project of fdi in india

1 FOREIGN DIRECT INVESTMENT & INDIA’S STRATEGY IN THE SHARE OF WORLD GDP

1. Introduction

What does a F.D.I means?

Foreign direct investment (FDI) is defined as a company from one country making

a physical (Monetary or Manpower) investment into setting up a factory in another country referred to as

“host country”. It is the establishment of an enterprise by a foreigner. Its definition can be extended to

include investments made to acquire lasting interest in enterprises operating outside of the economy of the

investor. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a

multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise

control over its foreign affiliate.


2. Objective of Study

The objective of study is simple yet complex, as India emerges as one the top economies in the world, it

can’t escape the FDI and its immense socio-eco potential. The objective of study increases as India as a

country is diverse and effects of FDI could wary from region to region such as FDI which eases urban

lifestyle have a potential threat on the countries rural part. The diversity and social impact of FDI should be

taken into account before introducing such a bold move to the masses of country. A systematic study could

help in eradicating ups and downs of FDI through a flow chart of planning and execution.

Some of the factors which should be taken into account before introducing FDI in any part or system of

country are as follows:

1. Affected population (both positive and negative aspect)

2. Economic Scenario

3. Political and Social Sensitiveness

Theoretically it covers

➢ To know the flow of investment in India

➢ To know how can India grow by Investment .

➢ To examine the trends and patterns in the FDI across different sectors and from different countries in

India

➢ To know in which sector we can get more foreign currency in terms of investment in India

➢ To know how much to invest in a developed country or in a developing.

➢ To know Which sector is good for investment.

➢ To know which country in investing in which country

➢ To know the reason for investment in India

➢ Influence of FII on movement of Indian stock exchange

➢To understand the FII & FDI policy in India.


3. Historical Perspective

At the time of independence, the attitude towards foreign capital was one of fear and suspicion. This

was natural on account of the previous exploitative role played by it in ‘draining away’ resources

from this country. The suspicion and hostility found expression in the Industrial Policy of 1948

which, though recognizing the role of private foreign investment in the country, emphasized that its

regulation was necessary in the national interest. Because of this attitude expressed in the 1948

resolution, foreign capitalists got dissatisfied and as a result, the flow of imports of ca[ital goods got

obstructed. As a result, the prime minister had to give following assurances to the foreign capitalists

in 1949:

1. No discrimination between foreign and Indian capital. The government o India will not

differentiate between the foreign and Indian capital. The implication was that the government would

not place any restrictions or impose any conditions on foreign enterprise which were not applicable

to similar Indian enterprises.

2. Full opportunities to earn profits. The foreign interests operating in India would be permitted to

earn profits without subjecting them to undue controls. Only such restrictions would be imposed

which also apply to the Indian enterprises.

3. Guarantee of compensation. If and when foreign enterprises are compulsorily acquired,

compensation will be paid on a fair and equitable basis as already announced in government’s

statement of policy.

Though the Prime Minister stated that the major interest in ownership and effective control of an

undertaking should be in Indian hands, he gave assurance that there would be “no hard and fast rule

in this matter”. By a declaration issued on June 2, 1950, the government assured the foreign

capitalists that they can remit the he foreign investments made by them in the country after January

1, 1950. in addition, they were also allowed to remit whatever investment of profit and taken place.


Despite the above assurances, foreign capital in the requisite quantity did now flow into India during

the period of the First plan. The atmosphere of suspicion had not changed substantially. However,

the policy statement of the Prime Minister issued in 1949 and continued practically unchanged in the

1956 Industrial Policy Resolution, had opened up immense fields to foreign participation. In

addition, the trends towards liberalization grew slowly and gradually more strong and the role of

foreign investment grew more and more important. The government relaxed its policy concerning

majority ownership in several cases and granted several tax concessions for foreign personnel.

Substantial liberalization was announced in the New Industrial Policy declared by the government on

24th July 1991 and doors of several industries have been opened up for foreign investment. Prior to

this policy, foreign capital was generally permitted only in the those industries where Indian capital

was scarce and was not normally permitted in those industries which had received government

protection or which are of basic and/or strategic importance to the country. The declared policy of

the government was to discourage foreign capital in certain inessential consumer goods and service

industries. However, this provision was frequently violated as a number of foreign collaborations

even in respect of cosmetics, toothpaste, lipstick etc. were allowed by the government. It was also

stated that foreign capital should help in promoting experts or substituting imports. The government

also laid down that in al those industries where foreign capital investment is allowed, the major

interest in ownership and effective control should always be in Indian hands (this condition was also

often relaxed). The foreign capital investments and technical collaborations were required to be so

regulated as to fit into the overall framework of the plans. In those industries where foreign

technicians and managers were allowed to operate as Indians with requisite skills and experience

were not available, vital importance was to be accorded to the training and employment of Indians in

the quickest possible manner.


4. F.D.I. in India

The economy of India is the third largest in the world as measured by purchasing power parity (PPP),

with a gross domestic product (GDP) of US $3.611 trillion. When measured in USD exchange-rate

terms, it is the tenth largest in the world, with a GDP of US $800.8 billion (2006). is the second

fastest growing major economy in the world, with a GDP growth rate of 8.9% at the end of the first

quarter of 2006-2007. However, India's huge population results in a per capita income of $3,300 at

PPP and $714 at nominal.The economy is diverse and encompasses agriculture, handicrafts, textile,

manufacturing, and a multitude of services. Although two-thirds of the Indian workforce still earn

their livelihood directly or indirectly through agriculture, services are a growing sector and are

playing an increasingly important role of India's economy. The advent of the digital age, and the

large number of young and educated populace fluent in English, is gradually transforming India as an

important 'back office' destination for global companies for the outsourcing of their customer

services and technical support.

India is a major exporter of highly-skilled workers in software and financial services,

and software engineering. India followed a socialist-inspired approach for most of its independent

history, with strict government control over private sector participation, foreign trade, and

foreign direct investment. However, since the early 1990s, India has gradually opened up its

markets through economic reforms by reducing government controls on foreign trade and

investment. The privatization of publicly owned industries and the opening up of certain sectors to

private and foreign interests has proceeded slowly amid political debate. India faces a burgeoning

population and the challenge of reducing economic and social inequality. Poverty remains a serious

problem, although it has declined significantly since independence, mainly due to the green

revolution and economic reforms. FDI up to 100% is allowed under the automatic route in all

activities/sectors except the following which will require approval of the Government:


Activities/items that require an Industrial License; Proposals in which the foreign collaborator has a

previous/existing venture/tie up in India

FDI in India includes, FDI inflows as well as FDI outflow from India. Also FDI foreign direct

investment and FII foreign institutional investors are a separate case study while preparing a report

on FDI and economic growth in India. FDI and FII in India have registered growth in terms of both

FDI flows in India and outflow from India. The FDI statistics and data are evident of the emergence

of India as both a potential investment market and investing country. FDI has helped the Indian

economy grow, and the government continues to encourage more investments of this sort - but with

$5.3 billion in FDI . India gets less than 10% of the FDI of China. 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.

This money has 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 world’s major investors. 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, through private equity or

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 of projects

have 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 national

government also 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 in financial services, 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 these

banks must 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 to projects getting bogged down in

red tape and bureaucracy. India actually receives less than half the FDI that the federal government

approves.


5. Trends in India’s foreign trade

Trading is permitted under automatic route with FDI up to 51% provided it is primarily export

activities, and the undertaking is an export house/trading house/super trading house/star trading

house. However, under the FIPB route:-

i.100% FDI is permitted in case of trading companies for the following activities:

a) Exports;

b) Bulk imports with ex-port/ex-bonded warehouse sales;

c) Cash and carry wholesale trading;

d) Other import of goods or services provided at least 75% is for procurement and sale of goods and

services among the companies of the same group and not for third party use or onward

transfer/distribution/sales.

ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy:

a) Companies for providing after sales services (that is not trading per se)

b) Domestic trading of products of JVs is permitted at the wholesale level for such trading companies

who wish to market manufactured products on behalf of their joint ventures in which they have

equity participation in India.

c) Trading of hi-tech items/items requiring specialized after sales service d. Trading of items for

social sector

d) Trading of hi-tech, medical and diagnostic items.

e) Trading of items sourced from the small scale sector under which, based on technology provided

and laid down quality specifications, a company can market that item under its brand name.

f) Domestic sourcing of products for exports.

g) Test marketing of such items for which a company has approval for manufacture provided such

test marketing facility will be for a period of two years, and investment in setting up manufacturing

facilities commences simultaneously with test marketing


7. India’s Share in World GDP

“The gross domestic product (GDP) is equal to the total expenditures for all final goods and services

produced within the country in a stipulated period of time.”

The Gross Domestic Product (GDP) in India was worth 1841.70 billion US dollars in 2012. The

GDP value of India represents 2.97 percent of the world economy. GDP in India is reported by the

World Bank Group. From 1970 until 2012, India GDP averaged 485.7 USD Billion reaching an all-

time high of 1872.9 USD Billion in December of 2011 and a record low of 63.5 USD Billion in

December of 1970. The gross domestic product (GDP) measures of national income and output for a

given country's economy.

Its economy may be in the grips of a slowdown, its polity paralysed and markets morose, but all this

hasn't prevented India from overtaking Japan to become the world's third-largest economy in

purchasing power terms.Data just released by the International Monetary Fund (IMF) shows that

India's gross domestic product in purchasing power parity (PPP) terms stood at $4.46 trillion in 2011,

marginally higher than Japan's $4.44 trillion, making it the third-biggest economy after the United

States and China. India's share in world GDP in terms of PPP, a measure of relative consumer prices


across countries, stood at 5.65% in 2011 against Japan's 5.63%, with the gap expected to widen

significantly by 2017. In five years, the IMF estimates the share of India's GDP in PPP terms would

grow to 8.09% compared with 4.8% for Japan. Economists said India's move up the league table was

a reminder of the boundless potential the country offered, despite the prevailing mood of pessimism.

"This basically turns the spotlight back on the tremendous opportunity India's growth story has even

under the given conditions. If India plays its cards correctly through policy measures we can actually

achieve much more in the next 5-10 years," said Saugata Bhattacharya, chief economist with Axis

Bank. Added Samiran Chakraborty, chief economist with Standard Chartered India: "This shows that

India is no longer an emerging economy. It has already emerged. But beyond that there are not many

conclusions one can take from the data." The PPP system allows GDP comparisons to be made by

asking how much money would be needed to purchase the same goods and services in two countries

and using that to calculate an implicit foreign exchange rate. Under this method, a dollar should be

able to buy the same amount of goods anywhere in the world and exchange rates should adjust

accordingly. It also strips away distortions that come with market exchange rates, which are often

volatile, affected by political and financial factors that do not lead to immediate changes in income

and tend to understate the standard of living in poor countries.


7. F.D.I & Challenges in India

FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken.

Change in sectoral policy/sectoral equity cap is notified from time to time through Press Notes by the

Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy announcement by

SIA are subsequently notified by RBI under FEMA. All Press Notes are available at the website of

Department of Industrial Policy & Promotion. FDI Policy permits FDI up to 100 % from

foreign/NRI investor without prior approval in most of the sectors including the services sector

under automatic route. FDI in sectors/activities under automatic route does not require any prior

approval either by the Government or the RBI. The investors are required to notify the Regional

office concerned of RBI of receipt of inward remittances within 30 days of such receipt and will

have to file the required documents with that office within 30 days after issue of shares to foreign

investors. The 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 system , extraction of coal and lignite and mining

industry is allowed upto 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% in telecom industry especially in the GSM services

7.1 Investment Risk in India

Sovereign Risk


India is an effervescent parliamentary democracy since its political freedom from British rule more

than50 years ago. The country does not face any real threat of a serious revolutionary movement

which might lead to a collapse of state machinery. Sovereign risk in India is hence nil for both

"foreign direct investment" and "foreign portfolio investment." Many Industrial and Business houses

have restrained themselves from investing in the North-Eastern part of the country due to unstable

conditions. Nonetheless investing in these parts is lucrative due to the rich mineral reserves here and

high level of literacy. Kashmir on the northern tip is a militancy affected area and hence investment

in the state of Kashmir are restricted by law

Political Risk

India has enjoyed successive years of elected representative government at the Union as well as

federal level. India suffered political instability for a few years in the sense there was no single party

which won clear majority and hence it led to the formation of coalition governments. However,

political stability has firmly returned since the general elections in 1999, with strong and healthy

coalition governments emerging. Nonetheless, political instability did not change India's bright

economic course though it delayed certain decisions relating to the economy. Economic

liberalization which mostly interested foreign investors has been accepted as essential by all

political parties including the Communist Party of India Though there are bleak chances of political

instability in the future, even if such a situation arises the economic policy of India would hardly be

affected.. Being a strong democratic nation the chances of an army coup or foreign dictatorship are

minimal. Hence, political risk in India is practically absent.

Commercial Risk

Commercial risk exists in any business ventures of a country. Not each and every product or service

is profitably accepted in the market. Hence it is advisable to study the demand / supply condition for

a particular product or service before making any major investment. In India one can avail the

facilities of a large number of market research firms in exchange for a professional fee to study the


state of demand / supply for any product. As it is, entering the consumer market involves some kind

of gamble and hence involves commercial risk

Risk Due To Terrorism

In the recent past, India has witnessed several terrorist attacks on its soil which could have a negative

impact on investor confidence. Not only business environment and return on investment, but also the

overall security conditions in a nation have an effect on FDI's. Though some of the financial experts

think otherwise. They believe the negative impact of terrorist attacks would be a short term

phenomenon. In the long run, it is the micro and macro-economic conditions of the Indian economy

that would decide the flow of Foreign investment and in this regard India would continue to be a

favorable investment destination.

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.


8. Foreign Institutional Investment

I. 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.

II. Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India which

proposes to make investment in India in securities. A Working Group for Streamlining of the

Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended streamlining of SEBI

registration procedure, and suggested that dual approval process of SEBI and RBI be changed to a

single approval process of SEBI. This recommendation was implemented in December 2003.


Currently, entities eligible to invest under the FII route are as follows:

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

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

charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or

established outside India proposing to make proprietary investments or with no single investor

holding more than 10 per cent of the shares or units of the fund.

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

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

private company, public company, pension fund, investment trust, and individuals.

FIIs registered with SEBI fall under the following categories:

a) Regular FIIs- those who are required to invest not less than 70 % of their investment in equity-

related instruments and 30 % in non-equity instruments.

b) 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset management

companies, nominee companies and incorporated/institutional portfolio managers or their

power of 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.


III. 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).

IV. 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 2009, there were 1609 FIIs

registered with SEBI


SEBI Registered FIIs in India

Year End of March

1992-93 0

1993-94 3

1994-95 156

1995-96 353

1996-97 439

1997-98 496

1998-99 450

1999-00 506

2000-01 527

2001-02 490

2002-03 502

2003-04 540

2004-05 685

2005-06 882

2006-07 996

2007-08 1279

2008-09 1609

2009-10 1805

FII trend in IndiaYear Gross

Purchases(a) (Rs. crore)

Gross Sales (b)

(Rs.crore)

Net

Investment (a-

b)

% increase in

FII inflow

1992-93 17 4 13 -

1993-94 5593 466 5127 39338.46

1994-95 7631 2835 4796 -6.45

1995-96 9694 2752 6942 44.75


9. Difference between FDI and FII

“FDI v/s FII”

Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is

an investment that a parent company makes in a foreign country. On the contrary, FII or Foreign

Institutional Investor is an investment made by an investor in the markets of a foreign nation.In FII,

the companies only need to get registered in the stock exchange to make investments. But FDI is

quite different from it as they invest in a foreign nation. The Foreign Institutional Investor is also

known as hot money as the investors have the liberty to sell it and take it back. But in Foreign Direct

Investment, this is not possible. In simple words, FII can enter the stock market easily and also

withdraw from it easily. But FDI cannot enter and exit that easily. This difference is what makes

nations to choose FDI’s more than then FIIs.

FDI is more preferred to the FII as they are considered to be the most beneficial kind of

foreign investment for the whole economy. specific enterprise. It aims to increase the enterprises

capacity or productivity or change its management control. In an FDI, the capital inflow is translated

into additional production. The FII investment flows only into the secondary market. It helps in

increasing capital availability in general rather than enhancing the capital of a specific

enterprise.The Foreign Direct Investment is considered to be more stable than Foreign Institutional

Investor. FDI not only brings in capital but also helps in good governance practices and better

management skills and even technology transfer. Though the Foreign Institutional Investor helps in

promoting good governance and improving accounting, it does not come out with any other benefits

of the FDI. While the FDI flows into the primary market, the FII flows into secondary market. While

FIIs are short-term investments, the FDI’s are long term.

1. FDI is an investment that a parent company makes in a foreign country. On the contrary,


FII is an investment made by an investor in the markets of a foreign nation.

2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and

exit easily.

3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in

general.

4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor


10. Conclusion

A large number of changes that were introduced in the country’s regulatory economic policies heralded

the liberalization era of the FDI policy regime in India and brought about a structural breakthrough in the

volume of the FDI inflows into the economy maintained a fluctuating and unsteady trend during the study

period. It might be of interest to note that more than 50% of the total FDI inflows received by India came

from Mauritius, Singapore 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 service sector had received the larger proportion followed by computer

software and hardware sector and telecommunication sector.

According to findings and results, we have concluded that FII did have significant impact on Sensex but

there is less co-relation with Banker and IT. 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 (maybe). Also FII is not the only factor affecting the stock indices. There are other

major factors that influence the bourses in the stock market.

project of fdi in india

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