TERM PAPER-BUSINESS ENVIRONMENT

TOPIC:FOREIGN INSTITUTION INVESTMENT

SUBMITTED TO- SUBMITTED BY

MR.HITESH JHANJI RAHUL TARGOTRA

ROLL NO:RT1002A17

REGD. NO: 11000047

ACKNOWLEDGEMENT

I would like to express our gratitude to Mr. Hitesh

Jhanji for encouraging us to prepare the term
paper .The term paper would not have been
completed without his able guidance and ideas. It
was our opportunity to work with such a literate.

Thank You

Sir!
 contents

1. INTRODUCTION

2. COMPLETE ANALYSIS

3. COMPLETE REPORT

4. SUGGESTIONS

5. CONCLUSION
 6. BIBLIOGRAPHY

PREFACE
1. OBJECTIVES:
� The basic objective is to know the Foreign Institutional Investments in detail.

�To put forth the role played by Foreign Institutional Investments in sensex.

�To know the guidelines for investment by Foreign Institutional Investments

2. METHODOLOGY:
�Secondary data sources and literature review.

�Various books and articles from magazines and newspapers have been referred.

3. LIMITATIONS:
�The project limits itself into the India regarding the Foreign Institutional
Investments.

�The legal aspects regarding Foreign Institutional Investments are reported in the
project considering India.

EXECUTIVE SUMMARY
Foreign Investment refers to investments made by residents of a country in financial
Assets and production process of another country. It can affect the factor productivity of the
recipient country and can also affect the balance of payments. In developing countries there
was a great need of foreign capital, not only to increase their productivity of labor but also
helps to build the foreign exchange reserves to meet the trade deficit.
It can come in two forms: Foreign Direct Investment (FDI) and Foreign Portfolio Investment
(FPI).Foreign direct investment involves in the direct production activity and also of medium
to long-term nature. But the foreign portfolio investment is a short-term investment mostly in
the financial markets and it consists of Foreign Institutional Investment (FII).
India, being a capital scarce country, has taken lot of measures to attract foreign investment
since the beginning of reforms in 1991. Till the end of January 2003 it could attract a total
foreign investment of around US$ 48 billion out of which US$ 23 billion is in the form of FPI.
FII consists of around US$ 12 billion in the total foreign investments. This shows the
importance of FII in the overall foreign investment programme.
As India is in the process of liberalizing the capital account, it would have significant
impact on the foreign investments and particularly on the FII, as this would affect short-term
stability in the financial markets. Hence, there is a need to determine the push and pull factors
behind any change in the FII, so that we can frame our policies to influence the variables which
drive-in foreign investment. Also FII has been subject of intense discussion, as it is held
responsible for intensifying currency crisis in 1990’s elsewhere.
India opened its stock markets to foreign investors in September 1992 and has, since 1993,
received considerable amount of portfolio investment from foreigners in the form of Foreign
Institutional Investments (FII) in equities. In order to trade in Indian equity markets, foreign
corporations need to register with the SEBI as Foreign Institutional Investors (FII).
“SEBI’s definition of FIIs presently includes foreign pension funds, mutual funds,
charitable/endowment/university funds etc. as well as asset management companies and other
money managers operating on their behalf.”
The FIIs registered with SEBI come from as many as 28 countries (including money
management companies operating in India on behalf of foreign investors). It is, however,
instructive to bear in mind that these national affiliations do not necessarily mean that the
actual investor funds come from these particular countries. Given the significant financial
flows among the industrial countries, national affiliations are very rough indicators of the
‘home’ of the FII investments. In particular institutions operating from Luxembourg, Cayman
Islands or Channel Islands or even those based at Singapore or Hong Kong are likely to be
investing funds largely on behalf of residents in other countries. Nevertheless, the regional
breakdown of the FIIs does provide an idea of the relative importance of different regions of
the world in the FII flows.

Introduction

We have heard people saying that the world is going global and India is also moving towards
prosperity but what does it actual means and who are the persons behind this scenario, which
should be known. Among them the persons who are responsible or we can say who have
contributed towards this scenario are the Foreign Institutional Investors.
The world is increasingly becoming interdependent. Today the needs of the customer have
increased and they want goods from all over the world. We can see variety of products
moving across the world and the world trade increased by 120%.
The developing countries are looking forward to steady flow of capital and are undergoing
the learning process of how to absorb them. As regard the attendant risks, the central bank of
the countries have to tackle them. There are many ways the inflow can come into the country.
Debt is a form of capital forms which are raised from banks or from the markets. The non-debt
creating flows includes Foreign Direct Investment or Portfolio Investments. Foreign
investment has clearly been a major factor in stimulating economic growth and development
in recent times.

Foreign investment in India is of two types: investment by foreign institutional investors (FII)
and foreign direct investment (FDI). Foreign investment can be in the form of investment in
secondary financial markets or as direct investment in companies (FDI). Foreign investment is
a major source of capital for many industries. In developing countries, not enough capital is
readily available for expansion or setting up new projects. Foreign investment in the form of
portfolio investment adds depth and liquidity to secondary markets .Further in developing
economies there is a great demand for foreign exchange within the economy exceeds the
supply. Inflows of foreign capital bridge the gap. In fact in India the reserves will now be used
for infrastructural development .In India, there seems to be a very strong correlation between
the unprecedented Bull Run that started in May 2003 when the BSE Sensex was at 3000 and
the surge in inflow of foreign capital through foreign institutional investors. We find that FII
investment in India had shown some upswings and downswings from around 1993-94 till
about 2002- 2003, but thereafter there has been an upsurge in FII investment with it averaging
around $9599 million a year during 2003-05. This figure is around 5 times the average annual
inflows witnessed from 1993-94 to 1997-98 and from 1999 to 2002 and more than 20 times the
average annual inflows during 1997-99 and 2002-03. Also while cumulative net FII inflows
into India from early 1990s to end of March 2003 amounted to $15,804 million, in the period
thereafter till about December 2005, the addition to this value was of $25,267 million. At the
same time we see that the Sensex which had fallen to about 3000 crossed 4000 and 5000
respectively by August and November 2003. It broke through the 6000 level by January 2004
before crossing the 7000 mark in June 2005. After that the rise of the sensex quickened further
over the year. It crossed 8000 in September and 9000 in November of 2005. And from then on
it has been quickening the pace of its rise crossing 10,000 in February 2006 and 15,000 in July
2007. One cannot expect the FIIs to take an active interest in the developmental concerns of
the emerging economies. If there is any benefit that accrues to the emerging economies it will
only be incidental. The main driving force behind the actions of these institutional investors is
profit. FIIs tend to invest selectively in companies that achieve good results or show potential
for future profitability. The share prices of such companies have risen substantially. This then
can have a compounding effect on the size and nature of the firm in that the firm can now
acquire other firms and hence grow even more. What might ensue is also a healthy competition
among firms vying for foreign investment or foreign ownership in terms of shareholders. In
order to attract foreign investment these firms could possibly employ greater transparency and
improve corporate governance. In terms of the macroeconomic impact of FII investments in
India we also need to consider the effect of the enormous inflows of foreign exchange that
occur as a result of these capital inflows. This inflow of foreign exchange exerts an upward
pressure on the Rupee. The appreciation of the Rupee would mean that imports into India
become cheaper and exports become more expensive. As imports become cheaper and exports
become more expensive, importers stand to gain from cheaper imports and on the whole those
industries that use imported raw materials will face lower costs. This in turn will lead to lower
prices and have a welcome deflationary effect. The appreciation of the Rupee also
simultaneously makes Indian exports less competitive in the global economy, thus forcing
organizations to be more productive and focus on quality. Foreign institutional investors have
played significant roles in other emerging economies too.

MINDSET OF INDIANS IN GENERALS:

India and the Indians have undergone a paradigm shift. There have been fundamental and
irreversible changes in the economy, government policies, outlook of business and industry,
and in the mindset of the Indians in general. From a shortage economy of food and Foreign
Exchange, India has now become a surplus one.
From an agro based economy it has emerged as a service oriented one. From the low-
growth of the past, the economy has become a high growth one in the long term. After having
been an aid recipient, India is now joining the aid givers club.
Although India was late in modernization of industry in general in the past, it is now a
front-runner in the emerging knowledge based new economy.
The government is continuing its reform and liberalization not out of compulsion but out of
conviction. Indian companies are no longer afraid of multinational corporations.
They have become globally competitive and some of they have started becoming am
MNCS themselves. Fatalism and contentment of the Indian mind set have given way to
optimism and ambition. The Indian culture which looks down upon wealth as a sin and
believed in the simple living and high thinking has started recognizing prosperity and success
as acceptable and necessary goals.
So today we are having new variety of products entering the market everyday. You order
it and you have it in few days/weeks from small things to the cars like Rolls Royce or Ferrari.

ANALYSIS OF FOREIGN INSTITUTION INVESTMENT IN INDIA

Swot Analysis
Strengths:
1 Provides most important resource i.e. finance:
To start any business and to make the idea to be actually implemented it needs finance. The
FIIs brings the inflow of money into the country. Many projects that require funding is done
with the help of FIIs. Today in this world, the Finance is the only resource, which has the
capability to be easily transferred from one place to another, and hence providing as a base for
business opportunities .Free flow of capital is conducive to both the total world welfare and to
the welfare of each individual.

2 Contributes to the economic growth of the country:

When FIIs enters the domestic country they bring in the money and acts as the facilitator of the
business development. As money comes into the country, it provides various benefits to the
leading sectors and ultimately results into the development of various sectors. For e.g. in India
I.T sector is the most booming sector and has shown the signs of improvement thus attracting
the FIIs.

3 Balances the balance of payments:

In the initial phase of economic development, the under developing countries need much larger
imports. As a result, the balance of payment position generally turns adverse. This creates gap
between earnings and foreign exchange. The foreign capital presents short run solution to the
problem. So in order to balance the Balance of Payment Foreign Investment is needed.

4 Provides more returns than in domestic countries:

FIIs provide more returns to the investors as compared to the domestic country. This is one of
the most important strength of FIIs. The main reason is that the countries in which th Foreign
Institutional Investors invest their money, provides more opportunities and many benefits. So
investors invest in foreign countries rather than in the domestic countries.

5 Develops relationship between two countries:

Due to FIIs the investors from different countries come into picture and various people also
come into the contact with each other. This develops a sense of relationship between different
people and develops a nice intra-cultural atmosphere.
Weaknesses

1 Focuses more on developing countries:

The main weakness of foreign institutional investments is that they provide opportunities to
only the developing and developed countries. The Foreign institutional investors focuses on the
developing countries rather than on the underdeveloped countries and because of this the under
developed countries remain underdeveloped. So this drawback of the FIIs should be improved
upon by making their investments in the under developed countries.

2 Hampering the progress due to anytime withdrawal:

The FIIs do not provide any guarantee i.e. the Foreign institutional investors can anytime
withdraw their money when they want to so this makes the nature of the FIIs unpredictable and
ultimately hampering the progress of the economy of that country. The very good example of
this is the mass withdrawal of the FIIs in the far eastern countries like Malaysia, Indonesia etc
in 1996-97.

3 Provides only the short term opportunities:

FIIs provide only the short term opportunities i.e. they do not provide the long term
opportunities as they are very much supple in nature and thereby limiting its scope to short
term opportunities. As far as the market seems to be good the FIIs are attracted and after that
they are not predictable. So FIIs are bound to provide only the short term opportunities.
Opportunities:

1 Better infrastructure:
Better infrastructure is available only when there is adequate finance available and this comes
with the help of FIIs. Infrastructure covers many dimensions, ranging from roads, ports,
railways and telecommunication systems to institutional development (e.g. accounting, legal
services, etc.) studies in china reveal the extent of transport facilities and the proximity to
major ports as having a positive significant effect on the location of FII within the country.
Poor infrastructure can be developed with the help of the foreign investment. Foreign investors
also point potential for attracting significant FII if host country government permits more
substantial foreign participation in the infrastructure sector.

2 Exploitation of resources to the maximum:

The major resources i.e. manpower, material and machines can be utilized to its fullest so as to
get the maximum benefit out of it. Through FIIs, the reserves or the resources that are untapped
because of the lack of funds can be exploited. Potential areas for exploration ventures include
gold, diamonds, copper, lead zinc, cobalt silver, tin etc. There is also scope for setting up
manufacturing units for value added products.

3 Better technologies available:

Technology is the main aspect on which the growth of the country is determined. Developing
countries has a very low level of technology. Their technology is not up to the standards and
they lack in modern technology. Developing countries possess a strong urge for
industrialization to develop their economies and to wriggle out of the low-level equilibrium
trap in which they are caught. This raises the necessity for importing technologies from
advanced countries. Such technology usually comes with foreign capital.
Threats:

1 Anytime withdrawal of investments:

The FIIs are more flexible in nature i.e. unlike FDI they are not guaranteed. Foreign
Institutional Investors can withdraw at any time they want. Foreign Direct Investment is for a
fixed period and the investments could not be withdrawn until a specified period. The recent
example was the net outflows of the money from the stock market that affected the whole
economy and its consequences are very much appalling resulting into posing threats to the
economy.

2 Investments made in Foreign Companies poses threat to Indian companies:

Many MNCs have their set up in India and these MNCs provide a stiff competition to the
domestic industries. The Foreign Institutional Investors invest their money in these MNCs and
they are equipped with the latest technology to provide products at cheaper rates. Moreover,
the Indian labourers are opposing the use of modern technology as the company downsizes the
number of workers that substitutes the modern technology.

3 Increased returns results in outflow of money:

Increased returns can pose a threat to the domestic country as the money flows out of the
country and this may affect the economy of the domestic country. The returns that the Foreign
Institutional Investors are getting are very much high and this returns they take to their home
country and this leads to the outflow of money from domestic country to the foreign.
REPORT ON FINANCIAL INSTITUTION INVESTMENT IN INDIA

NEED FOR FII IN DEVELOPING COUNTRIES

1. Infrastructure Renewal

To keep the Indian economy growing the infrastructure sector like power, transport, mining &
metallurgy, textiles, housing, retail, social welfare, medical etc. has to be upgraded. After the
Enron fiasco, it is difficult to persuade anybody in the west to take interest in any of these
sectors. Hence India is left to its own devices to raise money and build this sector. Borrowing
abroad supplemented with Indian resources is the only way open to India. This upgrade is
needed prior or in step with the industrial and service exports sector growth. It has to be placed
on a higher priority. Only recently a suggestion to use a small portion of India’s foreign
reserves met with howl of protests. The protestors in the Indian Parliament did not understand
the proposal. Hence the government is stuck to steam roller its proposal through the legislative
process or succumb to political pressure and do nothing. The latter is not acceptable.

If India finds its own $4 Billion a year for infrastructure then foreign investors will kick in
another similar portion. The resulting money will very quickly rebuild the now cumbersome
infrastructure.

2. Bridge the technological gap

Developing countries has a very low level of technology. Their technology is not up to the
standards and they lack in modern technology. Developing countries possess a strong urge for
industrialization to develop their economies and to wriggle out of the low-level equilibrium
trap in which they are caught. This raises the necessity for importing technologies from
advanced countries. Such technology usually comes with foreign capital.

3. Optimum utilization of resources

A number of developing countries possess huge mineral resources which are4 untapped and
unexploited. Due to lack of technology these countries are not able to use their resources to the
fullest. As a result they have to depend on the foreign investment with the
help of which technology of the country and that will ultimately lead to the optimum utilization
of the resources. India has very huge reserves of mineral resources and to optimize their use or
rather for extracting them efficiently and effectively modern technology is required which is
possible through foreign investment.

4. Balancing the balance of payment position

In the initial phase of economic development, the under developing countries need much larger
imports. As a result the balance of payment position generally turns adverse. This creates gap
between earnings and foreign exchange. The foreign capital presents short run solution to the
problem. So in order to balance the Balance Of Payment Foreign Investment is needed.

5. Develop the Diverse Market

The Indian market is widely diverse. The country has 17 official languages, 6 major religions,
and ethnic diversity as wide as all of Europe. Thus, tastes and preferences differ greatly among
sections of consumers. Therefore, it is advisable to develop a good understanding of the Indian
market and overall economy before taking the plunge. Research firms in India can provide the
information to determine how, when and where to enter the market. There are also companies
which can guide the foreign firm through the entry process from beginning to end --performing
the requisite research, assisting with configuration of the project, helping develop Indian
partners and financing, finding the land or ready premises, and pushing through the paperwork
required.
Who can be registered as an FII?
The applicant should be any of the following categories:
1. Pension funds
2. Mutual funds
3. Investment trust
4. Insurance or reinsurance companies
5. Endowment funds
6. University funds
7. Foundations or charitable trusts or charitable societies who propose to invest on their
own behalf and
a) Asset management companies
b) Nominee companies
c) Institutional portfolio managers
d) Trustees
e) Power of attorney holders
f) Bank
Entry options for Foreign Investors
A foreign company planning to set up business operations in India has the following options.

1. Incorporated entity:
A) By incorporating a company under the companies Act, 1956 through
� Joint venture; or
� Wholly owned subsidiaries.

Foreign equity into such Indian companies can be up to 100% depending on the requirements
of the investor, subject to the equity caps in respect of the area of activity under the foreign
direct investment policy.
Unincorporated entity
A) As a foreign company through
� Liaison office/ representative office.
� Project office
� Branch office

Such offices can undertake activities permitted under the Foreign Exchange Management
(establishment in India of branch or office of other place of business) Regulations, 2000.

2. Incorporation of company:
For registration and incorporation, an application has to be filed with the registrar of
companies (ROC). Once a company has been duly registered and incorporated as an Indian
company, it is subject to Indian laws and regulations as applicable to other domestic Indian
companies.
3. Liaison office/ representative office:
The role of liaison office is limited to collecting information about possible market
opportunities and providing information about the company and its products to prospective
Indian customers. It can promote export/ import from/ to India and also facilitate technical/
financial collaboration between parent companies and company in India. Liaison office cannot
take any commercial activity directly and indirectly and cannot, therefore, earn any income in
India. Approval for establishing a liaison office in India is granted by Reserve Bank of India.

4. Project office:
Foreign companies planning to execute specific projects in India can set up temporary project/
site offices in India. RBI has now granted general permission to foreign entities to establish
project offices subject to specified conditions. Such offices cannot undertake or carry on any
activity other than the activity relating and incidental to execution of the project. Project
offices may remit outside India the surplus of the project on its completion, general permission
for which has been granted by the RBI.

5. Branch office:
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set
up branch offices in India for the following purposes:
1. Export/ import of goods.
2. Rendering professional or consultancy services.
3. Carrying out research work, in which the parent company is engaged.
4. Promoting technical or financial collaborations between Indian companies and parentor
overseas group company.
5. Representing the parent company in India and acting as buying/ selling agents in India.
6. Rendering services in information technology and development of software in India.
7. Rendering technical support to products supplied by the parent/ group companies.
8. Foreign airline/ shipping company
A branch office is not allowed to carry out manufacturing activities on its own but is permitted
to subcontract these to an Indian manufacturer.
Branch offices established with approval of RBI, may remit outside, profit of the branch, net of
applicable Indian taxes and subject to RBI guidelines. Permission for setting up of branch
officers is granted by the Reserve Bank of India (RBI).

6. Branch office on “stand alone basis” in SEZ:

Such branch offices would be isolated and restricted to the special economic zone (SEZ)
Alone and no business activity/ transaction will be allowed outside the SEZs in India, which
include branches/ subsidiaries of its parent offices in India.
No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs to
undertake manufacturing and service activities subject to specified conditions.

7. Investment in a firm or a propriety concern by NRIs:

A non-resident Indian or a person of India origin resident outside India may invest by way of
contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis
provided:-
 I) Amount is invested by inward remittance or out of NRE / FCNR / NRO account
maintained with AD.
II) The firm or propriety concern is not engaged in ant agricultural/ plantation or real
estate business i.e. dealing in land and immovable property with a view to earning profit or
earning income there from.
III)Amount invested shall not be eligible for repatriation outside India NRIs/ PIO may
invest in sole proprietorship concerns/ partnership firms with repatriation benefits with the
approval of government/ RBI.

8. Investment in a firm or a proprietary concern other than NRIs:

No person resident outside India other than NRIs/ PIO shall make any investment by way of
contribution to the capital of a firm or a proprietorship concern or any associations of persons
in India. The RBI may, on an application made on it, permit a person resident outside India to
make such investment subject to such terms and conditions as may be considered necessary.

Reasons to invest in India

Some of the major reasons to invest in India:
1. It is one of the largest economies in the world, fourth largest economies in terms of purchasing
power parity.
2. Strategic location- access to the vast domestic and south Asian market.
3. Large and rapidly growing consumer markets up to 300 million people constitute the market for
branded consumer goods- estimated to be growing at 8% per annum.
4. Demand for several consumer products is growing at over 12% p.a.
5. Skilled manpower and professional managers are available at competitive cost
6. One of the largest manufacturing sectors in the world, spanning almost all areas of
manufacturing activities.
7. One of the largest pools of scientists, engineers, technicians and managers in the world.
8. Rich base of mineral and agricultural resources.
9. Developed banking system- commercial banking network is over 63000 branches supported by
a number of national and state level financial institutions.
10. Well developed R&D infrastructure and technical and marketing services.
11. Well balanced package of fiscal incentives.
12. English is widely spoken and understood.
13. Foreign brand names are freely used.
14. No income tax on profits derived from export of goods.
15. Complete exemption from customs duty on industrial inputs and corporate tax

Holiday for five years for 100% export oriented units and Export Processing
Zones.
A corporation must also decide where in India to set up. India has 28 unique states, each with their
own problems and benefits.
The most popular hubs for investment in India are Mumbai, Maharashtra, Bangalore, Karnataka
and New Delhi. Thus benefits make India a competitor for foreign investment.

Facilitation of foreign investment in India

1. Foreign investment can be done in the Automatic Route up to 100 per cent without need for
any approvals. The investor has to keep the Reserve Bank of India informed.

2. The sectors not open to foreign investments are retail trade, housing and real estate,
agriculture and lottery and gambling.

3. There are maximum limits on foreign investment. Some of these are being increased.

4. Prior approval of the government is needed for those cases, which need industrial license
and those involving investment beyond the maximum limits. Such cases are cleared by the
Foreign Investment Promotion Board in a transparent, efficient, time-bound and predictable
manner.

5. The Department of Industrial Policy and Promotion is the nodal agency for information and
assistance to foreign investors. It also gives information on projects available for foreign
investors and contains online applications for clearances
 Benefits of FII:

Host countries derive several benefits from FII:

1. Additional equity capital from whose profits yield tax revenues.

2. Transfer of patent technologies.

3. Access to scarce managerial skills.

4. Creation of new jobs.

5. Access to overseas market networks and marketing expertise.

6. Reduce flight of domestic capital abroad.

7. Long commitment to successful completion of FII projects.

8. A catalyst for associated lending, for specific projects, thus increasing the
availability of external funding.

9. Free flow of capital is conducive to both the total world welfare and to the
welfare of each individual.

10. Since returns on foreign investments are linked to the profits earned by the firm,
it is more flexible as compared to the foreign loans which are guided by rigid
interest and amortization requirements.
 11. Being subject to business calculation of private profit, it is likely to be employed
more productively as compared to public financial aid.

Potential for investment in India

1. Expansion of various transport facilities:

a) Roads:

The Government is focusing on expansion and modernization of roads and has opened this up
for private sector participation. 48 new road projects worth US$ 12 billion are under
construction. Development and up gradation of roads will require an investment of US$ 24
billion till 2008. Private sector participation in road projects will grow significantly.

b) Railways:

The railway sector will need an investment of US$ 22 billion for new coaches, tracks, and
communications and safety equipment over the next ten years.

c) Airways:

Up gradation and modernization of airports will require US$ 33 billion investment in the next
ten years.

d) Waterways:

There is potential for investment in the expansion and modernization of ports. The government
has taken up a US$22 billion 'Sagarmala' project to develop the Port and Shipping sector under
Public-Private Partnership. 100 percent FDI is permitted for construction and maintenance of
ports. The government is offering incentives to investors.

2. Better power facilities:

The Ministry of Power has formulated a blueprint to provide reliable, affordable and quality
power to all users by 2012. This calls for investment of US$ 73 billion in the next five years.
The gap between demand and production of power is around 10000 MW. Opportunities are
there for investment in power generation and distribution and development of non-
conventional energy sources.
3. Urban projects need investments:

There is potential for investment in urban infrastructure projects. Water supply and sanitation
projects alone offer scope for annual investment of US$ 5.71 billion. The entire gamut of
exploration, production, refining, distribution and retail marketing present opportunities for
FDI.

4. Exploration of mineral reserves:

India has an estimated 85 billion tones of mineral reserves remaining to be exploited. Potential
areas for exploration ventures include gold, diamonds, copper, lead zinc, cobalt silver, tin etc.
There is also scope for setting up manufacturing units for value added products.

5. Develop Telecom IT sector:

The telecom market, which is one of the world's largest and fastest growing, has an investment
potential of US$ 20-25 billion over the next five years. The telecom market turnover is
expected to increase from US$ 8.6 billion in 2003 to US$ 13 billion by 2007. Mobile telephony
has started growing at the rate of 10-12 million subscribers per year. The IT industry and IT-
enabled services, which are rapidly growing offer opportunities for FDI.

6. Service sector opportunities:

India has emerged as an important venue for the services sector including financial accounting,
call centers, and business process outsourcing. There is considerable potential for growth in
these areas.

7. For R & D and healthcare sector development:

Biotechnology and Bioinformatics, which are in the government's priority list for development,
offer scope for FDI. There are over 50 R&D labs in the public sector to support growth in these
areas. The Healthcare industry is expected to increase in size from its current US$ 17.2 billion
to US$ 40 billion by 2012.

8. Positive future of automobile industry:

The Indian auto industry with a turnover US $ 12 billion and the auto parts industry with a
turnover of 3 billion dollars offer scope for FDI. The government is encouraging the
establishment of world-class integrated textile complexes and processing units. FDI is
welcome.
9. Agricultural sector:

While India has abundant supply of food, the food processing industry is relatively nascent and
offers opportunities for FDI. Only 2 percent of fruits and vegetables and 15 percent of milk are
processed at present. There is a rapidly increasing demand for processed food caused by rising
urbanization and income levels. To meet this demand, the investment required is about US$28
billion. Food processing has been declared as a priority sector.

10. Promotion of exports:

The Government has recently established Special Economic Zones with the purpose of
promoting exports and attracting FDI. These SEZs do not have duty on imports of input and
they enjoy simplified fiscal and foreign exchange procedures and allow 100% FDI.

11. Development of Tourism industry:

The travel and tourism industry which has grown to a size of US$ 32 billion offers scope for
investment in budget hotels and tourism infrastructure.

Major Road blocks in foreign investment

The major obstacle is fortunately a non economic one. Rampant corruption is also said to
prevail is, of course, is most common in developing economies, which are on path of reforms.

1. Lack of political stability

It’s not the case that every government may allow the FII to enter into their country. Different
government follows different policy framework for FII. One government may follow liberal
approach while other may follow the conservative approach. India has emerged as the second
most option for FII destination in Asia after china. Incidentally successive government wasted
considerable time identifying the desirable sectors where the FII could be encouraged and
those where it must be discouraged.

2. Lack of economic stability

FII are the foreign investments and they are always done if the economy of the country
supports them. The economy always follows business cycle. Economic prosperity is followed
by recession. This is inevitable. During the time when the economy is facing a recession or
depression, FII is hard to come because the foreign players do not feel safe to invest. Apart
from this there are also many factors that affect the economy adversely and thereby discourage
FII.

3. Poor infrastructure
Infrastructure plays a very important role in affecting the decision of the Foreign Institutional
Investors whether to invest in a particular country or not. If the infrastructure of the country is
poor the Foreign Institutional Investors may not invest in that country as it would affect their
returns and at the same time they would invest where the infrastructure is good and returns are
good. So initiative should be taken by the government to improve the infrastructure.

4. Corruption cum lack of transparency

Corruption deters several efficient players from investing as they think that the clearance of
their proposal is not performance or reputation but under the table dealings. As pointed out by
a recent FICCI study only about 29% of the FDI amount approved between August 1991 and
January 1999 actually came in. This clearly shows lack of transparency and bureaucracy.
The fundamental problem is the government instability to formulate a clear and consistent
regulatory framework for FII.
FIIs AS PORTFOLIO INVESTMENTS
Introduction
Portfolio investment flows from industrial countries have become increasingly important for
developing countries in recent years. The Indian situation has been no different. In the year
2000-01 portfolio investments in India accounted for over 37% of total foreign investment in
the country and 47% of the current account deficit. The corresponding figures in the previous
year were 59% and 64% respectively. A significant part of these portfolio flows to India comes
in the form of Foreign Institutional Investors’ (FIIs’) investments, mostly in equities. Ever
since the opening of the Indian equity markets to foreigners, FII investments have steadily
grown from about Rs. 2600 crores in 1993 to over Rs.11, 000 crores in the first half of 2001
alone. Their share in total portfolio flows to India grew from 47% in 1993-94 to over 70% in
1999-2001.
While it is generally held that portfolio flows benefit the economies of recipient
countries, policy-makers worldwide have been more than a little uneasy about such
investments. Portfolio flows – often referred to as “hot money” – are notoriously volatile
compared to other forms of capital flows. Investors are known to pull back portfolio
investments at the slightest hint of trouble in the host country often leading to disastrous
consequences to its economy. They have been blamed for exacerbating small economic
problems in a country by making large and concerted withdrawals at the first sign of economic
weakness. They have also been held responsible for spreading financial crises – causing
‘contagion’ in international financial markets.
Recommendations

Foreign investment is a valuable non-debt creating, external resource supplement inadequate

savings and has a major role in transforming technology, improving managerial skills and
facilitating market development. In our economic system, capital is the fuel that generates
profits.
India must extend a hospitable environment for foreign investors by providing essential
guarantees for investors for
1) Enter and exit.
2) Operate on equal terms alongside local operators.
3) Repatriate their investments when needed

India has a pool of human resource and this can attract the Foreign Institutional Investors to
invest their money into our country there by increasing the output with the help of tapping the
human resource.
The ready availability of the required infrastructure in the form of serviceable roads, ports,
telecommunications, airports and water and power facilities is a pre-requisite for attracting
large volume of foreign investments.
Continued export and careful management of India’s imports will also be crucial in
maintaining India’s ability to maintain and continue to build international equity and debt
Institutional Investors confidence.
An environment should be created in India whereby investors would be confident in remitting
funds into India, instead of just obtaining approval and waiting for the time to invest.
Though Foreign Investments poses threats, the strengths should also be considered and the
opportunities that Foreign Institutional Investments provide. If India has to attract huge
amounts of Foreign Investments, it needs to first overcome the barriers that exist. There should
be no room for Bureaucracy, Red Tapism and a laid back attitude. Approvals should be easily
forth coming.
Both the FIIs and FDI should be invited to the fullest and given importance so that it will
create a win-win situation on the part of both the parties. Both the parties will be benefited
from Foreign Investments i.e. India will get capital and the investors will get returns to
maximum.

BIBLIOGRAPHY:
 http://finance.mapsofworld.com/investment/foreign-institutional.html
 http://www.indianindustry.com/indian-economy/foreign-institutional-investors.html
 http://www.google.co.in/#hl=en&source=hp&biw=1366&bih=667&q=introduction+for
eign+institution+investment&aq=9&aqi=g10&aql=&oq=introduction+&gs_rfai=&fp=
e43fc69e24519849
 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=430700
 http://en.wikipedia.org/wiki/Institutional_investor
 http://en.wikipedia.org/wiki/Qualified_Domestic_Institutional_Investor
 http://isid.org.in/pdf/FII_ISM.pdf
 http://www.indianofficer.com/forums/law/6466-foreign-institutional-investor-fii.html