FDI & FII

CHAPTER 1:-INTRODUCTION

Foreign investment refers to investments made by the residents of a country in the financial assets and production processes of another country. The effect of foreign investment, however, varies from country to country. It can affect the factor productivity of the recipient country and can also affect the balance of payments. Foreign investment provides a channel through which countries can gain access to foreign capital. It can come in two forms: 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 impaction 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 FDI and foreign institutional investment (FII). Until recently, however, India has attracted only a small share of global FDI and FII primarily due to government restrictions on foreign involvement in the economy. But beginning in 1991 and accelerating rapidly since 2000, India has liberalized its investment regulations and actively encouraged new foreign investment, a sharp reversal from decades of discouraging economic integration with the global economy.

The world is increasingly becoming interdependent. Goods and services followed by the financial transaction are moving across the borders. In fact, the world has become a border less world. With the globalization of the various markets, international financial flow shaves so far been in excess for the goods and services among the trading countries of the world. Of the different types of financial inflows, the FDI and foreign institutional investment (FII)) has played an important role in the process of development of many economies. Further many developing countries consider FDI and FII as an important element in their development strategy among the various forms of foreign assistance.

The FDI and FII flows are usually preferred over the other form of external finance, because they are not debt creating, nonvolatile in nature and their returns depend upon the projects financed by the investor. The FDI and FII would also facilitate international trade and transfer of knowledge, skills and technology.

The FDI and FII is the process by which the resident of one country (the source country)acquire the ownership of assets for the purpose of controlling the production, distribution and other productive activities of a firm in another country(the host country).

According to the international monetary fund (IMF), FDI and FII is defined as an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of investor.

The government of India (GOI) has also recognized the key role of the FDI and FII in its process of economic development, not only as an addition to its own domestic capital but also as an important source of technology and other global trade practices. In order to attract the required amount of FDI and FII it has bought about a number of changes in its economic policies and has put in its practice a liberal and more transparent FDI and FII policy with a view to attract more FDI and FII inflows into its economy. These changes have heralded the liberalization era of the FDI and FII policy regime into India and have brought about a structural breakthrough in the volume of FDI and FII inflows in the economy. In this context, this report is going to analyze the trends and patterns of FDI and FII flows into India during the post liberalization period that is 2006 to 2009 year.

CHAPTER 2:-THEORETICAL FRAMEWORK

2.1 FDI (FOREIGN DIRECT INVESTMENT)FDI means Foreign Direct Investment. India Foreign Direct Investment includes investments in theinfrastructure development projectsincluding construction of bridges and flyovers, finance sector includingbankingand insurance services,real estate development, retail sector etc. The foreign direct investment definition says the direct investment in any productive assets in a country by any foreign company is called foreign direct investment. 2.1.1 ABOUT FDIIs the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution, and other activities of a firm in another country (the host country). The international monetary funds balance of payment manual defines FDI as an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investors purpose being to have an effective voice in the management of the enterprise. The united nations 1999 world investment report defines FDI as an investment involving a long term relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign affiliate).

2.1.2 Automatic Route (A) New Ventures All items/activities for FDI/NRI/OCB investment up to 100% fall under the Automatic Route.

Whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route, he or she may do so.

Investment in public sector units as also for EOU/EPZ/EHTP/STP units would also qualify for the Automatic Route. Investment under the Automatic Route shall continue to be governed by the notified sectoral policy and equity caps and RBI will ensure compliance of the same.

The National Industrial Classification (NIC) 1987 shall remain applicable for description of activities and classification for all matters relating to FDI/NRI/OCB investment: Areas/sectors/activities hitherto not open to FDI/NRI/OCB investment shall continue to be so unless otherwise decided and notified by Government. Any change in sectoral policy/sectoral equity cap shall be notified by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion.

(B) Existing CompaniesBesides new companies, automatic route for FDI/NRI/OCB investment is also available to the existing companies proposing to induct foreign equity. For existing companies with an expansion programme, the additional requirements are that (i) the increase in equity level must result from the expansion of the equity base of the existing company without the acquisition of existing shares by NRI/OCB/foreign investors, (ii) the money to be remitted should be in foreign currency and (iii) proposed expansion programme should be in the sector(s) under automatic 11 route. Otherwise, the proposal would need Government approval through the FIPB. For this the proposal must be supported by a Board Resolution of the existing Indian company.

For existing companies without an expansion programme, the additional requirements for eligibility for automatic approval are (i) that they are engaged in the industries under automatic route, (ii) the increase in equity level must be from expansion of the equity base and (iii) the foreign equity must be in foreign currency.

The earlier SEBI requirement, applicable to public limited companies, that shares allotted on preferential basis shall not be transferable in any manner for a period of 5 years from the date of their allotment has now been modified to the extent that not more than 20 per cent of the entire contribution brought in by promoter cumulatively in public or preferential issue shall be locked-in.

The automatic route for FDI and/or technology collaboration would not be available to those who have or had any previous joint venture or technology transfer/trade mark agreement in the same or allied field in India.

Equity participation by international financial institutions such as ADB, IFC, CDC, DEG, etc. in domestic companies is permitted through automatic route subject to SEBI/RBI regulations and sector specific cap on FDI.

In a major drive to simplify procedures for foreign direct investment under the automatic route, RBI has given permission to Indian Companies to accept investment under this route without obtaining prior approval from RBI. Investors are required to notify the Regional Office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors. This facility is available to NRI/OCB investment also.

2.1.3 Government Approval For the following categories, Government approval for FDI/NRI/OCB through the FIPB shall be necessary: - All proposals that require an Industrial License which includes (1) the item requiring an Industrial License under the Industries (Development & Regulation) Act, 1951; (2) foreign investment being more than 24 per cent in the equity capital of units manufacturing items reserved for small scale industries; and (3) all items which require an Industrial Licence in terms of the locational policy notified by Government under the New Industrial Policy of 1991. All proposals in which the foreign collaborator has a previous venture/tie up in India. The modalities prescribed in Press Note No. 18 dated 14.12.1998 of 1998 Series, shall apply to 12 such cases. However, this shall not apply to investment made by multilateral financial institutions such as ADB, IFC, CDC, DEG, etc. as also investment made in IT sector. All proposals relating to acquisition of shares in an existing Indian company in favour of a foreign/NRI/OCB investor. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.

Areas/sectors/activities hitherto not open to FDI/NRI/OCB investment shall continue to be so unless otherwise decided and notified by Government. Any change in sectoral policy/sectoral equity cap shall be notified by the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion.

RBI has granted general permission under Foreign Exchange Management Act (FEMA) in respect of proposals approved by the Government. Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors. Such companies are, however, required to notify the Regional Office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and to file the required documents with the concerned Regional Offices of the RBI within 30 days after issue of shares to the foreign investors.

Allotment of shares on preferential basis shall be as per the requirements of the Companies Act, 1956, which will require special resolution in case of a public limited company.

In case of listed companies, valuation shall be as per the RBI/SEBI guidelines as follows: The issue price shall be either at: The average of the weekly high and low of the closing prices of the related shares quoted on the Stock Exchange during the six months preceding the relevant date or The average of the weekly high and low of the closing prices of the related shares quoted on the Stock Exchange during the two weeks preceding the relevant date.

The stock exchange referred to is the one at which the highest trading volume in respect of the share of the company has been recorded during the preceding six months prior to the relevant date.

The relevant date is the date thirty days prior to the date on which the meeting of the General Body of the shareholder is convened.

In all other cases a company may issue shares as per the RBI regulation in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.

Other relevant guidelines of Securities and Exchange Board of India (SEBI)/(RBI) including the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997, wherever applicable, would need to be followed.

2.1.4 Other Modes of Foreign Direct Investments Global Depository Receipts (GDR)/American Deposit Receipts (ADR)/Foreign Currency Convertible Bonds (FCCB): Foreign Investment through GDRs/ADRs, Foreign Currency Convertible Bonds (FCCBs) is treated as Foreign Direct Investment. Indian companies are allowed to raise equity capital in the international market through the issue of GDR/ADRs/FCCBs. These are not subject to any ceilings on investment. An applicant company seeking Governments approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition can be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.

There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. A company engaged in the manufacture of items covered under Automatic Route, whose direct foreign investment after a proposed 14 GDR/ADR/FCCBs issue is likely to exceed the percentage limits under the automatic route, or which is implementing a project falling under Government approval route, would need to obtain prior Government clearance through FIPB before seeking final approval from the Ministry of Finance.

There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements; in addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring.

2.1.5 FDI POLICY IN INDIAThe Foreign direct investment scheme and strategy depends on the respective FDI norms and policies in India. The FDI policy of India has imposed certain foreign direct investment regulations as per the FDI theory of the Government of India. These include FDI limits in India for example: Foreign direct investment in India in infrastructure development projects excluding arms and ammunitions, atomic energy sector, railways, extraction of coal and lignite andmining industryis allowed up to 100% equity participation with the capping amount as Rs. 1500 crores. FDI figures in equity contribution in the finance sector cannot exceed more than 40% in banking services including credit card operations and in insurance sector only in joint ventures with local insurance companies. FDI limit of maximum 49% intelecom industryespecially in the GSM services A recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010-2012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI. FDI for 2009-10 at USD 25.88 billion was lower by five per cent from USD 27.33 billion in the previous fiscal. Foreign direct investment in August dipped by about 60 per cent to USD 1.33 billion, the lowest in 2010 fiscal, industry department data released showed. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has - in a lot of ways - enabled India to achieve a certain degree of financial stability, growth and development. Thismoneyhas allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country. India has continually sought to attract FDI from the worlds majorinvestors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. FDI investments are permitted through financial collaborations, throughprivateequityor preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries. A number ofprojectshave been announced in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors. The Indian nationalgovernmentalso provided permission to FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5m. Currently, FDI is allowed infinancialservices, including the growing credit card business. These services include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that stipulates that thesebanksmust be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased. By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but less than 10% of the $60.6 billion that flowed into China. Why does India, with a stable democracy and a smoother approval process, lag so far behind China in FDI amounts? Although the Chinese approval process is complex, it includes both national and regional approval in the same process. Federal democracy is perversely an impediment for India. Local authorities are not part of the approvals process and have their own rights, and this often leads toprojectsgetting bogged down in red tape and bureaucracy. India actually receives less than half the FDI that the federal government approves.

2.1.6 FOREIGN DIRECT INVESTMENT:INDIAN SCENERIOForeign 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 allotmentsFDI 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

2.1.7 TYPESA foreign direct investor may be classified in any sector of the economy and could be any one of the following: An individual; A group of related individuals; An incorporated orunincorporated entity; Apublic companyorprivate company; A group of related enterprises; A government body; Anestate (law),trustor other social institution; or Any combination of the above.

2.1.8 METHODSThe foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods: By incorporating a wholly ownedsubsidiaryorcompany By acquiring shares in an associated enterprise Through amergeror anacquisitionof an unrelated enterprise Participating in an equityjoint venturewith another investor or enterprise

Foreign direct investment incentives may take the following forms: Lowcorporate taxandincome taxrates Tax holidays Other types of tax concessions Preferentialtariffs Special economic zones Epz- export processing zones Bonded warehouses Maquiladoras Investment financial subsidies Soft loanor loanguarantees Free land or land subsidies Relocation & expatriation subsidies Job training & employment subsidies Infrastructuresubsidies R&d support Derogation from regulations (usually for very large projects)

2.1.9 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 Trading in Transferable Development Rights (TDRs).

2.1.9 FDI ADVANTAGES Globalexposure Foreign revenues High quality human resources Employment will increase. Causes a flow of money into the economy which stimulates economic activity. Long run aggregate supply will shift outwards. Aggregate demand will also shift outwards as investment is a component of aggregate demand. It may give domestic producers an incentive to become more efficient. The government of the country experiencing increasing levels of FDI will have a greater voice at international summits as their country will have more stakeholders in it.

2.1.10 FDI DISADVANTAGES Twining programmes Unaccredited and unrecognized courses Top Universities interested in collaborating with Indias outstanding institutions Highfee structure Raising Inequality Profit not thesoleobjective Noraise infeeswithoutApproval Inflation may increase slightly Domestic firms may suffer if they are relatively uncompetitive If there is a lot of FDI into one industry e.g. the automotiveindustry then a country can become too dependent on it and it may turn into a risk that is why countries like the Czech Republicare seeking to attract high value- added services such as researchand development (e.g. :biotechnology)

2.2 FII (FOREIGN INSTITUTIONAL INVESTORS)FII means anentity/fund establishedor incorporatedoutside India which proposesto makeinvestmentin securities. FIIs are those investorsthat indirectlyinvest into the companies through thestock market.

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2.2.1 HistoryAncient Rome and medieval IslamRoman law ignored the concept ofjuristic person, yet at the time the practice of privateevergetismsometimes lead to the creation of revenues-producing capital which may be interpreted as an early form of charitable institution. In some African colonies in particular, part of the citys entertainment was financed by the revenue generated by shops and baking-ovens originally offered by a wealthy benefactor.In the South of Gaul,aqueductswere sometimes financed in a similar fashion.

The legal principle of juristic person might have appeared with the rise of monasteries in the early centuries of Christianity. The concept then might have been adopted by the emerging Islamic law. Thewaqf(charitable institution) became a cornerstone of the financing of education, waterworks, welfare and even the construction of monuments.Alongside some Christian monasteriesthe waqfs created in the 10thcentury CE are amongst the longest standing charities in the world (see for instance theImam Reza shrine).

Pre-industrial EuropeFollowing the spread of monasteries, almshouses and other hospitals, donating sometimes large sums of money to institutions became a common practice in medieval Western Europe. In the process, over the centuries those institutions acquired sizable estates and large fortunes in bullion. Following the collapse of the agrarian revenues, many of these institutions moved away from rural real estate to concentrate on bonds emitted by the local sovereign (the shift dates back to the 15thcentury for Venice,and the 17thcentury for Franceand the Dutch Republic). The importance of lay and religious institutional ownership in the pre-industrial European economy cannot be overstated, they commonly possessed 10 to 30% of a given region arable land. In the 18thcentury, private investors pool their resources to pursue lottery tickets andtontineshares allowing them to spread risk and become some of the earliest speculative institutions known in the West.

Before 1980Following several waves of dissolution (mostly during the Reformation and the Revolutionary period) the weight of the traditional charities in the economy collapsed; by 1800, institutions solely owned 2% of the arable land in England and Wales.New types of institutions emerged (banks, insurance companies), yet despite some success stories, they failed to attract a large share of the publics savings and, for instance, by 1950, they owned only 7% of US equities and certainly even less in other countries.

OverviewBecause of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable. For example, in the United States, a private placement under Rule 506 of Regulation D may be made to an "accredited investor" without registering the offering of securities with the Securities and Exchange Commission. In essence institutional investor, an accredited investor is defined in the rule as: A bank, insurance company, registered investment company (generally speaking, a mutual fund), business development company, or small business investment company; An employee benefit plan, within the meaning of theEmployee Retirement Income Security Act, if a bank, insurance company, orregistered investment advisermakes the investment decisions, or if the plan has total assets in excess of $5 million; A charitable organization, corporation, or partnership with assets exceeding $5 million; A director, executive officer, or general partner of the company selling the securities; A business in which all the equity owners are accredited investors; A natural person who has individual net worth, or joint net worth with the persons spouse, that exceeds $1 million at the time of the purchase; A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or A trust with assets in excess of $5 million, not formed to acquire the securities offered whose purchases a sophisticated person makes.2.2.2 Globalization of financial marketsInstitutional investors have played a major role in the emergence of truly global money flows, notably through their large-scale cross-border investments, channeling the excess liquidities ofpension fundsofG8and OPEC countries towards both Western bourses and emerging markets, contributing to the development of a truly integrated and thus more efficient global financial sphere.

When considered from a strictly local standpoint, institutional investors are sometimes calledForeign Institutional Investors(FIIs). This expression is mostly used inemerging marketssuch asMalaysiaandIndia.

In countries likeIndia, statutory agencies likeSEBIhave prescribed norms to register FIIs and also to regulate such investments flowing in through FIIs. In 2008, FIIs represented the largest institution investment category, with an estimated US$ 751.14 billion. Since the mid-1970s, it has been argued that geographicdiversificationwould generate superior risk-adjusted returns forlong-termglobal investors by reducing overall portfolio risk while capturing some of the higher rates of returns offered by theemerging marketsof Asia and Latin America.

2.2.3 REGIONAL

In various countries different types of institutional investors may be more important. Inoil-exporting countriessovereign wealth fundsare very important, while indeveloped countries,pension fundsmay be more important.

CanadaIn Canada, both pension funds and government funds are powerful investors in the market with hundreds of billions of dollars in assets in an economy of only around one trillion dollars- some think-tanks such as theCEE Councilhave argued that this constitutes a long-term competitive advantage for the Canadian economy. The most important Canadian institutional investors are: Caisse de depot et placement du Quebec(C$237.3 billion [2007]) Canada Pension Plan(C$116.6 Billion [2007]) Ontario Teachers' Pension Plan(C$106 billion [2006]) British Columbia Investment Management (C$83.4 billion [2007]) Alberta Investment Management(C$73.3 billion [2007])

United KingdomIn the UK, institutional investors may play a major role in economic affairs, and are highly concentrated in theCity of London's square mile. Their wealth accounts for around two thirds of the equity in public listed companies. For any given company, the largest 25 investors would have be able to muster over half of the votes. The major investor associations are: Investment Management Association Association of British Insurers National Association of Pension Funds The Association of Investment Trust CompaniesThe IMA, ABI, NAPF, and AITC, plus the British Merchant Banking and Securities House Association are also represented by the Institutional Shareholder Committee.

2.2.4 FII IN INDIAForeign Institutional Investors means an institution established or incorporated outside India which proposes to make investment in Indian securities.

A Working Group for Streamlining of the Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended streamlining of SEBI registration procedure, and suggested that dual approval process of SEBI and RBI be changed to a single approval process of SEBI. This recommendation was implemented in December 2003.

Currently, entities eligible to invest under the FII route are as follows: 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). As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FII invests. The following entities are eligible to be registered as sub-accounts, viz. partnership firms, private company, public company, pension fund, investment trust, and individuals.

FIIs registered with SEBI fall under the following categories: Regular FIIs- those who are required to invest not less than 70 % of their investment in quity-related instruments and 30 % in non-equity instruments. 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.

2.2.5 TYPES Pension fund Mutual fund Investment trust Unit trustandUnit Investment Trust Investment banking Hedge fund Sovereign wealth fund Private equity firms Insurance companies

2.2.6 FII ADVANTAGES FIIs have a greater appetite for equity than debt in their asset structure. The opening up the economy to FIIs has been in line with the accepted preference for non-debt creating foreign inflows over foreign debt. Enhanced flow of equity capital helps improve capital structures and contributes towards building the investment gap. FII inflows help in financial innovation and development of hedging instruments. Also, it not only enhances competition in financial markets, but also improves the alignment of asset prices to fundamentals. FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets. By increasing the availability of riskier long term capital for projects, and increasing firms incentives to provide more information about their operations, FIIs can help in the process of economic development. FIIs constitute professional bodies of asset managers and financial analysts, who, by contributing to better understanding of firms operations, improve corporate governance. Bad corporate governance makes equity finance a costly option. Also, institutionalization increases dividend payouts, and enhances productivity growth. Enhanced flows of equity capital Managing uncertainty and controlling risks Improving capital markets Equity market development aids economic development Improved corporate governance

2.2.7 FII DISADVANTAGES Anytime withdrawal Outflowofmoney Short term opportunities Easy routewithout identity Indianmarketmore sensitive Problems of Inflation: Huge amounts of FII fund inflow into the country creates a lot of demand for rupee, and the RBI pumps the amount of Rupee in the market as a result of demand created Problems for small investor: The FIIs profit from investing in emerging financial stock markets. If the cap on FII is high then they can bring in huge amounts of funds in the countrys stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stock market the downward path. This creates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs. Adverse impact on Exports: FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive due to the appreciation of the rupee. Hot Money: "Hot money" refers to funds that are controlled by investors who actively seek short-term returns. These investors scan the market for short-term, high interest rate investment opportunities. "Hot money" can have economic and financial repercussions on countries and banks. When money is injected into a country, the exchange rate for the country gaining the money strengthens, while the exchange rate for the country losing the money weakens. If money is withdrawn on short notice, the banking institution will experience a shortage of funds.

2.3 FDI v/s FIISr. No.FDIFII

1FDI is when a foreign company brings capital into a country to set up a production or other facilityFII is when a foreign company buys equity in the company through stock markets

2FDI involves in direct production activity and also of medium to long term natureDoes not involve direct activity as is for short team

3

Enables degree of control in the companyDoes not involve any degree of control in the company

4Brings long term capitalBrings short term capital

5It increases production, brings in more and better products and services besides increasing the employment opportunities and revenue for the government by way of taxes.It only widens and deepens the stock exchanges and provides a better price discovery process for the scripts.

2.4 Role of FDI The importance of FDI extends beyond the financial capital that flows into the country. In addition, FDI inflows can be a tool for bringing knowledge, managerial skills and capability, product design, quality characteristics, brand names, channels for international marketing of products, etc. And consequent integration into global production chains, which are the foundation of a successful exports strategy (BlomStrom, Kokko and Zejan, 1994; Borensztein, De Gregorio and Lee, 1998; De Mello, 1999; United Nations Conference on Trade and Development (UNCTAD) 1999; Lall, 2000; Organization for Economic Cooperation and Development (OECD) 2002, Lipsey, 1999).

FDI could benefit both the domestic industry as well as the consumer, by providing opportunities for technological transfer and up gradation, access to global managerial skills and practices, optimal utilization of human capabilities and natural resources, making industry internationally competitive, opening up export markets, providing backward and forward linkages and access to international quality goods and services and augmenting employment opportunities. For all these reasons, FDI is regarded as an important vehicle for economic development particularly for developing economies. FDI flows are usually preferred over other forms of external finance because they are non debt creating, non-volatile19 and their returns depend on the performance of the projects financed by the investors. In a world of increased competition and rapid technological change, their complimentary and catalytic role can be very valuable.

2.5 Guiding Principles for Policies toward Attracting FDI A predictable and non-discriminatory regulatory environment and anAbsence of undue administrative impediments to business more generally. A stable macroeconomic environment, including access to engaging inInternational trade. Sufficient and accessible resources, including the presence of relevant infrastructure and human capital.

The conditions sought by foreign enterprises are largely equivalent to those that constitute a heal thy business environment more generally.However, internationally mobile investors may be more rapidly responsive to changes in business conditions. The most effective action by host country authorities to meet investors expectations is: Safeguarding public sector transparency, including an impartial system of courts and law enforcement. Ensuring that rules and their implementation rest on the principle of non discrimination between foreign and domestic enterprises and are in accordance with international law. Providing the right of free transfers related to an investment and protecting against arbitrary expropriation. Putting in place adequate frameworks for a healthy competitive environment in the domestic business sector. Removing obstacles to international trade. Redress those aspects of the tax system that constitute barriers to FDI.

First comes trade, and then comes foreign direct investment. But what do commercial investors look for when judging potential recipients? Economic advisors for several international organizations listed some of their investment criteria at the IDRC development forum on emerging markets: Countries where residents are saving and investing locally receive high marks. Countries where residents are moving their financial assets out rate poorly. Existing investment in assets that cannot be liquidated easily indicate that people have faith in a country's economic future, and in its financial and banking system. A reasonable record of national policy stability, backed by a competent national bureaucracy that applies its policies in a consistent manner, indicates the presence of a strong and honest government infrastructure. Established legal framework, including property rights. Domestic and regional sales markets reaching a critical mass promote the construction of local production and distribution facilities. Good export market access (aided by tariff reductions), combined with lower-cost production costs, may justify building factories for regional or global markets. The ability to successfully apply new technologies and the availability of relevant skills attracts investment. With today's production methods, fewer industries require cheap, unskilled labor. A local natural resource base is no longer a prerequisite for economic development, as shown by success stories such as Taiwan and Korea.

2.5.1 Make in India Is an initiative of the Government of India, to encourage companies to manufacture their products in India. It was launched by Prime Minister, Narendra Modi on 25 September 2014.The major objective behind the initiative is to focus on 25 sectors of the economy for job creation and skill enhancement. Some of these sectors are: automobiles, chemicals, IT, pharmaceuticals, textiles, ports, aviation, leather, tourism and hospitality, wellness, railways, auto components, design manufacturing, renewable energy, mining, bio-technology, and Electronics.

The initiative hopes to increase GDP growth and tax revenue. The initiative also aims at high quality standards and minimizing the impact on the environment. The initiative hopes to attract capital and technological investment in India.

Under the initiative, brochures on the 25 sectors and a web portal were released. Before the initiative was launched, foreign equity caps in various sectors had been relaxed or removed. The application for licenses was made available online. The validity of licenses was increased to 3 years. Various other norms and procedures were also relaxed. In August 2014, the Cabinet of India allowed 49% foreign direct investment (FDI) in the defense sector and 100% in railways infrastructure. The defense sector previously allowed 26% FDI and FDI was not allowed in railways. This was in hope of bringing down the military imports of India. Earlier, one Indian company would have held the 51% stake, this was changed so that multiple companies could hold the 51%.Responses In October 2014, Lava Mobiles CMD Hari Om Rai said Lava will start manufacturing from a Noida plant from April 2015. In November 2014, Lava was in talks with Nokia to buy its Chennai plant. In January 2015, the Spice Group said it would start a mobile phone manufacturing unit in Uttar Pradesh with an investment of 500 crore. A memorandum of understanding was signed between the Spice Group and the Government of Uttar Pradesh. In January 2015, HyunChil Hong, the President & CEO of Samrsung South West Asia, met with Kalraj Mishra, Union Minister for Micro, Small and Medium Enterprises (MSME), to discuss a joint initiative under which 10 "MSME-Samsung Technical Schools" will established in India. In February, Samsung said that will manufacture the Samsung Z1 in its plant in Noida.

2.6 How FII started in India? India opened its stock market to foreign investors in September 1992 Since 1993, received portfolio investment from foreigners in the form of foreign institutional investment in equities. This has become one of the main channels of FII in India for foreigners. In order to trade in Indian equity market foreign corporations need to register with SEBI as Foreign Institutional Investor (FII).

2.7 The eligibility criteria for applicant seeking FII registrationAs per Regulation 6 of SEBI (FII) Regulations1995, Foreign Institutional Investors are required to fulfill the following conditions to qualify for grant of registration: Applicant should have track record, professional competence, financial soundness, experience, general reputation of fairness and integrity; The applicant should be regulated by an appropriate foreign regulatory authority in the same capacity/category where registration is sought from SEBI. Registration with authorities, which are responsible for incorporation, is not adequate to qualify as Foreign Institutional Investor. The applicant is required to have the permission under the provisions of the Foreign Exchange Management Act, 1999 from the Reserve Bank of India. Applicant must be legally permitted to invest in securities outside the country or its in-corporation / establishment. The applicant must be a "fit and proper" person. The applicant has to appoint a local custodian and enter into an agreement with the custodian. Besides it also has to appoint a designated bank to route its transactions. Payment of registration fee of US $ 5,000.00

2.8 SEBI ANNOUNCES NEW REGULATIONS FOR FII'S Market regulator Security Exchange Board of India recently announced new rules for foreign investments through financial instruments such as participatory notes, asking FIIs to wind up P-Notes for investing in derivatives within 18 months. SEBI also imposing curbs on P-Notes for investing in spot market. In derivatives, foreign institutional investors (FIIs) and their sub-accounts cannot issue fresh P-Notes and will have to wind up their current position in 18 months. In spot market, FIIs will not be allowed to issue P-Notes more than 40 per cent of their assets under custody. The reference date for calculating such assets will be September 30. Those FIIs who have issued P-Notes of more than 40 per cent of their assets could issue such instruments only if they cancel, redeem, or close their existing PNs. Those FIIs who have issued P-Notes less than 40 per cent of their assets under custody can issue additional instruments at the rate of 5 per cent of their assets.

3.9 Trends of Foreign Institutional Investments in India.Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds. Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and the secondary market including the equity and other securities/instruments of companies listed/to be listed on stock exchanges in India. It can be observed from the table below that India is one of the preferred investment destinations for FIIs over the years. As of March 2014, there were 1396 FIIs registered with SEBI.

CHAPTER 4:-RESEARCH METHODOLOGY

4.1 RESEARCH NEED Scope of the study is very broader and covers the sectors related to Foreign Institutional Investors and Foreign Direct Investment. The study will provide a very clear picture of the comparison of Foreign Direct Investment and Foreign Institutional Investors in India. It will also describe the market trends due to FDIs and FIIs inflows and outflows.

4.2 RESEARCH OBJECTIVE Objective 1 pertaining to FDI: examines the trends and patterns in the foreign direct investment (FDI) across different sectors and from different countries in India during 1991-2014 period means during post liberalization period. Objective 2 pertaining to FII: influence of FII on movement of Indian stock exchange during the post liberalization period that is 1991 to 2014.

4.3 RESEARCH DESIGN4.3.1 TYPES OF RESEARCH:- Exploratory Research- Exploratory research is research conducted for a problem that has not been clearly defined. Exploratory research helps determine the best research design, data collection method and selection of subjects. When the purpose of research is to gain familiarity with a phenomenon or acquire new insight into it in order to formulate a more precise problem or develop hypothesis, the exploratory studies come in handy 4.3.2 SAMPLING:- The study is limited to a sample of top 10 investing countries e.g. Mauritius, USA etc. and top 10 sectors e.g. electrical instruments, telecommunications etc. which had attracted larger inflow of FDI and data of NSE stock exchange will be taken to know the impact of FII.

4.3.3 DATA COLLECTION METHOD The research will be done with the help Secondary data (from internet site and journals). The data is collected mainly from websites, annual reports, World Bank reports, research reports, already conducted survey analysis, database available etc.

4.3.4 TOOLS USED Appropriate Statistical tools like average, the liner trend mode will be used to analyze the data like to analyze the growth and patterns of the FDI and FII flows in India during the post liberalization period. Further the percentage analysis will be used to measure the share of each investing countries and the share of each sectors in the overall flow of FDI and FII into India.

4.4 LIMITATION OF THE STUDY There is time limitation for project report. There is cost limitation for project report. The study has limited itself to a sample of top ten investing countries and top ten level sectors which have attracted higher inflow of FDI. The data for analysis of impact of FII on stock exchange is limited to National stock exchange (NSE) only.

CHAPTER 5:-DATA ANALYSIS

1. Analysis of share of top ten investing countries FDI equity in flows

RanksCountryCumulative inflows(from Aug. 1991 to march2014)

%age with totalinflows (in terms ofrupees)

1Mauritius7916234.11

2U.S.A.2453610.57

3U.K166607.17

4Netherlands114024.91

5Japan9313 4.01

6Germany70603.04

7Singapore70503.03

8France38031.63

9South Korea32341.39

10Switzerland28791.24

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 India-Mauritius double-taxation treaty. Firms based in Mauritius invested 79162 crores in India between Aug. 1991 and March 2014, 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 19912014 periods, followed by the United Kingdom, the Netherlands, and Japan.

MauritiusAccording to Indian government statistics, Mauritius accounts for the largest share of cumulative FDI inflows to India from 1991 to 2014, nearly 34.11 percent. Many companies based outside of India utilize Mauritian holding companies to take advantage of the India- Mauritius Double Taxation Avoidance Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains taxes, and may allow some India-based firms to avoid paying certain taxes through a process known as round tripping. The extent of round tripping by Indian companies through Mauritius is unknown. However, the Indian government is concerned enough about this problem to have asked the government of Mauritius to set up a joint monitoring mechanism to study these investment flows. The potential loss of tax revenue is of particular concern to the Indian government. The existence of the treaty makes it difficult to clearly understand the pattern of FDI flows, and likely leads to reduced tax revenues collected by the Indian government.

United StatesThe 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 2014. According to the Indian government, the top sectors attracting FDI from the United States to India during 19912014 (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.

European UnionWithin the European Union, the largest country investors were the United Kingdom and then Netherlands, with 16660 crore and 11402 crore, respectively, of cumulative FDI inflows between Aug. 1991 and March 2014. The United Kingdom, the Netherlands, and Germany together accountedfor 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 2014. FDI from the EU to India is primarily concentrated in the power/energy, telecommunications, and transportation sectors. The top sectors attracting FDI from the European Union are similar to FDI from the United States. Manufacturing; information services; and professional, scientific, and technical services have attracted the largest shares of FDI inflows from the EU to India since 2000. Unilever, Reuters Group, P&O Ports Ltd, Vodafone, and Barclays are examples of EU companies investing in India by means of mergers and acquisitions. European companies accounted for 31 percent of the total number and 43 percent of the total value for all reported Greenfield FDI projects. The number of EU Greenfield projects was distributed among four major clusters: ICT (17 percent), heavy industry (16 percent), business and financial services (15 percent), and transport (11 percent). However, the heavy industry cluster accounted for the majority (68 percent) of the total value of these projects.

JapanJapan was the Fifth largest source of cumulative FDI inflows in India between August 1991 and March 2014, 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 2014, 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.

2. Analysis of sectors attracting highest FDI equity inflows

The IT industry is one of the booming sectors in India. At present India is the leading country pertaining to the IT industry in the Asia -Pacific region. With more international companies entering the industry, the Foreign Direct Investments in India has been phenomenon over the year. The rapid development of the telecommunication sector was due to the FDI inflows in form of international players entering the market and transfer of advanced technologies. The telecom industry is one of the fastest growing industries in India. With a growth rate of 45%, Indian telecom industry has the highest growth rate in the world.

The FDI in Automobile Industry has experienced huge growth in the past few years. The increase in the demand for cars and other vehicles is powered by the increase in the levels of disposable income in India. The options have increased with quality products from foreign car manufacturers. The introduction of tailor made finance schemes, easy repayment schemes has also helped the growth of the automobile sector. For the past few years the Indian Pharmaceutical Industry is performing very well. The varied functions such as contract research and manufacturing, clinical research, research and development pertaining to vaccines are the strengths of the Pharma Industry in India. Multinational pharmaceutical corporations outsource these activities and help the growth of the sector.

The FDI inflow in the Cement Industry in India has increased with some of the Indian cement giants merging with major cement manufacturers in the. The FDI in Semiconductor sector in India were crucial for the development of the IT and the ITES sector in India. Electronic hardware is the major component of several industries such as information technology, telecommunication, automobiles, electronic appliances and special medical equipment. S.No Sector Amount of FDI Inflows %age with total FDI Inflows (+)

(In Rs crore) (In US$ million)

1SERVICES SECTOR 143878.4431970.8519.99

2TELECOMMUNICATIONS 57049.9512546.547.84

3COMPUTER SOFTWARE & HARDWARE 49626.4511106.56.94

4HOUSING & REAL ESTATE (INCLUDING CINEPLEX,MULTIPLEX, INTEGRATED TOWNSHIPS & COMMERCIAL COMPLEXES ETC.) 49024.5810972.676.86

5CONSTRUCTION ACTIVITIES 49440.1810867.246.79

6DRUGS & PHARMACEUTICALS 42745.269170.245.73

7POWER 32798.257214.834.51

8AUTOMOBILE INDUSTRY 29354.316469.534.04

9METALLURGICAL INDUSTRIES 26287.485909.423.69

10PETROLEUM & NATURAL GAS 14611.843338.752.09

11CHEMICALS (OTHER THAN FERTILIZERS) 14703.353244.932.03

12HOTEL & TOURISM 14770.583229.482.02

13TRADING 14131.093126.531.95

14ELECTRICAL EQUIPMENTS 12902.142844.751.78

15INFORMATION & BROADCASTING (INCLUDING PRINT MEDIA) 12062.22632.881.65

16CEMENT AND GYPSUM PRODUCTS 11324.882535.431.58

17MISCELLANEOUS MECHANICAL & ENGINEERING INDUSTRIES 9787.162180.261.36

18CONSULTANCY SERVICES 8772.221924.541.2

19INDUSTRIAL MACHINERY 7590.941664.261.04

20PORTS 6717.371635.081.02

21AGRICULTURE SERVICES 6912.481445.370.9

22FOOD PROCESSING INDUSTRIES 6324.111376.990.86

23NON-CONVENTIONAL ENERGY 6142.371324.220.83

24HOSPITAL & DIAGNOSTIC CENTRES 5252.561183.040.74

25ELECTRONICS 5214.61151.070.72

26TEXTILES (INCLUDING DYED,PRINTED) 5036.271104.540.69

27SEA TRANSPORT 4992.351100.780.69

28FERMENTATION INDUSTRIES 4480.651022.150.64

29MINING 4042.33937.90.59

30PAPER AND PULP (INCLUDING PAPER PRODUCTS) 3554.227640.48

31PRIME MOVER (OTHER THAN ELECTRICAL GENERATORS) 2801.95599.130.37

32MEDICAL AND SURGICAL APPLIANCES 2421.14514.080.32

33CERAMICS 2171.84503.790.31

34EDUCATION 2306.13491.990.31

35RUBBER GOODS 2124.88454.470.28

36AIR TRANSPORT (INCLUDING AIR FREIGHT) 1924.46431.20.27

37MACHINE TOOLS 1950.99428.940.27

38SOAPS, COSMETICS & TOILET PREPARATIONS 1934411.340.26

39DIAMOND,GOLD ORNAMENTS 1505.37334.310.21

40VEGETABLE OILS AND VANASPATI 1300.77276.560.17

41FERTILIZERS 1196.78255.350.16

42PRINTING OF BOOKS (INCLUDING LITHO PRINTING INDUSTRY) 1110.39244.280.15

43RAILWAY RELATED COMPONENTS 1058.18234.760.15

44COMMERCIAL, OFFICE & HOUSEHOLD EQUIPMENTS 1026.7225.850.14

45AGRICULTURAL MACHINERY 903.7200.320.13

46GLASS 806176.20.11

47EARTH-MOVING MACHINERY 728.9167.330.1

48TEA AND COFFEE (PROCESSING & WAREHOUSING COFFEE & RUBBER) 451.11100.260.06

49PHOTOGRAPHIC RAW FILM AND PAPER 269.2666.540.04

50INDUSTRIAL INSTRUMENTS 304.2665.950.04

51LEATHER,LEATHER GOODS AND PICKERS 267.959.60.04

52RETAIL TRADING (SINGLE BRAND) 204.0744.450.03

53BOILERS AND STEAM GENERATING PLANTS 201.8641.770.03

54SUGAR 174.6439.560.02

55TIMBER PRODUCTS 173.5636.170.02

56COAL PRODUCTION 103.1124.780.02

57SCIENTIFIC INSTRUMENTS 96.7821.210.01

58DYE-STUFFS 84.86190.01

59GLUE AND GELATIN 70.5614.550.01

60DEFENCE INDUSTRIES 17.683.720

61COIR 9.562.020

62MATHEMATICAL,SURVEYING AND DRAWING INSTRUMENTS 5.051.270

63MISCELLANEOUS INDUSTRIES 33596.677487.614.68

SUB. TOTAL 722833.7159973.12

64RBIS- NRI SCHEMES (2000-2002) 533.06121.33-

GRAND TOTAL 723366.76160094.45-

47B.M COLLEGE OF BUSINESS ADM.