Acknowledgement

Any accomplishment requires the efforts of many people and this work is no exception. So at this juncture it would be no exaggeration to thank all those who have extended slightest of help to me during my seminar period. First and foremost I would like to thank Prof. Sanjay Bhandari sir, H.O.D. (Electronics and Communication Dept.) for allowing me to be a part of this enriching program. I would like to thank Dr. G.K. Varshney sir, H.O.D. (Humanities) for his focused and sincere guidance given to me. I would also thank Prof. Neha Mathur maam for giving me her valuable guidance for seminar preparation. I would also like to thank my classmates, who have helped me during the course of my seminar preparation and for making it an unforgettable experience.

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Contents
Acknowledgment Contents Introduction About Foreign Direct Investment Foreign Direct Investment : Indian Scenario Foreign Direct Investment Approval Route Analysis of sector specific policy of FDI Analysis of share of top ten investing countries in India Analysis of sectors attracting highest FDI equity in flows Advantages Disadvantages References Page No. 1 2 3 5 6 8 9 14 17 19 21 22

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Introduction
Foreign investment refers to investments made by the residents of a country in the financial assets and production processes of another country. The effect of foreign investment, however, varies from country to country. It can affect the factor productivity of the recipient country and can also affect the balance of payments. Foreign investment provides a channel through which countries can gain access to foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign institutional investment (FII). Foreign direct investment involves in direct production activities and is also of a medium- to long-term nature. But foreign institutional investment is a short-term investment, mostly in the financial markets. FII, given its short-term nature, can have bidirectional causation with the returns of other domestic financial markets such as money markets, stock markets, and foreign exchange markets. Hence, understanding the determinants of FII is very important for any emerging economy as FII exerts a larger impact on the domestic financial markets in the short run and a real impact in the long run. India, being a capital scarce country, has taken many measures to attract foreign investment since the beginning of reforms in 1991. India is the second largest country in the world, with a population of over 1 billion people. As a developing country, Indias economy is characterized by wage rates that are significantly lower than those in most developed countries. These two traits combine to make India a natural destination for foreign direct investment (FDI) and foreign institutional investment (FII). Until recently, however, India has attracted only a small share of global foreign direct investment (FDI) and foreign institutional investment (FII), primarily due to government restrictions on foreign involvement in the economy. But beginning in 1991 and accelerating rapidly since 2000, India has liberalized its investment regulations and actively encouraged new foreign investment, a sharp reversal from decades of discouraging economic integration with the global economy. The world is increasingly becoming interdependent. 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

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economies. Further many developing countries consider foreign direct investment (FDI) and foreign institutional investment (FII) as an important element in their development strategy among the various forms of foreign assistance. The Foreign direct investment (FDI) and foreign institutional investment (FII) flows are usually preferred over the other form of external finance, because they are not debt creating, nonvolatile in nature and their returns depend upon the projects financed by the investor. The Foreign direct investment (FDI) and foreign institutional investment (FII) would also facilitate international trade and transfer of knowledge, skills and technology. The Foreign direct investment (FDI) and foreign institutional investment (FII) is the process by which the resident of one country(the source country) acquire the ownership of assets for the purpose of controlling the production, distribution and other productive activities of a firm in another country(the host country). According to the international monetary fund (IMF), foreign direct investment (FDI) and foreign institutional investment (FII) is defined as an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of investor. The government of India (GOI) has also recognized the key role of the foreign direct investment (FDI) and foreign institutional investment (FII) in its process of economic development, not only as an addition to its own domestic capital but also as an important source of technology and other global trade practices. In order to attract the required amount of foreign direct investment (FDI) and foreign institutional investment (FII), it has bought about a number of changes in its economic policies and has put in its practice a liberal and more transparent foreign direct investment (FDI) and foreign institutional investment (FII) policy with a view to attract more foreign direct investment (FDI) and foreign institutional investment (FII) inflows into its economy. These changes have heralded the liberalization era of the foreign direct investment (FDI) and foreign institutional investment (FII) policy regime into India and have brought about a structural breakthrough in the volume of foreign direct investment (FDI) and foreign institutional investment (FII) inflows in the economy. In this context, this report is going to analyze the trends and patterns of foreign direct investment (FDI) and foreign institutional investment (FII) flows into India during the post liberalization period that is 1991 to 2007 year.

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About Foreign Direct Investment

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 2012 Is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution, and other activities of a firm in another country (the host country). The international monetary funds balance of payment manual defines FDI as an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investors purpose being to have an effective voice in the management of the enterprise. The united nations 1999 world investment report defines FDI as an investment involving a long term relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign affiliate). .

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Foreign Direct Investment: Indian Scenario

Foreign Direct Investment (FDI) is permitted as under the following forms of investments Through financial collaborations. Through joint ventures and technical collaborations. Through capital markets via Euro issues. Through private placements or preferential allotments. Forbidden Territories FDI is not permitted in the following industrial sectors: Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc. Retail Trading (except single brand product retailing). Lottery Business Gambling and Betting Business of chit fund Nidhi Company Trading in Transferable Development Rights (TDRs). Activity/sector not opened to private sector investment.

Foreign Investment through GDRs (Euro Issues) Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

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1. Clearance from FIPB There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year. A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in AnnexIII, 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.

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Foreign Direct Investment Approval Route

Foreign direct investments in India are approved through two routes 1. Automatic approval by RBI The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are comprehensive and cover most industries of interest to foreign companies. Investments in highpriority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. 2. The FIPB Route Processing of non-automatic approval cases FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

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Analysis of sector specific policy of FDI

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Analysis of share of top ten investing countries in India

Foreign investors have begun to take a more active role in the Indian economy in recent years. By country, the largest direct investor in India is Mauritius; largely because of the IndiaMauritius double-taxation treaty. Firms based in Mauritius invested 79162 crores in India between Aug. 1991 and March 2007, equal to 34.11 percent of total FDI inflows. The second largest investor in India is the United States, with total capital flows of 24536 crore during the 19912007 periods, followed by the United Kingdom, the Netherlands, and Japan. According to Indian government statistics, Mauritius accounts for the largest share of cumulative FDI inflows to India from 1991 to 2007, nearly 34.11 percent. Many companies based outside of India utilize Mauritian holding companies to take advantage of the IndiaMauritius Double Taxation Avoidance Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains taxes, and may allow some India-based firms to avoid paying certain taxes through a process known as round tripping. The extent of round tripping by Indian companies through Mauritius is unknown. However, the Indian government is concerned enough about this problem to have asked the government of Mauritius to set up a joint monitoring mechanism to study these investment flows. The

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potential loss of tax revenue is of particular concern to the Indian government. The existence of the treaty makes it difficult to clearly understand the pattern of FDI flows, and likely leads to reduced tax revenues collected by the Indian government. The United States is the second largest source of FDI in India (10.57 % of the total), valued at 24536 crore in cumulative inflows between August 1991 and March 2007. According to the Indian government, the top sectors attracting FDI from the United States to India during 1991 2007 (latest available) are fuel (36 percent), telecommunications (11 percent), electrical equipment (10 percent), food processing (9 percent), and services (8 percent). According to the available M&A data, the two top sectors attracting FDI inflows from the United States are computer systems design and programming and manufacturing. Since 2002, many of the major U.S. software and computer brands, such as Microsoft, Honeywell, Cisco Systems, Adobe Systems, McAfee, and Intel have established R&D operations in India, primarily in Hyderabad or Bangalore. The majority of U.S. electronics companies that have announced greenfield projects in India are concentrated in the semiconductor sector. By far the largest such project is AMDs chip manufacturing facility in Hyderabad, Andhra Pradesh. The largest share (36 percent) was found in the manufacturing sector, most prominently in the machinery, chemicals, and transportation equipment manufacturing segments. Other important categories of employment are professional, scientific, and technical services; and wholesale trade, with 29 percent and 18 percent of U.S. affiliate employment, respectively. Within the European Union, the largest country investors were the United Kingdom and the Netherlands, with 16660 crore and 11402 crore, respectively, of cumulative FDI inflows between Aug. 1991 and March 2007. The United Kingdom, the Netherlands, and Germany together accounted for almost 75 percent of all FDI flows from the EU to India. All EU countries together accounted for approximately 25 percent of all FDI inflows to India between August 1991 and March 2007. FDI from the EU to India is primarily concentrated in the power/energy, telecommunications, and transportation sectors. The top sectors attracting FDI from the European Union are similar to FDI from the United States. Manufacturing; information services; and professional, scientific, and technical services have attracted the largest shares of FDI inflows from the EU to India since 2000. Unilever, Reuters Group, P&O Ports Ltd, Vodafone, and Barclays are examples of EU companies investing in India by means of mergers and acquisitions. European companies accounted for 31 percent of the total number and 43 percent of the total value for all reported Greenfield FDI projects. The number of EU Greenfield projects was distributed among four major clusters: ICT (17 percent), heavy industry (16 percent), business and financial services (15 percent), and transport (11 percent).

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However, the heavy industry cluster accounted for the majority (68 percent) of the total value of these projects. Japan was the Fifth largest source of cumulative FDI inflows in India between August 1991 and March 2007, i.e. the cumulative flow is 9313 crore and it is 4.01% of total inflow. FDI inflows to India from most other principal source countries have steadily increased since 2000, but inflows from Japan to India have decreased during this time period. There does not appear to be a single factor that explains the recent decline in FDI inflows from Japan to India. India is, however, one of the largest recipients of Japanese Official Development Assistance (ODA), through which Japan has assisted India in building infrastructure, including electricity generation, transportation, and water supply. It is possible that this Japanese government assistance may crowd out some private sector Japanese investment. The top sectors attracting FDI inflows from Japan to India are transportation (54 percent), electrical equipment (7 percent), telecommunications, and services (3 percent). The available M&A data corresponds with the overall FDI trends in sectors attracting inflows from Japan to India. Companies dealing in the transportation industry, specifically automobiles, and the auto component/peripheral industries dominate M&A activity from Japan to India, including Yamaha Motors, Toyota, Kirloskar Auto Parts Ltd., and Mitsubishi Heavy Industries Ltd. Japanese companies have also invested in an estimated 148 Greenfield FDI projects valued at least at $3.7 billion between 2002 and 2006. In April 2007, Japanese and Indian officials announced a major new collaboration between the two countries to build a new Delhi-Mumbai industrial corridor, to be funded through a public-private partnership and private-sector FDI, primarily from Japanese companies. The project was begun in January 2008 with initial investment of $2 billion from the two countries. The corridor will cross 6 states and extend for 1,483 km, in an area inhabited by 180 million people. At completion in 2015, the corridor is expected to include total FDI of $4550 billion. A large share of that total is destined for infrastructure, including a 4,000 MW power plant, 3 ports, and 6 airports, along with additional connections to existing ports. Private investment is expected to fund 10-12 new industrial zones, upgrade 56 existing airports, and set up 10 logistics parks. The Indian government expects that by 2020, the industrial corridor will contribute to employment growth of 15 percent in the region, 28 percent growth in industrial output, and 38 percent growth in exports.

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Analysis of sectors attracting highest FDI equity in flows

The sectors receiving the largest shares of total FDI inflows between August 1991 and March 2007 were the electrical equipment sector and the services sector, each accounting for 18.77 and 17.84 percent respectively. These were followed by the telecommunications, transportation, fuels, and chemicals sectors. The top sectors attracting FDI into India via M&A activity were manufacturing; information; and professional, scientific, and technical services. These sectors correspond closely with the sectors identified by the Indian government as attracting the largest shares of FDI inflows overall. ICT and electronics have been the largest industry recipients of Greenfield FDI into India in recent years, but have seen the number of new Greenfield projects plateau since 2004. Rather, the size of the projects in these industries has increased substantially. For example, global semiconductor manufacturers Advanced Micro Devices (AMD - United States) and Flextronics (Singapore) have entered into separate joint ventures with SemIndia to build semiconductor manufacturing facilities in Hyderabad. The $3 billion AMD-SemIndia joint venture will produce semiconductor chips which can then be used

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to manufacture electronic products in the Flextronics-SemIndia $3 billion joint venture. The chip fabrication facility will manufacture chips for cell phones, set-top boxes, personal computers, and similar products. The heavy industry and transport equipment sectors together attracted over FDI of 15427 crore in Greenfield FDI projects during 1991 to 2007. The cluster with the highest reported value during 200206 is heavy industry. Projects in this sector tend to be highly capital intensive, with single projects frequently requiring upwards of $6 billion in startup investment costs. The largest recent examples include the POSCO and Arcelor-Mittal Steel projects, and Vedanta Resources (United Kingdom) aluminum smelter project, all planned for the state of Orissa.

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Advantages of FDI
1. Raising the Level of Investment: Foreign investment can fill the gap between desired investment and locally mobilised savings. Local capital markets are often not well developed. Thus, they cannot meet the capital requirements for large investment projects. Besides, access to the hard currency needed to purchase investment goods not available locally can b e d i f f i c u l t . FDI solves both these problems at once as it is a direct source of external capital. It can f i l l t h e g a p b e t w e e n d e s i r e d f o r e i g n exchange requirements and those derived from net export earnings. 2. Upgradation of Technology: F o r e i g n i n v e s t m e n t b r i n g s w i t h i t technological knowledge while transferring machinery and equipment to developing countries. equipment Production and units in developing that can countries the use out-d a t e d techniques reduce productivity

o f workers and lead to the production of goods of a lower standard.

3. Improvement in Export Competitiveness: country improve its export

FDI

can

help By

the

host

performance.

raising

t h e l e v e l o f efficiency and the standards of product quality, FDI makes a positive impact on the host countrys export competitiveness. Further, because of the international linkages of MNCs, FDI provides to the host country better access to foreign markets. Enhanced export possibility contributes to the growth of the host economies by relaxing demand side constraints o n g r o w t h . T h i s i s i m p o r t a n t f o r t h o s e c o u n t r i e s w h i c h h a v e a s m a l l domestic market and must increase exports vigorously to maintain their tempo of economic growth. 4 . E m p l o y m en t G e n e r a t i o n : c r e a t e of F D I operating gain training new F o r e i g n of i n v e s t m e n t in the c a n of

employment in the modern sectors of developing countries. Recipients employees course enterprises, which contributes to human capital

formation in the host country.

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5. Benefits to Consumers: Consumers in developing countries stand to gain from FDI through new products, and improved quality of goods at competitive prices. 6. Resilience Factor: FDI has proved to be resilient during financial c r i s i s . F o r instance, in East Asian countries such investment was remarkably stable during the global financial crisis of 1997-98. In sharp contrast, other forms of private capital flows like portfolio equity and debt flows were subject to large reversals during the same crisis. Similar o b s e r v a t i o n s h a v e b e e n m a d e i n L a t i n A m e r i c a i n t h e 1 9 8 0 s a n d i n Mexico in 199495. FDI is considered less prone to crises because direct investors typically have a longer-term perspective when engaging in a host country. In addition to risk sharing properties of FDI, it is widely believed that FDI provides a stronger stimulus to economic growth in the host countries than other types of capital inflows. FDI is more than just capital, as it offers access to internationally available technologies and management know-how.

7. Revenue to Government: P r o f i t s g e n e r a t e d b y F D I c o n t r i b u t e t o corporate tax revenues in the host country.

Disadvantages of FDI

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1.

When

foreign

investment

is

competitive

with

home

i n v e s t m e n t , profits in domestic industries fall, leading to fall in domestic savings. 2 . C o n t r i b u t i o n o f f o r e i gn f i r m s t o p u b l i c r e v e n u e t h r o u g h c o r p o r a t e taxes is comparatively less because of liberal tax concessions, investment allowances, disguised public subsidies and tariff protection provided by the host government. 3. Foreign firms reinforce dualistic socio-economic s t r u c t u r e a n d increase income inequalities. They create a small number of highly paid modern sector executives. They divert resources away from priority sectors to the manufacture of sophisticated products for the consumption o f t h e l o c a l elite. As they are located in urban areas, they create imbalances between rural and urban opportunities, accelerating flow of rural population to urban areas. 4. Foreign firms stimulate inappropriate consumption patterns th rough e x c e s s i v e a d v e r t i s i n g a n d m o n o p o l i s t i c m a r k e t p o w e r . T h e p r o d u c t s made by multinationals for the domestic market are not necessarily low i n p r i c e a n d h i g h i n q u a l i t y . T h e i r t e c h n o l o g y i s g e n e r a l l y c a p i t a l - intensive which does not suit the needs of a labour-surplus economy. 5. and Foreign firms able to extract from sizeable economic of political concessions competing g o v e r n m en t s

developing countries. Consequently, private profits of these companies m a y e x c e e d s o c i a l benefits. 6. Continual outflow of profits is too large in many cases, p u t t i n g pressure on foreign exchange reserves. Foreign investors a r e v e r y particular about profit repatriation facilities. 7. Foreign firms may influence political decisions in developing countries. In view of their large size and power, national sovereignty and control over economic policies may be jeopardized. In extreme cases, foreign firms may bribe public officials at the highest levels to secure undue favours. Similarly, they may contribute to friendly political partiesand subvert the political process of the host country.

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

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7.1 Internet sites: a) www.rbi.org.in/home.aspx b) www.google.com c) www.fdimagazine.com d) http://dipp.nic.in/fdi_statistics/india_fdi_index.htm e) www.nseindia.com f) www.sebi.gov.in 7.2 Journals : a) ICFAI Journal: E.g. the ICFAI journal of public finance, issue- February, vol. VI. b) Handbook of statistics on the Indian securities market 2008. 7.3 Books: a) Foreign direct investment in India by Lata Chakravarthy. b) FDI (issues in emerging economies) by K. Seethe Pathi.

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