INDEXSr NoChapterPage no

1.0INTRODUCTION

1.1Introduction4

1.2Objectives of the study

1.3Methods of Research

1.4Significance of study

1.5Chapter Scheme

1.6List of Tables

1.7List of Charts

1.8Limitations

CH 2FDI IN INDIA

2.1Types of FDI

CH 3IMPORTANCE OF FDI

CH 4METHODS OF FDI

4.1Entry Mode

CH 5INVESTMENT RISK IN INDIA

5.1Sovereign Risk

5.2Political Risk

5.3Commercial Risk

5.4Risk Due To Terrorism

CH 6FDI POLICY IN INDIA

6.1FDI Policy

6.2Government Approvals for Foreign Companies Doing Business in India

6.3Procedure Under Automatic route

6.4Procedure Under Government Approval

6.5Investment by way of share aquisition

6.6New investment by an existing collaboration in India

6.7General Permission of RBI under FEMA

6.8Participation by International Financial Institution

6.9FDI in small scale sector units

6.10FDI Indian Scenario

CH 7SPECIAL FACILITIES AND RULES FOR NRIS &OCBS

CH 8FDI EQUITY FLOWS BY COUNTRIES

8.1Foreign Investment Promotion Board

8.2Following various industries attracting FDI from Netherlands to India

CH 9FOREIGN INSTITUTIONAL INVESTMENT

9.1Introduction to FII

9.2Market Design in India for foreign institutional investor

9.3Prohibitions on Investment

9.4Trends of Foreign Institutional Investment in India

9.5FDI V/S FII

CH 10OBJECTIVE OF THE STUDY

CH 11RESEARCH METHODOLOGY

CH 12BIBILOGRAPHY

CHAPTER - 1.01.1 - IntroductionThese three letters stand for foreign direct investment. The simplest explanation of FDIA would be a direct investment by a corporation in a commercial venture in another country. A key to separating this action from involvement in other ventures in a foreign country is that the business enterprise operates completelyoutside the economy of the corporations home country. The investing corporation must control 10 percentor more of the voting power of the new venture.Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor's country of origin. A parent business enterprise and its foreign affiliate are the two sides of the FDI relationship. Together they comprise an MNC.

FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly.

FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor. FDIsrequire a business relationship between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations. For an investment to be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a business enterprise operating in a foreign country.

Foreign Direct Investment when a firm invests directly in production or other facilities, overwhich it has effective control, in a foreign country.

1.2 - OBJECTIVES OF THE STUDY

To study the role, significance of plastic moneyTo know the implications of plastic money

1.3 - METHODS OF RESEARCH

The data is collected only from secondary data source. Such as Newspapers, Magazines, Books, Journals, E-data, etc.

1.4 - SIGNIFICANCE OF THE STUDY

FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. The largest flows of foreign investment occur between the industrialized countries (North America, Western Europe and Japan). But flows to non-industrialized countries are increasing sharply.

Avoiding foreign government pressure for local production. Circumventing trade barriers, hidden and otherwise. Making the move from domestic export sales to a locally-based national sales office. Capability to increase total production capacity. Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc.

1.5 - CHAPTER SCHEME

This study consists of following chapter:-

CHAPTER 1:- INTRODUCTIONCHAPTER 2:- FDI IN INDIACHAPTER 3:- IMPORTANCE OF FDICHAPTER 4:- METHODS OF FDICHAPTER 5:- INVESTMENT RISKS IN INDIACHAPTER 6:- FDI POLICY IN INDIACHAPTER 7:-SPECIAL FACILITIES AND RULES FOR NRIS AND OCBSCHAPTER 8:- FDI EQUITY INFLOW BY COUNTRIESCHAPTER 9:- FOREIGN INSTITUTIONAL INVESTMENTCHAPTER 10:-OBJECTIVE OF THE STUDYCHAPTER 11:-RESEARCH METHODOLOGYCHAPTER 12:-BIBILOGRAPHY

CHAPTER - 2.0

Foreign Direct Investment 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 work force 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 green revolution and economic reforms.

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 worlds 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.

2.1 - TYPES OF FDI

FDIs can be broadly classified into two types:

Outward FDI :- An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known as 'direct investments abroad.

Inward FDIs :- Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns.

Other Categorizations of FDI :- Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC.

Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different nations.- Horizontal FDI the MNE enters a foreign country to produce the same products product at home.- Conglomerate FDI the MNE produces products not manufactured at home.- Vertical FDI the MNE produces intermediate goods either forward or backward in the supply stream.- Liability of foreignness the costs of doing business abroad resulting in a competitive

CHAPTER 3.0

Importance of FDI

The simple answer is that making a direct foreign investment allows companies to accomplish severaltasks:

- Avoiding foreign government pressure for local production.- Circumventing trade barriers, hidden and otherwise.- Making the move from domestic export sales to a locally-based national sales office.- Capability to increase total production capacity.- Opportunities for co-production, joint ventures with local partners, joint marketing Arrangements, licensing, etc;

A more complete response might address the issue of global business partnering in very generalterms. While it is nice that many business writers like the expression, think globally, act locally, thisoften used clich does not really mean very much to the average business executive in a small andmedium sized company. The phrase does have significant connotations for multinationalcorporations. But for executives in SMEs, it is still just another buzzword.

The simple explanation for this is the difference in perspective between executives of multinational corporations and small andmedium sized companies. Multinational corporations are almost always concerned with worldwidemanufacturing capacity and proximity to major markets. Small and medium sized companies tend to bemore concerned with selling their products in overseas markets. The advent of the Internet has ushered focusing on access to markets, access to expertise and most of all in a new and very different mindset that tends to focus more on access issues. SMEs in particular are now access to technology.

CHAPTER 4.04.1 - Methods of Foreign Direct InvestmentsThe foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods: By incorporating a wholly owned subsidiary or company By acquiring shares in an associated enterprise Through a merger or an acquisition of an unrelated enterprise Participating in an equity joint venture with another investor or enterprise Foreign direct investment incentives may take the following forms: Low corporate tax and income tax rates Tax holidays Other types of tax concessions Preferential tariffs Special economic zones Investment financial subsidies Soft loan or loan guarantees Free land or land subsidies Relocation & expatriation subsidies Job training & employment subsidies Infrastructure subsidies R&D support Derogation from regulations (usually for very large projects) The manner in which a firm chooses to enter a foreign market through FDI.

4.2 - Entry Mode

International franchisingBranchesContractual alliancesEquity joint venturesWholly foreign-owned subsidiaries.

CHAPTER 5.0

INVESTMENT RISKS IN INDIA

5.1 - 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 mightbright economic course though itdelayed certain decisions relating to the economy. Economic liberalization which mostly interestedforeign investors has been accepted as essential by all political parties lead to a collapse of state machinery. Sovereign risk in India is hence nil for both "foreign directinvestment" and "foreign portfolio investment." Many Industrial and Business houses have restrainedthemselves from investing in the North-Eastern part of the country due to unstable conditions. Nonethelessinvesting 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 arerestricted by law.

5.2 Political Risk

India has enjoyed successive years of elected representative government at the Union as well as federallevel. India suffered political instability for a few years in the sense there was no single party which wonclear majority and hence it led to the formation of coalition governments. However, political stability hasfirmly returned since the general elections in 1999, with strong and healthy coalition governmentsemerging. Nonetheless, political instability did not change India's including the Communist Party ofIndia Though there are bleak chances of political instability in the future, even if such a situation arisesthe economic policy of India would hardly be affected.. Being a strong democratic nation the chances ofan army coup or foreign dictatorship are minimal. Hence, political risk in India is practically absent.

5.3 - Commercial Risk

Commercial risk exists in any business ventures of a country. Not each and every product or service isprofitably accepted in the market. Hence it is advisable to study the demand / supply condition for aparticular product or service before making any major investment. In India one can avail the facilities of alarge 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 henceinvolves commercial risk.

5.4 - Risk Due To Terrorism

In the recent past, India has witnessed several terrorist attacks on its soil which could have a negativeimpact on investor confidence. Not only business environment and return on investment, but also theoverall security conditions in a nation have an effect on FDI's. Though some of the financial experts thinkotherwise. They believe the negative impact of terrorist attacks would be a short term phenomenon. In thelong run, it is the micro and macro economic conditions concerned of RBI of receipt of inwardremittances within 30 days of such receipt and will have to file the of the Indian economy that would decide the flowof Foreign investment and in this regard India would continue to be a favorable investment destination.

CHAPTER 6.O

FDI Policy in India6.1 - Foreign Direct Investment Policy

FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change in sector policy/sector 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 required documents with that officewithin 30 days after issue of shares to foreign investors.

The Foreign direct investment scheme and strategy depends on the respective FDI norms and policies inIndia. The FDI policy of India has imposed certain foreign direct investment regulations as per the FDItheory of the Government of India. These include FDI limits in India for example:

Foreign direct investment in India in infrastructure development projects excluding arms andammunitions, atomic energy sector, railways system, extraction of coal and lignite and mining industry is allowed up to 100% equity participation with the capping amount as Rs. 1500 corers.FDI figures in equity contribution in the finance sector cannot exceed more than 40% in bankingservices including credit card operations and in insurance sector only in joint ventures with localinsurance companies.FDI limit of maximum 49% in telecom industry especially in the GSM services.

6.2 - Government Approvals for Foreign Companies Doing Business in India

Government Approvals for Foreign Companies Doing Business in India or Investment Routes forInvesting in India, Entry Strategies for Foreign Investors India's foreign trade policy has beenformulated with a view to invite and encourage FDI in India. The Reserve Bank of India has prescribedthe administrative and compliance aspects of FDI. A foreign company planning to set up businessoperations in India has the following options:

Investment under automatic route; andInvestment through prior approval of Government.

6.3 - Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either bythe Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 not available, include thefollowing:

BankingNBFC's Activities in Financial Services SectorCivil AviationPetroleum Including Exploration/Refinery/MarketingHousing & Real Estate Development Sector for Investment from Persons other than NRIs/OCBs.Venture Capital Fund and Venture Capital Company.Investing Companies in Infrastructure & Service Sector.Atomic Energy & Related Projects.Defense and Strategic Industries.Agriculture (Including Plantation)Print MediaBroadcastingPostal Services

6.4 - Procedure Under Government Approval

FDI in activities not covered under the automatic route, requires prior Government approval and areconsidered by the Foreign Investment Promotion Board (FIPB). Approvals of composite proposalsinvolving foreign investment/foreign technical collaboration are also granted on the recommendations ofthe FIPB. Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% ExportOriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA),Ministry of Finance. Application for NRI and 100% EOU cases should be presented to SIA in Departmentof Industrial Policy & Promotion.

6.5 - Investment by way of Share Acquisition

A foreign investing company is entitled to acquire the shares of an Indian company without obtaining anyprior permission of the FIPB subject to prescribed parameters/ guidelines. If the acquisition of sharesdirectly or indirectly results in the acquisition of a company listed on the stock exchange, it would requirethe approval of the Security Exchange Board of India.

6.6 - New Investment By An Existing Collaborator In India

A foreign investor with an existing venture or collaboration (technical and financial) with an Indianpartner in particular field proposes to invest in another area, such type of additional investment is subjectto a prior approval from the FIPB, wherein both the parties are required to participate to demonstrate thatthe new venture does not prejudice the old one.

6.7 - General Permission of RBI Under FEMA

Indian companies having foreign investment approval through FIPB route do not require any furtherclearance from RBI for receiving inward remittance and issue of shares to the foreign investors. Thecompanies are required to notify the concerned Regional office of the RBI of receipt of inwardremittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors orNRIs.

6.8 - Participation By International Financial Institutions

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

6.9 - FDI In Small Scale Sector Units

A small-scale unit cannot have more than 24 per cent equity in its paid up capital from any industrialundertaking, either foreign or domestic.If the equity from another company (including foreign equity) exceeds 24 per cent, even if the investmentin plant and machinery in the unit does not exceed Rs 10 million, the unit loses its small-scale status andshall require an industrial license to manufacture items reserved for small-scale sector. See also FDI inSmall Scale Sector in India Further Liberalized.

6.10 - Foreign Direct Investment Indian Scenario

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.

CHAPTER - 7.0

Special Facilities and Rules for NRI's and OCB's

NRI's and OCB's are allowed the following special facilities: Direct investment in industry, trade, infrastructure etc. Up to 100% equity with full repatriation facility for capital and dividends in the following sectors:-

High Priority Industry GroupsExport Trading CompaniesHotels and Tourism-related ProjectsHospitals, Diagnostic CentersShippingDeep Sea FishingOil ExplorationPowerHousing and Real Estate DevelopmentHighways, Bridges and PortsSick Industrial UnitsIndustries Requiring Compulsory Licensing

Up to 40% Equity with full repatriation: New Issues of Existing Companies raising Capitalthrough Public Issue up to 40% of the new Capital Issue.

On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership engaged inIndustrial, Commercial or Trading Activity.

Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the equity Capital orConvertible Debentures of the Company by each NRI. Investment in Government Securities, Unitsof UTI, National Plan/Saving Certificates.

CHAPTER - 8.0

FDI Equity Inflow By Countries

FDI Inflows by Countries are as follows :-

A. MauritiusMauritius invested Rs.19,18,633 million in India Up to the January 2010, equal to 44.01 percent of total FDI inflows. 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. These are the sectors which attracting more FDI from Mauritius Electrical equipment Gypsum and cement products Telecommunications Services sector that includes both non- financial and financial Fuels.

B) Singapore

Singapore continues to be the single largest investor in India amongst the Singapore with FDI inflows into Rs. 3,80,142crore up to January 2010Sector-wise distribution of FDI inflows received from Singapore the highest inflows have been in the services sector (financial and non financial), which accounts for about 30% of FDI inflows from Singapore. Petroleum and natural gas occupies the second place followed by computer software and hardware, mining and construction.

C) UNITED STATE OF AMERICA

The United States is the third largest source of FDI in India (7.64 % of the total), valued at 732335 crore in cumulative inflows up to January 2010. According to the Indian government, the top sectors attracting FDI from the United States to India are fuel, telecommunications, electrical equipment, food processing, and services. 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.

D) UNITED KINDOM.

The United Kingdom is the fourth largest source of FDI in India (5.53 % of the total), valued at 2,40,974crore in cumulative inflows up to January 2010Over 17 UK companies under the aegis of the Nuclear Industry Association of UK have tied up with Ficci to identify joint venture and FDI possibilities in the civil nuclear energy sector. UK companies and policy makers the focus sectors for joint ventures, partnerships, and trade are nonconventional energy, IT, precision engineering, medical equipment, infrastructure equipment, and creative industries.

E) Netherlands

FDI from Netherlands to India has increased at a very fast pace over the last few years. Netherlands ranks fifth among all the countries that make investments in India. The total flow of FDI from Netherlands to India came to Rs. 1, 78,047 crores between 1991 and 2002. The total percentage of FDI from Netherlands to India stood at 4.08% out of the total foreign direct investment in the country up to August 2009.

8.1 - Foreign Investment Promotion Board

The FIPB (Foreign Investment Promotion Board) is a government body that offers a single windowclearance for proposals on foreign direct investment in the country that are not allowed access through theautomatic route. Consisting of Senior Secretaries drawn from different ministries with Secretary,Economic Affairs in the chair, this high powered body discusses and examines proposals for foreigninvestment in the country for restricted sectors ( as laid out in the Press notes and extant foreigninvestment policy) on a regular basis. Currently proposals for investment beyond 600 crore require them concurrence of the CCEA (Cabinet Committee on Economic Affairs). The threshold limit is likely to be raised to 1200 crore soon. The Board thus plays an important role in the administration andimplementation of the Governments FDI policy. In circumstances where there is ambiguity or a conflictof interpretation, the FIPB has stepped in to provide solutions. Through its fast track working it hasestablished its reputation as a body that does not unreasonably delay and is objective in its decisionmaking. It therefore has a strong record of actively encouraging the flow of FDI into the country. TheFIPB is assisted in this task by a FIPB Secretariat. The launch of e- filing facility is an important initiativeof the Secretariat to further the cause of enhanced accessibility and transparency.

8.2 - Following Various industries attracting FDI from Netherlands to India are:-

Food processing industries Telecommunications that includes services of cellular mobile, basic telephone, and radio paging Horticulture Electrical equipment that includes computer software and electronics Service sector that includes non- financial and financial services.

The sectors receiving the largest shares of total FDI inflows up to arch 2010 were the service sector and computer software and hardware sector, each accounting for 22.14 and 9.48 percent respectively. These were followed by the telecommunications, real estate, construction and automobile 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.

The ASSOCHAM has revealed that FDI in Chemicals sector (other than fertilizers) registered maximum growth of 227 per cent during April 2008 March 2009 as compared to 11.71 per cent during the last fiscal. The sector attracted USD 749 million FDI in FY 09 as compared to USD 229 million in FY 08. During the year 2009 government had raised the FDI limit in telecom sector from 49 per cent to 74 per, which has contributed to the robust growth of FDI. The telecom sector registered a growth of 103 per cent during fiscal 2008-09 as compared to previous fiscal. The sector attracted USD 2558 million FDI in FY 09 as compared to the USD 1261 million in FY 08, acquired 9.37 per cent share in total FDI inflow.India automobile sector has been able to record 70 per cent growth in foreign investment. The FDI inflow in automobile sector has increased from USD 675 million to 1,152 million in FY 09 over FY 08. The other sectors which registered growth in highest FDI inflow during April March 2009 were housing & real estate (28.55 per cent), computer software & hardware (18.94 per cent), construction activities including road & highways (16.35 per cent) and power (1.86 per cent).

CHAPTER - 9.0

Foreign Institutional Investment

9.1- Introduction To FII

Since 1990-91, the Government of India embarked on liberalization and economic reforms with a view ofbringing about rapid and substantial economic growth and move towards globalization of the economy. Asa part of the reforms process, the Government under its New Industrial Policy revamped its foreigninvestment policy recognizing the growing importance of foreign direct investment as an instrument oftechnology transfer, augmentation of foreign exchange reserves and globalization of the Indian economy.Simultaneously, the Government, for the first time, permitted portfolio investments from abroad byforeign institutional investors in the Indian capital market. The entry of FIIs seems to be a follow up of therecommendation of the Narsimhan Committee Report on Financial System. While recommending theirentry, the Committee, however did not elaborate on the objectives of the suggested policy. The committeeonly 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 securitiestraded on the primary and secondary markets, including shares, debentures and warrants issued bycompanies which were listed or were to be listed on the Stock Exchanges in India. While presenting theBudget for 1992-93, the then Finance Minister Dr. Manmohan Singh had announced a proposal to allowreputed foreign investors, such as Pension Funds etc., to invest in Indian capital market.

9.2 Market design in India for foreign institutional investorsForeign Institutional Investors means an institution established or incorporated outside India whichproposes to make investment in India in securities. A Working Group for Streamlining of the Proceduresrelating to FIIs, constituted in April, 2003, inter alia, recommended streamlining of SEBI registrationprocedure, and suggested that dual approval process of SEBI and RBI be changed to a single approvalprocess of SEBI. This recommendation was implemented in December 2003.Currently, entities eligible to invest under the FII route are as follows :- As FII: Overseas pension funds, mutual funds, investment trust, asset management company,nominee company, bank, institutional portfolio manager, university funds, endowments,foundations, charitable trusts, charitable societies, a trustee or power of attorney holderincorporated or established outside India proposing to make proprietary investments or with nosingle investor holding more than 10 per cent of the shares or units of the fund.

As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FIIinvests. The following entities are eligible to be registered as sub-accounts, viz. partnershipfirms, private company, public company, pension fund, investment trust, and individuals.

FIIs registered with SEBI fall under the following categories:-

Regular FIIs- those who are required to invest not less than 70 % of their investment in equity-relatedinstruments and 30 % in non-equity instruments.

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

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset managementcompanies, nominee companies and incorporated/institutional portfolio managers or their power ofattorney holders (providing discretionary and non-discretionary portfolio management services) to beregistered as FIIs. While the guidelines did not have a specific provision regarding clients, in theapplication 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 ofsuch clients. Asset management companies/portfolio managers are basically in the business of managingfunds and investing them on behalf of their funds/clients. Hence, the intention of the guidelines was toallow these categories of investors to invest funds in India on behalf of their 'clients'. These 'clients' latercame 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 underthe Portfolio Investment Scheme.

9.3 - Prohibitions on Investments:-FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also notallowed to invest in any company which is engaged or proposes to engage in the following activities:

- Business of chit fund- Nidhi Company- Agricultural or plantation activities- 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).Trading in Transferable Development Rights (TDRs).

9.4 - Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository Receipts (ADRs)/ GlobalDepository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds. Before1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertakeportfolio investments in India. Thereafter, the Indian stock markets were opened up for direct participationby FIIs. They were allowed to invest in all the securities traded on the primary and the secondary marketincluding 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 forFIIs over the years. As of March 2009, there were 1609 FIIs registered with SEBI.

9.5 - FDI v/s FII

Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is aninvestment that a parent company makes in a foreign country. On the contrary, FII or Foreign InstitutionalInvestor is an investment made by an investor in the markets of a foreign nation.In FII, the companiesonly need to get registered in the stock exchange to make investments. But FDI is quite different from it asthey invest in a foreign nation. The Foreign Institutional Investor is also known as hot money as theinvestors 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 cannotenter and exit that easily. This difference is what makes nations to choose FDIs more than then FIIs.

FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreigninvestment for the whole economy. specific enterprise. It aims to increase the enterprises capacity orproductivity or change its management control. In an FDI, the capital inflow is translated into additionalproduction. The FII investment flows only into the secondary market. It helps in increasing capitalavailability in general rather than enhancing the capital of a specific enterprise. The Foreign DirectInvestment is considered to be more stable than Foreign Institutional Investor. FDI not only brings incapital but also helps in good governance practices and better management skills and even technologytransfer. Though the Foreign Institutional Investor helps in promoting good governance and improvingaccounting, it does not come out with any other benefits of the FDI. While the FDI flows into the primarymarket, the FII flows into secondary market.

While FIIs are short-term investments, the FDIs are longterm.-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.-FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exiteasily.-Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general.-The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor.

CHAPTER - 10.0

Objective Of The Study

Objective of the study :-

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 which country s safe to invest. 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.

CHAPTER - 11.0

Research Methodology

Research methodologyIn order to accomplish this project successfully we will take following steps.

Data collection :-Internet, Books , newspapers, journals and books, other reports and projects, literatures

FDI :-

The study is limited to a sample of investing countries e.g. Mauritius, Singapore, USA etc. and sectorse.g. service sector, computer hardware and software, telecommunications etc. which had attracted largerinflow of FDI from different countries.

FII:Correlation :- We have used the Correlation tool to determine whether two ranges of data movetogether that is, how the Sensex, Bank, IT, Power and Capital Goods are related to the FIIwhich may be positive relation, negative relation or no relation.We will use this model for understanding the relationship between FII and stock indices returns.FII is taken as independent variable. Stock indices are taken as dependent variable

Hypothesis Test :-

If the hypothesis holds good then we can infer that FIIs have significant impacton the Indian capital market. This will help the investors to decide on their investments in stocksand 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.

CHAPTER - 12.0

BIBILOGRAPHY

A) Reference Books:- AUTHOR'S NAME :-Dana VachanTITLE OF BOOK :-Foreign InvestmentsPUBLICATION :- 3rd Edition, 2010

B) JOURNALSE-DATA

http://www.answers.com/topic/foreign-direct-investment#History http://www.unctad.org/sections/dite_iiab/docs/diteiiab20041_en.pdf http://www.economywatch.com/foreign-direct-investment/ http://www.legalserviceindia.com/articles/fdi_india.htm www.coca-colacompany

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