
obtain approval from the Reserve Bank of India under the Foreign Exchange Regulation Act, 1973 to
enable them buy and sell securities, open foreign currency and rupee bank accounts and remit and
repatriate funds.

For all practical purposes, full convertibility of rupee is applicable to FII investments. Gradually, the
scope of FII operations has been expanded by permitting (a) additional categories of investors, (b)
recognizing other instruments in which they can invest, and (c) altering the individual and aggregate FII
shares in any one Indian company. The latest position is that an FII (investing on its own behalf) or a
sub-account can hold up to 10 per cent of paid-up equity capital (PUC) of a company. The total
investment by all FIIs and sub-accounts in any one company cannot exceed 24 per cent of the total PUC.
In companies which pass a special resolution in this regard, the total FII investment can reach up to 30
per cent of the PUC. Imposition of investment ceilings, one expects, was aimed at:
one, preventing cornering of shares that could result in take-over operations;5 and two, to keep price
fluctuations under limits. The 24 per cent limit does not include investments made by the foreign
portfolio investors outside the portfolio investment route, i.e., through the direct investment approval
process.

Investments made through purchases of GDRs and convertibles are also excluded. For calculating the
FII investment limits, investments by NRIs and Overseas Corporate Bodies predominantly controlled by
them, which were included earlier, are no longer included for purposes of monitoring the FII investment
ceilings.6 In the Budget Speech 2000-2001 it was proposed to raise the upper limit to 40 per cent.
In spite of the fact that FPI has been given an important place in India's financial sector under the
liberalization package, very few studies of the FII operations in India exist. One reason for this has been
the paucity of data. The studies generally point to the positive relationship between FII investments and
movement of the Bombay Stock Exchange share price index. We looked at the relationship in a
somewhat different way. It has been noticed that net FII investments were lower in the fourth quarter in
all the years except 1993, their first year of operations, and 1999. The average of BSE Sensex also fell in
the last quarter except in 1993 and 1999. Contrary to the expectations FII investments picked up during
the last quarter itself after a dip in the third quarter of 1999.

Average level of Sensex also did not decline during the last quarter. It does, however, appear that FIIs
buy in the first and second quarters following the depression created by their low activity or relative
selling pressure in the last quarter. The decline, which starts in the third quarter, reaches the maximum in
the last quarter. One of the possible explanations for the BSE Sensex also declining during the last

51
quarter could be that the local market players look towards FIIs for leads. In such a situation, even with
relatively small turnovers, FIIs can swing the market by their actions. The extent of FII influence on
market players can probably be gauged from the fact that SEBI asked the stock exchanges not to release
FII trading details [Hindu Business Line, 1999]8 as SEBI decided to release the data with a one day lag
and after due confirmation with the FIIs' custodians. To give better empirical content to the general
understanding that FIIs influence the Indian equity markets we tried to get detailed data on FII
transactions. Our efforts at getting FII-wise information from the RBI and SEBI, however, did not meet
with any success.9 In view of this, we had to rely on other sources. At the beginning of March 2000, the
number of FIIs registered with SEBI stood at 502. The sheer number of FIIs does not give a full picture
of the FII operations in India since each of the FIIs can represent unlimited number of subaccounts.

On the number of sub-accounts, however, no information is available. With the importance attached to
sub-account-wise investment limits one would have expected SEBI to provide information on these.
Also, a good number of FIIs are under common control (as indicated by their names, addresses and
telephone numbers) and render individual FII limits less relevant.

FIIs registered with SEBI fall under the following categories:

a) Regular FIIs-
Foreign investors, who are required to invest not less than 70 % of their investment in
equity-related instruments and 30 % in non-equity instruments.
b) 100 % debt-fund FIIs-
Those who are permitted to invest only in debt instruments.The Government guidelines for
FII of 1992 allowed, inter-alia, entities such as asset management companies, nominee
companies and incorporated/institutional portfolio managers or their power of attorney
holders (providing discretionary and non-discretionary portfolio management services) to be
registered as FIIs. While the guidelines did not have a specific provision regarding clients, in
the application form the details of clients on whose behalf investments were being made
were sought.

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

Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository Receipts (ADR)/
Global Depository Receipts (GDR), Foreign Institutional Investments and investments in
offshore funds. Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate
Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian

52
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.

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:

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

general reputation of fairness and integrity.
2. Whether the applicant is regulated by an appropriate foreign regulatory authority.
3. 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.
4. 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.
d) University fund, endowments, foundations or charitable trusts or charitable societies.
5. Whether the grant of certificate to the applicant is in the interest of the development of the
securities market.
6. Whether the applicant is a fit and proper person. The SEBI’s initial registration is valid
for a period of three years from the date of its grant of renewal.

53
INVESTMENT CONDITIONS AND RESTRICTIONS FOR FIIS:
A Foreign Institutional Investor may invest only in the following:-

(a) Securities in the primary and secondary markets including shares, debentures and
warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in
India.
(b) Units of schemes floated by domestic mutual funds including Unit Trust of India,
whether listed or not listed on a recognized stock exchange.
(c) Dated Government securities.
(d) Derivatives traded on a recognized stock exchange.
(e) Commercial paper.
(f) Security receipts.

The total investments in equity and equity related instruments (including fully convertible
debentures, convertible portion of partially convertible debentures and tradable warrants)
made by a Foreign Institutional Investor in India, whether on his own account or on account
of his sub- accounts, should not be less than seventy per cent of the aggregate of all the
investments of the Foreign Institutional Investor in India, made on his own account and on
account of his sub-accounts. However, this is not applicable to any investment of the foreign
institutional investor either on its own account or on behalf of its sub-accounts in debt
securities which are unlisted or listed or to be listed on any stock exchange if the prior
approval of the SEBI has been obtained for such investments. Further, SEBI while granting
approval for the investments may impose conditions as are necessary with respect to the
maximum amount which can be invested in the debt securities by the foreign institutional

54
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.

PROHIBITIONS ON INVESTMENTS:
No foreign institutional investor should invest in security receipts on behalf of its sub-
account. A foreign corporate or individual is not eligible to invest through the hundred
percent debt route. 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, residential/commercial premises, roads or bridges.)

Foreign Direct Investments in India

5) Trading in Transferable Development Rights (TDR).

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.

FDI: AN INTRODUCTION.
FDI is the process whereby residents of one country (the source country) acquire ownership
of assets for the purpose of controlling the production, distribution, and other activities of a
firm in another country (the host country). The international monetary fund’s balance of
payment manual defines FDI as an investment that is made to acquire a lasting interest in an
enterprise operating in an economy other than that of the investor. The purpose of an
investors’ should be an effective voice in the management of the enterprise.

55
The United Nations World Investment Report, 1999 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).”

FDI: INDIAN SCENARIO

Foreign Direct Investment is permitted as under the following forms of investments

 Through financial collaborations.

 Through joint ventures and technical collaborations.
 Through capital markets via Euro issues.
 Through private placements or preferential allotments.

FORBIDDEN TERRITORIES
Foreign Direct Investment 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 GDR

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 –

56
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.

FDI: ENTRY FOR INVESTMENT IN INDIA

Foreign direct investments in India are approved through two routes –

57
1. Automatic approval by RBI –

The Reserve Bank of India accords automatic approval within a period of two weeks
(subject to compliance of norms) to all proposals and permits foreign equity up to 24%;
50%; 51%; 74% and 100% is allowed depending on the category of industries and the
sectoral caps applicable. The lists are comprehensive and cover most industries of interest to
foreign companies. Investments in high priority industries or for trading companies
primarily engaged in exporting are given almost automatic approval by the RBI.

For the Automatic Route no prior Government approval is required if the investment to be
made falls within the sectoral caps specified for the listed activities. Only filings have to be
made by the Indian company with the concerned regional office of the Reserve Bank of
India (“RBI”) within 30 days of receipt of remittance and within 30 days of issuance of
shares

All items/activities for FDI investment up to 100% fall under the Automatic Route except
the following:

58
• All proposals that require an Industrial License.
• All proposals in which the foreign collaborator has a previous venture/ tie up in India
• All proposals relating to acquisition of existing shares in an existing Indian Company
by a foreign investor.
• All proposals falling outside notified sectoral policy/ caps or under sectors in which
FDI is not permitted.

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.

Investment proposals falling outside the automatic route would require prior Government
approval. Foreign Investment requiring Government approvals are considered and approved
by the Foreign Investment Promotion Board (“FIPB”). Decision of the FIPB usually
conveyed in 4-6 weeks. Thereafter, filings have to be made by the Indian company with the
RBI. FIPB Approval has been required
• For all activities, which are not covered under the Automatic Route
• Composite approvals involving foreign investment/ foreign technical collaboration
• Published Transparent Guidelines vs. Earlier Case by Case Approach
• Downstream Investment

3. CCFI Route:

Investment proposals falling outside the automatic route and having a project cost of Rs.
6,000 million or more would require prior approval of Cabinet Committee of Foreign
Investment (“CCFI”). Decision of CCFI usually conveyed in 8-10 weeks. Thereafter, filings
have to be made by the Indian company with the RBI
Investment proposals falling within the automatic route and having a project cost of Rs.
6,000 million or more do not require to be approved by CCFI

OPTIONS FOR FOREIGN INVESTORS IN INDIA

59
A foreign company planning to set up business operations in India has the following
options:
 Incorporated Entity
 As an Unincorporated Entity

INCORPORATED ENTITY
A foreign company can enter India for its business operations by incorporating a company
under the Companies Act, 1956 through
 Joint Ventures; or
 Wholly Owned Subsidiaries

Joint Venture
Joint Venture with an Indian Partner preferably with majority equity participation Though a
wholly owned subsidiary has been the most preferred option, foreign companies have also
been setting up shop in India by forging strategic alliances with Indian partners. The trend in
this respect is to choose a partner who is in the same fi eld/area of activity and has suffi cient
experience and expertise in his line of activity.

Wholly owned Subsidiary Company

A foreign company can set up a wholly owned subsidiary company in India for carrying out
its activities. Such subsidiary is treated as an Indian resident and an Indian Company for all
Indian regulations (including Income Tax, FEMA and Companies Act), despite being 100%
foreign owned. At least two members are mandatory.
Incorporation of a company with the Registrar of Companies (“RoC”) is a two-step process:

60
 1. Obtaining approval from Registrar of Companies (RoC) for the name of the Indian
Company. Minimum 4 alternative names are required to be given for consideration.
The name of the company should clearly reflect the main objects of the company.
2. Drafting Memorandum and Articles of Association of the Company and obtaining
Certificate of Incorporation.

Foreign equity in such Indian companies can be up to 100% depending on the requirements
of the investor, subject to equity caps in respect of the area of activities under the Foreign
Direct Investment (FDI) policy.

AS AN UNINCORPORATED ENTITY
As a foreign Company through
 Liaison Office/ Representative Office
 Project Office
 Branch Office
Such offices can undertake activities permitted under the Foreign Exchange Management
(Establishment in India of branch or office of other place of business) Regulations, 2000.
For registration and incorporation, an application has to be filed with Registrar of
Companies (ROC). Once a company has been duly registered and incorporated as an Indian
company, it is subject to Indian laws and regulations as applicable to other domestic Indian
companies.

Liaison Office/Representative Office:

In the establishment of companies regarding foreign investment The role of the liaison office
is limited to collecting information about possible market opportunities and providing
information about the company and its products to prospective Indian customers. It can
promote export/import from/to India and also facilitate technical/financial collaboration
between parent company and companies in India. Liaison office can not undertake any
commercial activity directly or indirectly and can not, therefore, earn any income in India.
Approval for establishing a liaison office in India is granted by Reserve Bank of India
(RBI).

Project Office:
Foreign Companies planning to execute specific projects in India can set up temporary
project/site offices in India. RBI has now granted general permission to foreign entities to
establish Project Offices subject to specified conditions. Such offices can not undertake or
carry on any activity other than the activity relating and incidental to execution of the
project.
Project Offices may remit outside India the surplus of the project on its completion, general
permission for which has been granted by the RBI.

61
Branch Office:
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set
up Branch Offices in India for the following purposes, with the prior approval of RBI and
subsequent registration with RoC: :
1. Export/Import of goods
2. Rendering professional or consultancy services
3. Carrying out research work, in which the parent company is engaged.
4. Promoting technical or financial collaborations between Indian companies and parent or
overseas group company.
5. Representing the parent company in India and acting as buying/selling agents in India.
6. Rendering services in Information Technology and development of software in India.
7. Rendering technical support to the products supplied by the parent/ group companies.
8. Foreign airline/ shipping company.

Branch Offices established with the approval of RBI may remit outside India profit of the
branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting
up branch offices is granted by the Reserve Bank of India (RBI).

Branch Office on “Stand Alone Basis” in SEZ:

Such Branch Offices would be isolated and restricted to the Special Economic Zone (SEZ)
alone and no business activity/ transaction will be allowed outside the SEZs in India, which
include branches/ subsidiaries of its parent office in India. No approval shall be necessary
from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and
service activities subject to specified conditions.

Application for setting up Liaison Office/ Project Office/ Branch Office may be submitted in
form FNC 1 (available at RBI website at www.rbi.org.in )

OPTIONS FOR NON-RESIDENT INDIAN

62
NRIs have few more entry options for investments in India
Investment in a firm or a proprietary concern by other than NRIs
A Non-Resident Indian or a Person of Indian Origin resident outside India may invest by
way of contribution to the capital of a firm or a proprietary concern in India on non-
repatriation basis provided,
i) Amount is invested by inward remittance or out of NRE/ FCNR/NRO account maintained
with AD
ii) The firm or proprietary concern is not engaged in any agricultural/plantation or real estate
business i.e. dealing in land and immovable property with a view to earning profit or earning
income there from.
iii) Amount invested shall not be eligible for repatriation outside India.
NRI/ PIO may invest in sole proprietorship concerns/ partnership firms with repatriation
benefits with the approval of Government /RBI.

Investment in a firm or a proprietary concern by NRIs

No person resident outside India other than NRIs/PIO shall make any investment by way of
contribution to the capital of a firm or a proprietorship concern or any association of persons
in India. The RBI may, on an application made to it, permit a person resident outside India
to make such investment subject to such terms and conditions as may be considered
necessary.
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.

63
EPILOGUE
SWOT ANALYSIS
CONCLUSION
RECOMMENDATIONS

SWOT ANALYSIS

64
 Strengths
1) Provides the most
important resource i.e. is
finance.
2) Contributes to the
economic growth of the
country.
3) Balances the balance of
payment position.
Opportunities
1) Better infrastructure.
2) Exploitation of resources
to the maximum.
3) Better technology
available.
Weakness
1) Focuses more on developing countries.
2) Hampering the progress due to anytime
withdrawal.
3) Provides only short term opportunities.
4) Provides more returns than in domestic
countries.
5) Develops relationship between two
countries.
Threats
1) Anytime withdrawal of investments.
2) Investments made in Foreign countries
poses threat to the Indian companies.
3) Increased returns.

STRENGTHS:

1. Provides most important resource i.e. finance: To start any business and to make the
idea to be actually implemented it needs finance. The FIIs brings the inflow of money
into the country. Many projects that require funding is done with the help of FIIs. Today
in this world, the Finance is the only resource, which has the capability to be easily
transferred from one place to another, and hence providing as a base for business
opportunities .Free flow of capital is conducive to both the total world welfare and to the
welfare of each individual.

2. Contributes to the economic growth of the country: When FIIs enters the domestic
country they bring in the money and acts as the facilitator of the business development.
As money comes into the country, it provides various benefits to the leading sectors and
ultimately results into the development of various sectors. E.g. in India I.T sector is the
most booming sector and has shown the signs of improvement thus attracting the FIIs.

3. Balances the balance of payments: In the initial phase of economic development, the
under developing countries need much larger imports. As a result, the balance of
payment position generally turns adverse. This creates gap between earnings and foreign
exchange. The foreign capital presents short run solution to the problem. So in order to
balance the Balance of Payment Foreign Investment is needed.
4. Provides more returns than in domestic countries: FIIs provide more returns to the
investors as compared to the domestic country. This is one of the most important strength
of FIIs. The main reason is that the countries in which th Foreign Institutional Investors
invest their money, provides more opportunities and many benefits. So investors invest
in foreign countries rather than in the domestic countries.

65
5. Develops relationship between two countries: Due to FIIs the investors from different
countries come into picture and various people also come into the contact with each
other. This develops a sense of relationship between different people and develops a nice
intra-cultural atmosphere.

WEAKNESSES:

1. Focuses more on developing countries: The main weakness of foreign

institutional investments is that they provide opportunities to only the developing and
developed countries. The Foreign institutional investors focuses on the developing
countries rather than on the underdeveloped countries and because of this the under
developed countries remain underdeveloped. So this drawback of the FIIs should be
improved upon by making their investments in the under developed countries.

2. Hampering the progress due to anytime withdrawal: The FIIs do not provide
any guarantee i.e. the Foreign institutional investors can anytime withdraw their money
when they want to so this makes the nature of the FIIs unpredictable and ultimately
hampering the progress of the economy of that country. The very good example of this is
the mass withdrawal of the FIIs in the far eastern countries like Malaysia, Indonesia etc
in 1996-97.

3. Provides only the short term opportunities: FIIs provide only the short term
opportunities i.e. they do not provide the long term opportunities as they are very much
supple in nature and there by limiting its scope to short term opportunities. As far as the
market seems to be good the FIIs are attracted and after that they are not predictable. So
FIIs are bound to provide only the short term opportunities.

OPPORTUNITIES:

1. Better infrastructure: Better infrastructure is available only when there is adequate

finance available and this comes with the help of FIIs. Infrastructure covers many
dimensions, ranging from roads, ports, railways and telecommunication systems to
institutional development (e.g. accounting, legal services, etc.) studies in china reveal the
extent of transport facilities and the proximity to major ports as having a positive
significant effect on the location of FII within the country. Poor infrastructure can be
developed with the help of the foreign investment. Foreign investors also point potential
for attracting significant FII if host country government permits more substantial foreign
participation in the infrastructure sector.
2. Exploitation of resources to the maximum: The major resources i.e. manpower,
material and machines can be utilized to its fullest so as to get the maximum benefit out
of it. Through FIIs, the reserves or the resources that are untapped because of the lack of
funds can be exploited. Potential areas for exploration ventures include gold, diamonds,

66
 copper, lead zinc, cobalt silver, tin etc. There is also scope for setting up manufacturing
units for value added products.

3. Better technology available: Technology is the main aspect on which the growth of
the country is determined. Developing countries has a very low level of technology.
Their technology is not up to the standards and they lack in modern technology.
Developing countries possess a strong urge for industrialization to develop their
economies and to wriggle out of the low-level equilibrium trap in which they are caught.
This raises the necessity for importing technologies from advanced countries. Such
technology usually comes with foreign capital.

THREATS:

1. Anytime withdrawal of investments: The FIIs are more flexible in nature i.e.
unlike FDI they are not guaranteed. Foreign Institutional Investors can withdraw at any
time they want. Foreign Direct Investment is for a fixed period and the investments could
not be withdrawn until a specified period. The recent example was the net outflows of
the money from the stock market that affected the whole economy and its consequences
are very much appalling resulting into posing threats to the economy.

2. Investments made in Foreign Companies poses threat to Indian companies:

Many MNCs have their set up in India and these MNCs provide a stiff competition to the
domestic industries. The Foreign Institutional Investors invest their money in these
MNCs and they are equipped with the latest technology to provide products at cheaper
rates. Moreover, the Indian laborers are opposing the use of modern technology as the
company downsizes the number of workers that substitutes the modern technology.

3. Increased returns results in outflow of money: Increased returns can pose a threat
to the domestic country as the money flows out of the country and this may affect the
economy of the domestic country. The returns that the Foreign Institutional Investors are
getting are very much high and this returns they take to their home country and this leads
to the outflow of money from domestic country to the foreign country.

67
 CONCLUSION

Foreign Institutional Investments are very much needed for India. They are necessary for
the continuous development of our country. The economy of our country has shown a better
performance and has led to the economic growth due to the FIIs. Though there are threats
from the Foreign Institutional Investments we should be positive and see the future of our
country. In last 50 years, India has developed a strong and professionally competent
technical, marketing and business manpower in Livestock production and Information
Technology.
This is an added advantage over many developing countries of Asia and Africa. Availability
of competent and comparatively low-cost manpower in India is a great asset which is
attracting foreign investors. As a result of stagnancy or in some cases reduction in
agricultural production, demand for several inputs like machinery and equipment, feeds,
pharmaceuticals etc. has reduced in some countries of America and Europe.
It is therefore not surprising that these business enterprises have focused their attention to
emerging Asian markets, particularly India and China. India is in a better position as it has a
strong technical manpower base and large number of English speaking population.

INDIA’S FUTURE
The future of the India is bright and moreover due to FIIs the economy will gain a swing in
the future in short run as well as long run. India is a pool of various resources, their effective
utilization is possible only with the investments and in large sum. The prosperity of India
will soon be visible in the near future. By evolving the strategy to improve the competitive
position in these areas, overall level of competitiveness can be raised thereby enhancing the
export potential of the country.
Thus, India could take a proactive initiative in seeking an international discipline on
investment incentives with a built in exception based on the level of industrialization. Soon
India will be leading country.

68
 RECOMMENDATIONS

Foreign investment is a valuable non-debt creating, external resource supplement

inadequate savings and has a major role in transforming technology, improving managerial
skills and facilitating market development. In our economic system, capital is the fuel that
generates profits.
India must extend a hospitable environment for foreign investors by providing essential
guarantees for investors for
1 1) Enter and exit.
2 2) Operate on equal terms alongside local operators.
3 3) Repatriate their investments when needed

India has a pool of human resource and this can attract the Foreign Institutional Investors to
invest their money into our country there by increasing the output with the help of tapping
the human resource.
The ready availability of the required infrastructure in the form of serviceable roads, ports,
telecommunications, airports and water and power facilities is a pre-requisite for attracting
large volume of foreign investments.
Continued export and careful management of India’s imports will also be crucial in
maintaining India’s ability to maintain and continue to build international equity and debt
Institutional Investors confidence.
An environment should be created in India whereby investors would be confident in
remitting funds into India, instead of just obtaining approval and waiting for the time to
invest.

Though Foreign Investments poses threats, the strengths should also be considered and the
opportunities that Foreign Institutional Investments provide. If India has to attract huge
amounts of Foreign Investments, it needs to first overcome the barriers that exist. There
should be no room for Bureaucracy, Red Tapism and a laid back attitude. Approvals should
be easily forth coming.

Both the FIIs and FDI should be invited to the fullest and given importance so that it will
create a win-win situation on the part of both the parties. Both the parties will be benefited
from Foreign Investments i.e. India will get capital and the investors will get returns to
maximum.

69
ANNEXURE

Agencies/ departments involved with clearances

approvals
FDI permitted in various sectors/ activities
Sector-wise FDI inflows (April 2000 to Jan. 2009)
Abbreviation
Reference and Bibliography

Agencies Involved with Clearances Approvals

70
Industrial Entrepreneur
Memorandum for delicensed
industries
Approval for Industrial License /
Carry-on-business license
Approval for Technology Transfer:
1. Automatic route
2. Government approval
(Project Approval Board)
Approval for financial collaboration:
1. Automatic route
2. Government approval (FIPB)
Approval for Industrial Park
1. Automatic route
2. Non-Automatic Route
(Empowered Committee)
Registration as a Company &
Certificate of Commencement of
business
Matters relating to FDI Policy
Foreign Exchange Matters
Taxation matters
Direct taxation issues
Excise and Customs Issues
Import of goods
Environmental Clearances
Overseas Investment by Indians
FDI Permitted % In Various Sectors/ Activities
1
Department of Industrial
http://dipp.nic.in
Policy and Promotion, SIA
Department of Industrial
http://dipp.nic.in
Policy and Promotion, SIA
Reserve Bank of India
Department of Industrial www.rbi.org.in
http://dipp.nic.in
Policy and Promotion, SIA
Reserve Bank of India
www.rbi.org.in
Department of Economic
http://fi nmin.nic.in
Affairs
Department of Industrial
http://dipp.nic.in
Policy and Promotion, SIA
Department of Company
Affairs (Registrar of http://dca.nic.in
Companies)
Department of Industrial
http://dipp.nic.in
Policy and Promotion, SIA
Reserve Bank of India www.rbi.org.in
Department of Revenue http://fi nmin.nic.in
Central board of Direct Taxes http://incometaxindia.gov.
in
Central Board of Excise and
www.cbec.gov.in
Customs
Directorate General of
http://dgft.delhi.nic.in
Foreign trade
Ministry of Environment and
http://envfor.nic.in/
Forests
Overseas Investment
Division, Reserve Bank of www.rbi.org.in
India
71
SECTORS WHERE FDI UP TO 26 % ALLOWED
1) Broadcasting:
a) FM Radio – FDI + FII investment up to 20% with prior Government approval
subject to guidelines by Ministry of Information & Broadcasting.

b) Up Linking News & Current Affairs TV Channel – up to 26% (FDI + FII) with
prior FIPB approval.

2) Print media: Publishing newspaper and periodicals dealing with news and current
affairs - FDI up to 26% with prior Government approval

3) Defense industries: FDI up to 26% with prior Government approval

4) Insurance: Foreign equity (FDI+FII) up to 26% under the automatic route

5) Petroleum and Natural Gas Sector: Refining in case of PSUs: up to 26% with prior
FIPB approval.

SECTORS WHERE FDI UP TO 49 % ALLOWED

i. Broadcasting:
a. Setting up hardware facilities such as up-linking, HUB, etc.- FDI+FII
equity up to 49% with prior Government approval subject to up-linking Policy
notified by Ministry of Information & Broadcasting.

b. Cable network- Foreign equity (FDI+FII) up to 49% with prior Government

approval subject to Cable Television Network Rules (1994) notified by Ministry of
Information & Broadcasting.

c. DTH - Foreign equity (FDI+FII) up to 49% with prior Government approval.

FDI can not exceed 20% subject to guidelines by Ministry of Information &
Broadcasting.

ii. Domestic Scheduled Passenger Airline Sector - FDI up to

49% under the automatic route with no direct or indirect participation of foreign airlines.

iii. Asset Reconstruction Companies – up to 49% (only FDI)

with prior FIPB approval.

iv. Petroleum Refining By PSUs. No divestment of domestic

equity in existing PSUs would be permitted for increasing the FDI up to 49%.

v. Commodity exchanges – FDI +FII up to 49% with a sub-

limit for FII at 23% and for FDI at 26%.

72
 vi. Stock exchanges - FDI +FII up to 49% with a sub-limit for
FII at 23% and for FDI at 26%.

vii. Credit Information Companies- FDI +FII up to 49% with

a sub-limit for FII at 24% in the CICs listed on the Stock Exchanges.

SECTORS WHERE FDI UP TO 51% IS ALLOWED

Single Brand product retailing- with prior Government approval subject to:-

a) Products being sold under the same brand internationally.

b) Products sold being of a single brand. Retailing of multiple products sold under
different brand names, even if produced by the same manufacturer, would not be
allowed.

c) Single Brand product retailing would cover only such products as are branded at the
manufacturing point.

SECTORS WHERE FDI UP TO 74% ALLOWED

1. Telecommunication services: basic and cellular – FDI up to 74% allowed. FDI up to
49% is under automatic route. Beyond 49% and upto 74% requires FIPB approval.
Foreign equity includes FDI, FII, NRI, FCCBs, ADRs, GDRs, convertible preference
shares, and proportionate foreign equity in Indian promoters/ Investing Company.

2. ISP with gateways, radio-paging, end-to-end bandwidth – FDI up to 74% with FDI
beyond 49% requiring prior Government approval

3. Establishment and operation of satellites - FDI up to 74% with prior Government

approval.

4. Private sector banks - Foreign equity (FDI + FII) up to 74% under the automatic route.

5. Non-Scheduled airlines, Chartered airlines - FDI up to 74% under the automatic route
subject to no direct or indirect participation by foreign airlines.

6. Cargo airlines and Ground handling- FDI up to 74% allowed under the automatic route.

7. Private sector banks - Foreign equity (FDI + FII) up to 74% under the automatic route

FDI UP TO 100 % ALLOWED SUBJECT TO CONDITION

73
1. Development of Existing Airports – FDI up to 74% under automatic route and beyond
this under FIPB route

2. Exploration and mining of coal and lignite for captive consumption: FDI up to 100%
under automatic route subject to provisions of Coal Mines (Nationalization) Act, 1973

3. Trading: Trading of items sourced from small scale sector under govt. approval route

4. Trading: Test marketing of such items for which a company has approval for
manufacture under govt. approval route

5. Courier services for carrying packages, parcels and other items which do not come
within the ambit of the Indian Post Office Act, 1898: Prior Government approval
subject to existing laws and subject to existing laws and exclusion of activity relating to
distribution of letters, which is exclusively reserved for the State.

6. Tea Sector, including tea plantation: Prior Government approval subject to divestment
of 26% equity within five years

7. Non Banking Finance Companies: FDI up to 100% under the automatic route subject
to minimum capitalization norms

8. Construction Development projects: FDI up to 100% on the automatic route subject to

minimum capitalization norms; minimum area development and lock-in on original
investment.

9. ISP without gateway, infrastructure provider providing dark fiber, right of way,
duct space, tower (Category I); electronic mail and voice mail: FDI up to 49% under
automatic route. Beyond 49% and up to 100% subject to FIPB approval subject to
divestment of 26% equity in 5 years if the investing companies are listed in other parts of
the world.

10. Domestic Scheduled/ Non-Scheduled & Chartered airlines/Air transport services:

NRI investment up to 100% permitted under the automatic route with no direct or
indirect participation of foreign airlines.

11. Power trading: Up to 100% subject to compliance with regulations under Electricity
Act, 2003.

12. Cigars & Cigarettes: Up to 100% with prior FIPB approval and Subject to industrial
license under the Industries (Development & Regulation) Act, 1951.

13. Alcohol distillation and brewing - 100% FDI under automatic route subject to license by
appropriate authority.

74
 SECTOR-WISE FDI INFLOWS (April 2000 to January 2009)

SECTOR AMOUNT OF FDI INFLOWS % of TOTAL FDI

INFLOWS (In Rs)
Rs Million US$ Million

Services Sector 787420.81 18118.40 22.39

Computer Software & hardware 391109.74 8876.43 11.12

Telecommunications 275441.38 6215.55 7.83

Construction Activities 213595.12 5029.01 6.07

Automobile 146799.41 3310.23 4.17

Housing & Real estate 217936.02 5118.85 6.20

Power 137089.37 3129.66 3.90

Chemicals (Other than Fertilizers) 87008.07 1964.06 2.47

Ports 63290.50 1551.88 1.80

Metallurgical industries 109563.20 2612.85 3.11

Electrical Equipments 57379.63 1324.92 1.63

Cement & Gypsum Products 70781.19 1621.03 2.01

Petroleum & Natural Gas 94417.17 2244.17 2.68

Trading 62416.85 1480.94 1.77

Consultancy Services 48647.43 1112.92 1.38

Hotel and Tourism 52500.05 1217.50 1.49

Food Processing Industries 34362.49 760.32 0.98

Electronics 33914.75 748.57 0.96

Misc. Mechanical & Engineering industries 28310.13 648.86 0.80

Broadcasting (Incl. Print media) 52115.90 1194.20 1.48

Mining 21204.94 522.86 0.60

Textiles (Incl. Dyed, Printed) 26736.94 611.03 0.76

75
Sea Transport 17653.81 402.59 0.50

Hospital & Diagnostic Centers 27241.42 644.73 0.77

Fermentation Industries 27743.46 658.04 0.79

Machine Tools 10955.32 247.88 0.31

Air Transport ( Incl. air freight) 10552.19 240.71 0.30

Ceramics 17462.43 409.92 0.50

Rubber Goods 11392.76 247.60 0.32

Agriculture Services 7937.13 188.39 0.23

Industrial Machinery 13748.27 316.97 0.39

Paper & Pulp 18612.76 429.06 0.53

Diamond & Gold Ornaments 11014.62 248.15 0.31

Agricultural Machinery 6649.12 148.37 0.19

Earth Moving Machinery 5749.34 134.22 0.16

Commercial, Office & Household 5798.71 132.74 0.16

Equipments

Glass 5683.60 126.51 0.16

Printing of Books (Incl. Litho printing) 6066.23 135.80 0.17

Soaps, Cosmetics and Toilet Preparations 4984.88 114.54 0.14

Medical & Surgical Appliances 8087.87 177.42 0.23

Education 14374.11 309.09 0.41

Fertilizers 4282.17 96.59 0.12

Photographic raw Film & Paper 2580.20 63.90 0.07

Railway related components 3281.85 75.11 0.09

Vegetable oils and Vanaspati 3769.18 83.69 0.11

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Sugar 1836.64 41.58 0.05

Tea & Coffee (Processing & warehousing 3774.81 84.28 0.11

coffee & rubber)

Leather, Leather goods & Packers 1621.56 36.74 0.05

Non-conventional energy 3640.58 86.84 0.10

Industrial instruments 1368.36 29.47 0.04

Scientific instruments 511.44 11.64 0.01

Glue and Gelatin 385.80 8.44 0.01

Boilers & steam generating plants 238.67 5.40 0.01

Dye-Stuffs 406.48 9.52 0.01

Retail Trading (Single brand) 1074.67 25.18 0.03

Coal Production 614.10 15.42 0.02

Coir 50.17 1.12 0.00

Timber products 139.59 3.10 0.00

Prime Mover excluding electrical generators 178.30 3.72 0.01

Defense Industries 6.87 0.15 0.00

Mathematical, Surveying & drawing 50.35 1.27 0.00

instruments

Misc. industries 180561.54 4162.55 5.19

Sub Total 3517310.79 81010.63 100.00

SOURCE: DIPP, Federal Ministry of Commerce and Industry, Government of India

GLOSSARY OF ABBREVIATIONS

ADB Asian Development Bank

ADR American Depository Receipt
AMC Asset Management Co.
AMFI Association of Mutual Funds in India
AMF Association of Mutual Funds in India
BSE Bombay Stock Exchange
CII Confederation of Indian Industry

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DIPP Department of Industrial Policy and Promotion
FMCG Fast Moving Consumer Goods
FI Financial Institutions
FCC Foreign Controlled Companies
FDI Foreign Direct Investment
FII Foreign Institutional Investor
FPI Foreign Portfolio Investment
GDP Gross Domestic Product
GDR Global/American Depository Receipts
GNP Gross National Product
IFC International Finance Corporation
IMF International Monetary Fund
IPO Initial Public Offering
LIC Life Insurance Corporation of India
NAV Net asset value
NRI Non-resident Indian
NSE National Stock Exchange
PIS Portfolio Investment Scheme
RBI Reserve Bank of India
SEBI Securities and Exchange Board of India
TNC Transnational corporations
ULIP United Linked Insurance Plan
UTI Unit Trust of India

References & Bibliography

Books:

1. NCFM- Derivatives market module

2. Richard I. Levin, David S. Rubin, Statistics For Management; Prentice
Halt Publication, 7th edition 2006

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 3. Schindler & Kooper, Research Methods In Business; Pearson Education
Publication, 6h edition 2007

Websites:-

www.nseindia.com/
http://www.bseindia.com/
http://www.indiainfoline.com/
http://www.moneycontrol.com/
http://google.com/finance
http://www.bseindia.com/
www.derivativesindia.com/
www.capitalmarket.com/
www.wikipedia.com/
http://www.equitypandit.com/
www.bloomberg.com/

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