fdi project report

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Table of contents

1. Introduction......02

1.1 Objective of project.....041.2 Research Methodology....05

2. Main text (FDI)....06

2.1 About foreign direct investment 07

2.2 FDI Indian scenario.08

2.3 FDI in India approval route.10

2.4 Analysis of sector specific policy of FDI11

2.5 Analysis of share of top ten investing countries in India.....16

2.6 Analysis of sectors attracting highest FDI equity in flows..20

3. Main text (FII)..22

3.1 Introduction to FII....27

3.2 Market design in India for FIIs....28

3.3 Registration process of FIIs.29

3.4 Prohibition on investment31

3.5 Trends of FIIs in India.32

3.6 Analysis of trends in FIIs investment..33

3.7 Details of indices taken36

3.8 Framing of hypothesis.38

3.9 Recording of observation.39

4. Key findings.40

5. Limitation. 42

6. Conclusion ...43

7. Bibliography44

7.1 Internet sites....44

7.2 Journal.44

7.3 Books..44

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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 productivityof 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

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process of development of many economies. Further many developing countries consider

foreign direct investment (FDI) and foreign institutional investment (FII) as an important

element in their development strategy among the various forms of foreign assistance.

The Foreign direct investment (FDI) and foreign institutional investment (FII) flows are

usually preferred over the other form of external finance, because they are not debt

creating, nonvolatile in nature and their returns depend upon the projects financed by the

investor. The Foreign direct investment (FDI) and foreign institutional investment (FII)

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

The Foreign direct investment (FDI) and foreign institutional investment (FII) is the

process by which the resident of one country(the source country) acquire the ownership

of assets for the purpose of controlling the production, distribution and other productive

activities of a firm in another country(the host country).

According to the international monetary fund (IMF), foreign direct investment (FDI) and

foreign institutional investment (FII) is defined as an investment that is made to acquire

a lasting interest in an enterprise operating in an economy other than that of investor.

The government of India (GOI) has also recognized the key role of the foreign direct

investment (FDI) and foreign institutional investment (FII) in its process of economic

development, not only as an addition to its own domestic capital but also as an important

source of technology and other global trade practices. In order to attract the required

amount of foreign direct investment (FDI) and foreign institutional investment (FII), it

has bought about a number of changes in its economic policies and has put in its practice

a liberal and more transparent foreign direct investment (FDI) and foreign institutional

investment (FII) policy with a view to attract more foreign direct investment (FDI) and

foreign institutional investment (FII) inflows into its economy. These changes have

heralded the liberalization era of the foreign direct investment (FDI) and foreign

institutional investment (FII) policy regime into India and have brought about a structural

breakthrough in the volume of foreign direct investment (FDI) and foreign institutional

investment (FII) inflows in the economy. In this context, this report is going to analyze

the trends and patterns of foreign direct investment (FDI) and foreign institutional

investment (FII) flows into India during the post liberalization period that is 1991 to 2007

year.

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1.1 Objective of the project

Objective 1 pertaining to FDI: examines the trends and patterns in the foreign direct

investment (FDI) across different sectors and from different countries in India during

1991-2007 period means during post liberalization period. Objective 2 pertaining to FII:

influence of FII on movement of Indian stock exchange during the post liberalization

period that is 1991 to 2007.

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1.2 Research Methodology

The lifeblood of business and commerce in the modern world is information. The ability

to gather, analyze, evaluate, present and utilize information is therefore is a vital skill for

the manager of today.In order to accomplish this project successfully I will take following steps.

1) Data Collection:

The analysis 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.

2) Analysis:

Appropriate Statistical tools like correlation and regression will be used to analyze the

data like to analyze the growth and patterns of the FDI and FII flows in India during the

post liberalization period, the liner trend model will be used. Further the percentage

analysis will be used to measure the share of each investing countries and the share of

each sectors in the overall flow of FDI and FII into India.

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2.MAIN TEXT (FDI)

In this section I am going to discuss or describe the main business of the report i.e.

analysis of secondary data. It includes data in an organized form, discussion on its

significance and analyzing the results. For this I had divided this section in further twosubsections i.e. the first subsection fulfill the requirement of first objective which is

pertaining to FDI. The objective for FDI is to examine the trends and patterns in the

foreign direct investment (FDI) across different sectors and from different countries in

India during 1991-2007 period means during post liberalization period. And the second

subsection fulfills the analysis of second objective which is pertaining to FII. The

objective for FII is to examine the influence of FII on movement of Indian stock

exchange during the post liberalization period that is 1991 to 2007.

Subsection I: objective 1: Examine the trends and patterns in the

foreign direct investment (FDI) across different sectors and from

different countries in India during 1991-2007 period means during post

liberalization period.

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2.1 About foreign direct investment

Is the process whereby residents of one country (the source country) acquire ownership

of assets for the purpose of controlling the production, distribution, and other activities of

a firm in another country (the host country). The international monetary funds balance of

payment manual defines FDI as an investment that is made to acquire a lasting interest in

an enterprise operating in an economy other than that of the investor. The investors

purpose being to have an effective voice in the management of the enterprise. The

united nations 1999 world investment report defines FDI as an investment involving a

long term relationship and reflecting a lasting interest and control of a resident entity in

one economy (foreign direct investor or parent enterprise) in an enterprise resident in an

economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise

or foreign affiliate).

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2.2 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 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.

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2.3 Foreign direct investments in India are approved through two

routes

1. Automatic approval by RBI

The Reserve Bank of India accords automatic approval within a period of two weeks(subject to compliance of norms) to all proposals and permits foreign equity up to 24%;

50%; 51%; 74% and 100% is allowed depending on the category of industries and the

sectoral caps applicable. The lists are comprehensive and cover most industries of interest

to foreign companies. Investments in highpriority industries or for trading companies

primarily engaged in exporting are given almost automatic approval by the RBI.

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

FIPB stands for Foreign Investment Promotion Board which approves all other cases

where the parameters of automatic approval are not met. Normal processing time is 4 to 6

weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are

few. It is not necessary for foreign investors to have a local partner, even when the

foreign investor wishes to hold less than the entire equity of the company. The portion of

the equity not proposed to be held by the foreign investor can be offered to the public.

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2.4 Analysis of sector specific policy for FDI

Table no. 1: Sector-specific policy for FDI: (source of following table is

http://dipp.nic.in/fdi_statistics/india_fdi_index.htm)

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http://dipp.nic.in/fdi_statistics/india_fdi_index.htmhttp://dipp.nic.in/fdi_statistics/india_fdi_index.htm


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2.5 Analysis of share of top ten investing countries FDI equity in flows

Table no. 2: Share of top investing countries FDI equity inflows.

(Source: http://dipp.nic.in/fdi_statistics/india_fdi_index.htm)

Cumulative amount of FDI inflows (From Aug. 1991 to march 2007): Rs. 2,32,041

crore and US$ 54,628 million.

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 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

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crore during the 19912007 periods, followed by the United Kingdom, the Netherlands,

and Japan.

Mauritius

According to Indian government statistics, Mauritius accounts for the largest share of

cumulative FDI inflows to India from 1991 to 2007, nearly 34.11 percent. Many

companies based outside of India utilize Mauritian holding companies to take advantage

of the India- Mauritius Double Taxation Avoidance Agreement (DTAA). The DTAA

allows foreign firms to bypass Indian capital gains taxes, and may allow some India-

based firms to avoid paying certain taxes through a process known as round tripping.

The extent of round tripping by Indian companies through Mauritius is unknown.

However, the Indian government is concerned enough about this problem to have asked

the government of Mauritius to set up a joint monitoring mechanism to study these

investment flows. The potential loss of tax revenue is of particular concern to the Indian

government. The existence of the treaty makes it difficult to clearly understand the

pattern of FDI flows, and likely leads to reduced tax revenues collected by the Indian

government.

United States

The United States is the second largest source of FDI in India (10.57 % of the total),

valued at 24536 crore in cumulative inflows between August 1991 and March 2007.

According to the Indian government, the top sectors attracting FDI from the United States

to India during 19912007 (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

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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 Union

Within the European Union, the largest country investors were the United Kingdom and

the Netherlands, with 16660 crore and 11402 crore, respectively, of cumulative FDI

inflows between Aug. 1991 and March 2007. The United Kingdom, the Netherlands, and

Germany together accounted for almost 75 percent of all FDI flows from the EU to India.

All EU countries together accounted for approximately 25 percent of all FDI inflows to

India between August 1991 and March 2007. FDI from the EU to India is primarily

concentrated in the power/energy, telecommunications, and transportation sectors. The

top sectors attracting FDI from the European Union are similar to FDI from the United

States. Manufacturing; information services; and professional, scientific, and technical

services have attracted the largest shares of FDI inflows from the EU to India since 2000.

Unilever, Reuters Group, P&O Ports Ltd, Vodafone, and Barclays are examples of EU

companies investing in India by means of mergers and acquisitions. European companies

accounted for 31 percent of the total number and 43 percent of the total value for all

reported Greenfield FDI projects. The number of EU Greenfield projects was distributed

among four major clusters: ICT (17 percent), heavy industry (16 percent), business and

financial services (15 percent), and transport (11 percent). However, the heavy industry

cluster accounted for the majority (68 percent) of the total value of these projects.

Japan

Japan was the Fifth largest source of cumulative FDI inflows in India between August

1991 and March 2007, i.e. the cumulative flow is 9313 crore and it is 4.01% of total

inflow. FDI inflows to India from most other principal source countries have steadily

increased since 2000, but inflows from Japan to India have decreased during this time

period. There does not appear to be a single factor that explains the recent decline in FDI

inflows from Japan to India. India is, however, one of the largest recipients of Japanese

Official Development Assistance (ODA), through which Japan has assisted India in

building infrastructure, including electricity generation, transportation, and water supply.

It is possible that this Japanese government assistance may crowd out some private sector

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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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2.6 Analysis of sectors attracting highest FDI equity inflows

Table no. 3: Sectors attracting highest FDI equity inflows :( source:

http://dipp.nic.in/fdi_statistics/india_fdi_index.htm)

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

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since 2004. Rather, the size of the projects in these industries has increased substantially.

For example, global semiconductor manufacturers Advanced Micro Devices (AMD -

United States) and Flextronics (Singapore) have entered into separate joint ventures with

SemIndia to build semiconductor manufacturing facilities in Hyderabad. The $3 billion

AMD-SemIndia joint venture will produce semiconductor chips which can then be used

to manufacture electronic products in the Flextronics-SemIndia $3 billion joint venture.

The chip fabrication facility will manufacture chips for cell phones, set-top boxes,

personal computers, and similar products. The heavy industry and transport equipment

sectors together attracted over FDI of 15427 crore in Greenfield FDI projects during 1991

to 2007. The cluster with the highest reported value during 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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3. MAIN TEXT (FIIS)

Subsection II: objective 2: Pertaining to FII: influence of FII on

movement of Indian stock exchange during the post

liberalization period that is 1991 to 2007.

3.1 Introduction to FII

Since 1990-91, the Government of India embarked on liberalization and economic

reforms with a view of bringing about rapid and substantial economic growth and move

towards globalization of the economy. As a part of the reforms process, the Government

under its New Industrial Policy revamped its foreign investment policy recognizing the

growing importance of foreign direct investment as an instrument of technology transfer,

augmentation of foreign exchange reserves and globalization of the Indian economy.

Simultaneously, the Government, for the first time, permitted portfolio investments from

abroad by foreign institutional investors in the Indian capital market. The entry of FIIs

seems to be a follow up of the recommendation of the Narsimhan Committee Report on

Financial System. While recommending their entry, the Committee, however did not

elaborate on the objectives of the suggested policy. The committee only suggested that

the capital market should be gradually opened up to foreign portfolio investments.

From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all

the securities traded on the primary and secondary markets, including shares, debentures

and warrants issued by companies which were listed or were to be listed on the Stock

Exchanges in India. While presenting the Budget for 1992-93, the then Finance Minister

Dr. Manmohan Singh had announced a proposal to allow reputed foreign investors, such

as Pension Funds etc., to invest in Indian capital market. To operationalise this policy

announcement, it had become necessary to evolve guidelines for such investments by

Foreign Institutional Investors (FIIs).

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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 exchanges 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 EBI, under a single window approach.

5) For granting registration to the FII, SEBI should take into account the track record of

the FII, ts professional competence, financial soundness, experience and such other

criteria that may e considered by SEBI to be relevant. Besides, FII seeking initial

registration with SEBI were required to hold a registration from the Securities

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Commission, or the regulatory rganization 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 nder

FERA o the FII would also hold good for five years. Both would be renewable for similar

five year eriods later on.

7) RBI's general permission under FERA would enable the registered FII to buy, sell and

realize apital gains on investments made through initial corpus remitted to India,

subscribe/renounce ights offerings of shares, invest on all recognized stock exchanges

through a designated bank ranch, 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

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short term capital gains would automatically induce the FIIs to retain their investments as

long term investments.

10) Portfolio investments in primary or secondary markets were subject to a ceiling of

30% of issued share capital for the total holdings of all registered FIIs, in any one

company. The ceiling was made applicable to all holdings taking into account the

conversions out of the fully and partly convertible debentures issued by the company.

The holding of a single FII in any company would also be subject to a ceiling of 10% of

total issued capital. For this purpose, the holdings of an FII group would be counted as

holdings of a single FII.

11) The maximum holdings of 24% for all non-resident portfolio investments, including

those of the registered FIIs, were to include NRI corporate and non-corporate

investments, but did not include the following:

a. Foreign investments under financial collaborations (direct foreign investments), which

are permitted up to 51% in all priority areas.

b. Investments by FIIs through the following alternative routes:

i. Offshore single/regional funds;

ii. Global Depository Receipts;

iii. Euro convertibles.

12) Disinvestment would be allowed only through stock exchange in India, including the

OTC Exchange. In exceptional cases, SEBI may permit sales other than through stock

exchanges, provided the sale price is not significantly different from the stock market

quotations, where available.

13) All secondary market operations would be only through the recognized

intermediaries on the Indian Stock Exchange, including OTC Exchange of India. A

registered FII would be expected not to engage in any short selling in securities and to

take delivery of purchased and give delivery of sold securities.

14)A registered FII can appoint as Custodian an agency approved by SEBI to act as

custodian of Securities and for confirmation of transactions in Securities, settlement of

purchase and sale, and for information reporting. Such custodian should establish

separate accounts for detailing on a daily basis the investment capital utilization and

securities held by each FII for which it is acting as custodian. The custodian was

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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.

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3.2 Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside

India which proposes to make investment in India in securities. A Working Group for

Streamlining of the Procedures relating to FIIs, constituted in April, 2003, inter alia,

recommended streamlining of SEBI registration procedure, and suggested that dual

approval process of SEBI and RBI be changed to a single approval process of SEBI. This

recommendation was implemented in December 2003. Currently, entities eligible to

invest under the FII route are as follows:

i) As FII: Overseas pension funds, mutual funds, investment trust, asset management

company, nominee company, bank, institutional portfolio manager, university funds,

endowments, foundations, charitable trusts, charitable societies, a trustee or power of

attorney holder incorporated or established outside India proposing to make proprietary

investments or with no single investor holding more than 10 per cent of the shares or

units of the fund).

(ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf

the FII invests. The following entities are eligible to be registered as sub-accounts, viz.

partnership firms, private company, public company, pension fund, investment trust, and

individuals.

FIIs registered with SEBI fall under the following categories:a) Regular FIIs- those who are required to invest not less than 70 % of their investment in

quity-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

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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.

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3.3 Registration Process of FIIs

A FII is required to obtain a certificate by SEBI for dealing in securities. SEBI grants the

certificate SEBI by taking into account the following criteria:

i) The applicant's track record, professional competence, financial soundness, experience,

general reputation of fairness and integrity.

ii) Whether the applicant is regulated by an appropriate foreign regulatory authority.

iii) Whether the applicant has been granted permission under the provisions of the

Foreign Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for

making investments in India as a Foreign Institutional Investor.

iv) Whether the applicant is

a) an institution established or incorporated outside India as a pension fund, mutual fund,

investment trust, insurance company or reinsurance company.

b) an International or Multilateral Organization or an agency thereof or a Foreign

Governmental Agency or a Foreign Central Bank. c) an asset management company,

investment manager or advisor, nominee company, bank or institutional portfolio

manager, established or incorporated outside India and proposing to make investments in

India on behalf of broad based funds and its proprietary funds in if any or

d) university fund, endowments, foundations or charitable trusts or charitable societies.

v) Whether the grant of certificate to the applicant is in the interest of the development ofthe securities market.

vi) Whether the applicant is a fit and proper person.

The SEBIs initial registration is valid for a period of three years from the date of its grant

of renewal. Investment Conditions and Restrictions for FIIs: 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 recognised stock exchange.

(c) Dated Government securities.

(d) Derivatives traded on a recognised stock exchange.

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(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 investor on its own account or through its sub-

accounts. A foreign corporate or individual is not eligible to invest through the hundred

percent debt route. Even investments made by FIIs in security receipts issued by

securitization companies or asset reconstruction companies under the Securitization and

Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 are

not eligible for the investment limits mentioned above. No foreign institutional should

invest in security receipts on behalf of its sub-account.

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3.4 Prohibitions on Investments:

FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company.

They are also not allowed to invest in any company which is engaged or proposes to

engage in the following activities:

1) Business of chit fund

2) Nidhi Company

3) Agricultural or plantation activities

4) Real estate business or construction of farm houses (real estate business does not

include development of townships, construction of residential/commercial premises,

roads or bridges.

5) Trading in Transferable Development Rights (TDRs).

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3.5 Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository Receipts

(ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and

investments in offshore funds. Before 1992, only Non-Resident Indians (NRIs) and

Overseas Corporate Bodies were allowed to undertake portfolio investments in India.

Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They

were allowed to invest in all the securities traded on the primary and the secondary

market including the equity and other securities/instruments of companies listed/to be

listed on stock exchanges in India. It can be observed from the table below that India is

one of the preferred investment destinations for FIIs over the years. As of March 2007,

there were 996 FIIs registered with SEBI.

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3.6 Analysis of trends in FII investment

During the initial year 1992-93, the FII flows started in September, 1992 which amounted

to Rs. 13 crore because at this moment government was framing policy guidelines for

FIIs. However, within a year, the FIIs rose 39338.46% of 1992-93 during 1993-94

because government had opened door for investment in India. Thereafter, the FII inflows

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witnessed a dip of 6.45%. The year 1995-1996 witnessed a turnaround, gliding up the

contribution of FII to a massive of Rs. 6942 crore. Investment by FIIs during 1996-1997

rose a little i.e. 23.52% of the preceding year. This period was ripe enough for FII

Investments because at that time where international capital markets were in the phase of

overheating; the Indian economy posted strong fundamentals, stable exchange rate

expectations and offered investment incentives and congenial climate for investment of

these funds in India. During 1997-98, FII inflows posted a fall of 30.51%. This slack in

investments by FIIs was primarily due to the South-East Asian Crisis and the period of

volatility experienced between November 1997 and February 1998. The net investment

flows by FIIs have always been positive from the year of their entry. Only in the year

1998-99, an outflow to the tune of Rs. 17699 crore was witnessed for the first time. This

was primarily because of the economic sanctions imposed on India by the US, Japan and

other industrialized economies. These economic sanctions were the result of the testing of

series of nuclear bombs by India in May 1998. Thereafter, the FII portfolios investments

quickly recovered and showed positive net investments for all the subsequent years. FIIs

investments declined from Rs. 10122 crore during 1999-2000 to Rs. 9935 crore during

2000-01. FII investment posted a year-on-year decline of 1.8 % in 2000-01, 11.87 % in

2001-02 and 69.29 % in 2002-03. Investments by FII posted a fall of 80 % in 2002-03 as

compared with investments in the period of 1999-00. Investments by FIIs rebounded

from depressed levels from the year 2003-04 and witnessed an unprecedented surge. FIIs

flows were recycled to India following readjustment of global portfolios of institutional

investors, triggered by robust growth in Indian economy and attractive valuations in the

Indian equity market as compared with other emerging market economies in Asia. The

slowdown in 2004-05 was on account of global uncertainties caused by hardening of

crude oil prices and the upturn in the interest rate cycle. The resumption in the net FII

inflows to India from August 2004 continued till end 2004-05. The inflows of FIIs during

the year 2004-05 was Rs. 45881 crore. During 2006-07 the foreign institutional investors

continued to invest large funds in Indian securities market. However, due to global

developments like meltdown in global commodities markets and equity market during the

three month period between May 2006 to July 2006, fall in Asian Equity markets,

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tightening of capital controls in Thailand and its spillover effects, there was a slack in FII

investments.

As I had discussed FIIs environment in India like what is FII in India, policy

framework for FIIs, market design in India for foreign institutional investors,

registration process in India, Trends of Foreign Institutional Investments in India.

Now to fulfill the objective of this project i.e. influence of FII on movement of Indian

stock exchange (national stock exchange of India) during the post liberalization

period that is 1991 to 2007, the following research methodology is designed.

This project, in a way, reveals the influence of FIIs investment on movement of Indian

stock exchange (national stock exchange of India) during the post liberalization period

that is 1991 to 2007. I have applied a simple linear model to estimate the effect of FII on

the stock index. The data analysis tools used in the research is correlation and regression.

I have taken six indices to study the impact of FII on Indian bourses. One of these indices

is Nifty while other five are some specific index of NSE. These six indices give the close

picture of Indian stock exchanges. I have taken average monthly data of FIIs and monthly

closing index of all the indices.

There may be many other factors on which a stock index may depend i.e. Government

policies, budgets, bullion market, inflation, economic and political condition of the

country, FDI, Re./Dollar exchange rate etc. But for my study I have selected only one

independent variable i.e. FII and dependent variable is indices of nifty. This study uses

the concept of correlation and regression to study the relationship between FII and stock

index. The FII started investing in Indian capital market from September 1992 when the

Indian economy was opened up in the same year. Their investments include equity only.

The sample data of FIIs investments consists of monthly average from April 1992 to

March 2007 and indices value consist monthly closing value with period of study and

various observations which is given below in table.

Table no. 6: indices period of study and observations.

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3.7 Details of indices taken:

The CNX 100 tracks the behavior of combined portfolio of two indices viz. S&P CNX

Nifty and CNX Nifty Junior. It includes 100 of the 935 companies currently listed on the

NSE. CNX 100 is computed using market capitalisation weighted method, wherein the

level of the index reflects the total market value of all the stocks in the index relative to a

particular base period. The method also takes into account constituent changes in the

index and importantly corporate actions such as stock splits, rights, etc without affecting

the index value. The CNX 100 Index has a base date of Jan 1, 2003 and a base value of

1000.

The S&P CNX 500 is India's first broad-based benchmark of the Indian capital marketfor comparing portfolio returns vis--vis market returns. The S&P CNX 500 represents

about 92.66% of total market capitalization and about 86.44% of the total turnover on the

NSE. The S&P CNX 500 Equity Index is desegregated into 72 Industry sectors, which

are separately maintained by IISL. These industry indices are derived out of the S&P

CNX 500 and care is taken to see that the industry representation in the entire universe of

securities is reflected in the S&P CNX 500. e.g., if in the entire universe of securities,

banking sector has a 5% weightage then the Banking sector (as determined by the

Banking stocks in S&P CNX 500) would have a 5% weightage in the S&P CNX 500.

The Banking sector index would be derived out of the Banking stocks in the S&P CNX

500. The changes to the weightage of various sectors in the S&P CNX 500 would

dynamically reflect the changes in the entire universe of securities. The calendar year

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1994 has been selected as the base year for S&PCNX 500. The base value of the index is

set at 1000.

The CNX Bank Index is an index comprised of the most liquid and large capitalized

Indian Banking stocks. It provides investors and market intermediaries with a benchmark

that captures the capital market performance of Indian Banks. The Index has 12 stocks

from the banking sector, which trade on the National Stock Exchange. The CNX Bank

Index has a base date of Jan 1, 2000 and base value of 1000.

The CNX IT Companies in this index are those that have more than 50% of their

turnover from IT related activities like software development, hardware manufacture,

vending, support and maintenance. The CNX IT Index constituents represent about

12.80% of the total market capitalization as on September 1, 2006. The CNX IT Index

has a base date of Jan 1, 1996 and a base value of 1000. The Base Value of the index was

revised from 1000 to 100 w.e.f. May 28, 2004.

The CNX Nifty Junior Index comprises of the next rung of liquid securities after those

forming part of S&P CNX Nifty. It may be useful to think of the S&P CNX Nifty and the

CNX Nifty Junior as making up the 100 most liquid stocks in India. CNX Nifty Junior

represents about 8.98% of the total market capitalization as on September 1, 2006. The

average traded value for the last six months of all Junior Nifty stocks is approximately

9.17% of the traded value of all stocks on the NSE. Impact cost for CNX Nifty Junior for

a portfolio size of RS.2.50 million is 0.15%. The CNX Nifty Junior was introduced on

January 1, 1997, with base date and base value being November 03, 1996 and 1000

respectively and a base capital of Rs.0.43 trillion.

The S&P CNX Nifty is a well-diversified 50 stock index accounting for 22 sectors of the

economy. It is used for a variety of purposes such as benchmarking fund portfolios, index

based derivatives and index funds. S&P CNX Nifty is based upon solid economic

research and is well respected internationally as a pioneering effort in better

understanding how to make a stock market index. The average total traded value for the

last six months of all S&P CNX Nifty stocks is approximately 56.31 % of the traded

value of all stocks on the NSE. S&P CNX Nifty stocks represent about 59.91 % of the

total market capitalization as on September 1, 2006. The base period selected for S&P

CNX Nifty index is the close of prices on November 3, 1995, which marks the

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completion of one year of operations of NSE's Capital Market Segment. The base value

of the index has been set at 1000 and a base capital of RS.2.06 trillion.

3.8 Framing of hypothesis:

Null Hypothesis (Ho): The various NSE indices do not rise with the increase in FIIs

investment means FIIs have no influence on Indian stock exchange. Alternate Hypothesis

(H1): The various NSE indices rise with the increase in FIIs investment means FIIs have

influence on Indian stock exchange.

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.

3.9 Recording of observation:

I have taken the monthly closing index of all the indices. For FIIs I have recorded

monthly average of the net investments made by them in the Indian capital market. Net

Investments = gross purchases gross sales (fig. is in Rs crore) Use of Model: A simple

linear relationship has been shown between two variables using correlation and

regression as the data analysis tools. One variable is dependent and the other is

independent. I have taken FII as the independent variable while the stock index has been

taken as dependent variable. The impact of FII has been separately analyzed with each of

the index. So, correlation and regression has been separately run between FII and sixindices taking one index at a time with help of Microsoft excel Inference: If the

hypothesis holds good then we can infer that FIIs have significant impact on the Indian

capital market. This will help the investors to decide on their investments in stocks and

shares. If the hypothesis is rejected, or in other words if the null hypothesis is accepted,

then FIIs will have no significant impact on the Indian bourses. Regression Analysis:

This analysis tool performs linear regression analysis by using the "least squares" method

to fit a line through a set of observations. I can analyze how a single dependent variable is

affected by the values of one or more independent variables for example, how an

athlete's performance is affected by such factors as age, height, and weight. Correlation:

This analysis tool and its formulas measure the relationship between two data sets that are

scaled to be independent of the unit of measurement. The population correlation

calculation returns the covariance of two data sets divided by the product of their

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standard deviations. I can use the Correlation tool to determine whether two ranges of

data move together that is, whether large values of one set are associated with large

values of the other (positive correlation), whether small values of one set are associated

with large values of the other (negative correlation), or whether values in both sets are

unrelated (correlation near zero).

4. KEY FINDING:

a) Net FDI in India was valued at $4.7 billion in the 200506 Indian fiscal year, and more

than tripled, to $15.7 billion, in the 200607 fiscal year. Almost one-half of all FDI is

invested in the Mumbai and New Delhi regions.

b) By country, the largest investors in India are Mauritius, the United States, and the

United Kingdom. Investors based in many countries have taken advantage of the India-

Mauritius bilateral tax treaty to set up holding companies in Mauritius which

subsequently invest in India, thus reducing their tax obligations.

c) By industry, the largest destinations for FDI are electrical equipment (including

computer software and electronics), services, telecommunications, and transportation.

For objective 2

1. Impact of FII on S&P CNX Nifty: The effect of FII on Nifty is positive and the co-

efficient of correlation is high so the effect is also high. The standard error comes out to

be 575.658 which are high. This does not mean the relation is false but we can say that

the error in linear relation is high.

2. Impact of FII on Bank Nifty: The effect of FII on Bank Nifty is positive. So, FII isdirectly related to Bank Nifty. But the co-efficient of correlation is high so the effect is

also high. The standard error comes out to be 1229.644 which are very high. This means

that the deviation from the mean value is high. This does not mean the relation is false

but we can say that the error in linear relation is high. The value of multiple-R is also

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high. We can say that FII have significant impact on Bank Nifty during the period of 31-

January-2000- 30-March-07.

3. Impact of FII on CNX 100: CNX 100 is inversely related to FII for the period of 31-

January- 03- 30-March-2007. But the extent of impact is low as co-efficient of correlation

is -0.159.

4. Impact of FII on CNX IT: FII has inversely little significant relation with CNX IT, as

the value of correlation is -0.191. This does not mean that there is no relation at all

between them. It shows the absence of linear relation between the two variables but not a

lack of relationship altogether.

5. Impact of FII on CNX NIFTY JUNIOR: CNX NIFTY JUNIOR directly related to

FII for the period of 31-Oct-1995- 30-March-2007. But the value of R is high so the

degree of relation is also high low. Standard error in this case is 1319.6 which is high

compared to other standard errors between FII and other stock indices.

6. Impact of FII on S&P CNX 500: S&P CNX 500 is also highly correlated with FII. In

this case again the degree of relation is high.

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5 LIMITATIONA) The study has limited itself to a sample of top ten investing countries and top ten level

sectors which have attracted higher inflow of FDI.

B) The data for analysis of impact of FII on stock exchange is limited to National stock

exchange (NSE) only

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6.CONCLUSION:For objective 1:

The process of economic reforms which was initiated in July 1991 to liberalize and

globalize the economy had gradually opened up many sectors of its economy for the

foreign investors. A large number of changes that were introduced in the countrys

regulatory economic policies heralded the liberalization era of the FDI policy regime in

India and brought about a structural breakthrough in the volume of the FDI inflows into

the economy maintained a fluctuating and unsteady trend during the study period. Itmight be of interest to note that more than 50% of the total FDI inflows received by India

during the period from 1991-2007 came from Mauritius and the USA. The main reason

for higher levels of investment from Mauritius was that the fact that India entered into a

double taxation avoidance agreement (DTAA) with Mauritius were protected from

taxation in India. Among the different sectors, the electrical and equipment had received

the larger proportion followed by service sector and telecommunication sector.

For objective 2:

According to findings and results, I concluded that FII did have high significant impact

on the Indian capital market. Therefore, the alternate hypothesis is accepted. S&P CNX

NIFTY, BANK NIFTY, CNX NIFTY JUNIOR, S&P CNX 500 showed positive

correlation but CNX 100, CNX IT showed negative correlation with FII. Also the degree

of relation was high in all the case. It shows high degree of linear relation between FII

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and stock index. This shows that there is relationship between them. One of the reasons

for high degree of any linear relation can also be due to the sample data. The data was

taken on monthly basis. The data on daily basis can give more positive results (may be).

Also FII is not the only factor affecting the stock indices. There are other major factors

that influence the bourses in the stock market. I also analyzed that FII had significant

impact on the stock index for the period starting from January 1991 to March 2007. The

sample data available for other indices like BANK NIFTY, CNX 100, S&P CNX 500

was low with just 51, 87 and 94 respectively observations that have also hampered the

results.

7 BIBLIOGRAPHY

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

7.1 Internet sites:

a) www.rbi.org.in/home.aspx

b) www.google.com

c) www.fdimagazine.com

d) www.members.aol.com/RTMadaan1/sectors

e) http://dipp.nic.in/fdi_statistics/india_fdi_index.htm

f) www.nseindia.com

g) www.sebi.gov.in

7.2 Journals :

a) ICFAI Journal: E.g. the ICFAI journal of public finance, issue- February, vol. VI.

b) Handbook of statistics on the Indian securities market 2008.

7.3 Books:

a) Foreign direct investment in India by Lata Chakravarthy.

b) FDI (issues in emerging economies) by K. Seethe Pathi.

c) Foreign institutional investors by G Gopal Krishna Murthy.

fdi project report

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