Fii And Fdi In India

A REPORT ON “Foreign direct investment (FDI) and foreign institutional investors (FII) in India”

Submitted By: Nitin Kansal Enrollment No: 07BS2683 Mobile no. – 9861888252, 9238822258 E-mail Id- [email protected]

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A REPORT ON “Foreign direct investment (FDI) and foreign institutional investors (FII) in India”

Submitted By: Nitin Kansal Enrollment No: 07BS2683 Mobile no. – 9861888252, 9238822258 E-mail Id- [email protected]

A report submitted in partial fulfillment of the requirements of MBA program

Distribution list: Dr. Jyotirmayee Kar.

ACKNOWLEDGEMENTS

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Any accomplishment requires the effort of many people and this work is no different. I take this opportunity to thank Dr. Jyotirmayee Kar (Faculty Guide of ICFAI Business School) for providing me valuable product training and guidance at various stages of my project. I will also remain highly indebted to Dr. Pradeep Kumar Samanta (MRP Co-coordinator) for giving me the opportunity to work for this MRP. Lastly I am thankful to all my colleagues who have given time to help me during completion of the report.

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Table of contents Abstract……………………………………………………………………………………… …………………….....06 1. Introduction………………………………………………………………………………… …………………......07 1.1 Objective of project…………………………………………………………………… …………………….08 1.2 Methodology…………………….……………………………………………………… …………….……….08 1.3 Limitation………………………………………………………………………………… ………………………09 2. Main text (FDI)…………………………………………………………………………… …………………………09 2.1 About foreign direct investment …………………………………………………… ……………….10 2.2 FDI Indian scenario…………………………………………………………………… …………………….10 2.3 FDI in India approval route…………………………………………………………… …………………11 2.4 Analysis of sector specific policy of FDI…………………………………………… ………………12 2.5 Analysis of share of top ten investing countries in India…………………… …………….16 2.6 Analysis of sectors attracting highest FDI equity in flows…………………… ……………18 3. Main text (FII)…………………………………………………………………………… …………………………..19 3.1 Introduction to FII……………………………………………..………………………… ………………….19 3.2 Market design in India for FIIs…………………………………..…………………… ……………….23 4|Page

3.3 Registration process of FIIs………………………………….……………………… …………………..23 3.4 Prohibition on investment…………………………………………………………… ………………….25 3.5 Trends of FIIs in India………………………………………………………………… …………………….25 3.6 Analysis of trends in FIIs investment……………………………………………… ………………..26 3.7 Details of indices taken……………………………………………………………… …………………….28 3.8 Framing of hypothesis………………………………………………………………… …………………..29 3.9 Recording of observation……………………………………………………………… ………………...29 4. Key findings………………………………………………………………………………… ….…………………….31 5. Conclusion ……………………………………………………………………………..… ………………………….32

6. Appendices 1…………..………………………………………………………………… ………………………….33 7. Reference…………………………………………………………………………………… ……………..………….38 7.1 Internet sites…………………………………………………………………………… ……………..……….38 7.2 Journal…………………………………………………………………………………… …..……………………38 7.3 Books……….……………………………………………………………………………… ………...……………38

List of illustrations- list of tables. 5|Page

Table no. 1. 2. 3. 4. 5. 6. 7. 8.

Table name Sector-specific policy for FDI. Share of top investing countries FDI equity inflows. Sectors attracting highest FDI equity inflows. SEBI Registered FIIs in India. Trends in FII Investment. Indices period of study and observations. Key finding for objective 2. Data of monthly closing indices of various Nifty indexes.

Page no. 12 16 18 25 26 28 31 33

ABSTRACT The report of the project “Foreign direct investment (FDI) and foreign institutional investors (FII) in India” mainly focused on the following areas:

A) FOREIGN DIRECT INVESTMENT (FDI) Net foreign direct investment (FDI) flows into India reached 70630 crore in India’s 2006–07 fiscal year, means increase of 187% of the 24613 crore recorded during 2005–06, with the largest share of FDI flows from Mauritius, followed by the United States and the United Kingdom. This study examines FDI in India, in the context of the Indian economic and regulatory environment. This study present FDI trends in India, by country and by sectors during the post liberalization period that is 1991 to 2007 year, using official government data from Indian official government internet site like that of RBI, SEBI. To illustrate the driving forces behind these trends, the study also discusses the investment climate in India, Indian government incentives to foreign investors, the Indian regulatory environment as it affects investment, and the effect of India’s global, regional, and bilateral trade 6|Page

agreements on investment from top 10 FDI investing countries. Finally, the study examines global FDI in India’s in top 10 sectors of industry.

B) FOREIGN INSTITUTIONAL INVESTORS (FII) Institutional Investor is any investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. The growing Indian market had attracted the foreign investors, which are called Foreign Institutional Investors (FII) to Indian equity market, and this study present try to explain the impact and extent of foreign institutional investors in Indian stock market and examining whether market movement can be explained by these investors. It is often hear that whenever there is a rise in market, it is explained that it is due to foreign investors' money and a decline in market is termed as withdrawal of money from FIIs. This study tries to examine the influence of FII on movement of Indian stock exchange during the post liberalization period that is 1991 to 2007.

1. INTRODUCTION Foreign investment refers to investments made by the residents of a country in the financial assets and production processes of another country. The effect of foreign investment, however, varies from country to country. It can affect the factor productivity of the recipient country and can also affect the balance of payments. Foreign investment provides a channel through which countries can gain access to foreign capital. It can come in two forms: foreign direct investment (FDI) and foreign institutional investment (FII). Foreign direct investment involves in direct production activities and is also of a medium- to long-term nature. But foreign institutional investment is a short-term investment, mostly in the financial markets. FII, given its short-term nature, can have bidirectional causation with the returns of other domestic financial markets such as money markets, stock markets, and foreign exchange markets. Hence, understanding the determinants of FII is very important for any emerging economy as FII exerts a larger impact on the domestic financial markets in the short run and a real impact in the long run. India, being a capital scarce country, has taken many measures to attract foreign investment since the beginning of reforms in 1991.

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India is the second largest country in the world, with a population of over 1 billion people. As a developing country, India’s economy is characterized by wage rates that are significantly lower than those in most developed countries. These two traits combine to make India a natural destination for foreign direct investment (FDI) and foreign institutional investment (FII). Until recently, however, India has attracted only a small share of global foreign direct investment (FDI) and foreign institutional investment (FII), primarily due to government restrictions on foreign involvement in the economy. But beginning in 1991 and accelerating rapidly since 2000, India has liberalized its investment regulations and actively encouraged new foreign investment, a sharp reversal from decades of discouraging economic integration with the global economy. The world is increasingly becoming interdependent. Goods and services followed by the financial transaction are moving across the borders. In fact, the world has become a borderless world. With the globalization of the various markets, international financial flows have so far been in excess for the goods and services among the trading countries of the world. Of the different types of financial inflows, the foreign direct investment (FDI) and foreign institutional investment (FII)) has played an important role in the process of development of many economies. Further many developing countries consider foreign direct investment (FDI) and foreign institutional investment (FII) as an important element in their development strategy among the various forms of foreign assistance. The Foreign direct investment (FDI) and foreign institutional investment (FII) flows are usually preferred over the other form of external finance, because they are not debt creating, nonvolatile in nature and their returns depend upon the projects financed by the investor. The Foreign direct investment (FDI) and foreign institutional investment (FII) would also facilitate international trade and transfer of knowledge, skills and technology. The Foreign direct investment (FDI) and foreign institutional investment (FII) is the process by which the resident of one country(the source country) acquire the ownership of assets for the purpose of controlling the production, distribution and other productive activities of a firm in another country(the host country). According to the international monetary fund (IMF), foreign direct investment (FDI) and foreign institutional investment (FII) is defined as “an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of investor”. The government of India(GOI) has also recognized the key role of the foreign direct investment (FDI) and foreign institutional investment (FII) in its process of economic development, not only as an addition to its own domestic capital but also as an important source of technology and other global trade practices. In order to attract the required amount of foreign direct investment (FDI) and foreign institutional investment (FII), it has bought about a number of changes in its economic policies and has put in its practice a liberal and more transparent foreign direct investment (FDI) and foreign institutional investment (FII) policy with a view to attract more foreign direct investment (FDI) and foreign institutional investment (FII) inflows into its economy. These changes have heralded the liberalization era of the foreign direct investment (FDI) and foreign institutional investment (FII) policy regime into India and have brought about a structural breakthrough in the volume of foreign direct investment (FDI) and foreign institutional investment (FII) inflows in the economy. In this context, this report is going to analyze the trends and patterns of foreign direct investment (FDI) and 8|Page

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

1.1 Objective of the project:

Objective 1 pertaining to FDI: examines the trends and patterns in the foreign direct investment (FDI) across different sectors and from different countries in India during 1991-2007 period means during post liberalization period.

Objective 2 pertaining to FII: influence of FII on movement of Indian stock exchange during the post liberalization period that is 1991 to 2007.

1.2 Methodology The lifeblood of business and commerce in the modern world is information. The ability to gather, analyze, evaluate, present and utilize information is therefore is a vital skill for the manager of today. In order to accomplish this project successfully I will take following steps. 1) Sampling- The study is limited to a sample of top 10 investing countries e.g. Mauritius, USA etc. and top 10 sectors e.g. electrical instruments, telecommunications etc. which had attracted larger inflow of FDI and data of NSE stock exchange will be taken to know the impact of FII.

2) Data Collection: ➢ The research will be done with the help Secondary data (from internet site and journals). ➢ The data is collected mainly from websites, annual reports, World Bank reports, research reports, already conducted survey analysis, database available etc. 3) Analysis: Appropriate Statistical tools like correlation and regression will be used to analyze the data like to analyze the growth and patterns of the FDI and FII flows in India during the post liberalization period, the liner trend model will be used. Further the percentage analysis will be used to measure the share of each investing countries and the share of each sectors in the overall flow of FDI and FII into India. 9|Page

1.3 Limitations of the study: A) The study has limited itself to a sample of top ten investing countries and top ten level sectors which have attracted higher inflow of FDI. B) The data for analysis of impact of FII on stock exchange is limited to National stock exchange (NSE) only.

2.

MAIN TEXT (FDI)

In this section I am going to discuss or describe the main business of the report i.e. analysis of secondary data. It includes data in an organized form, discussion on its significance and analyzing the results. For this I had divided this section in further two subsections i.e. the first subsection fulfill the requirement of first objective which is pertaining to FDI. The objective for FDI is to examine the trends and patterns in the foreign direct investment (FDI) across different sectors and from different countries in India during 1991-2007 period means during post liberalization period. And the second subsection fulfills the analysis of second objective which is pertaining to FII. The objective for FII is to examine the influence of FII on movement of Indian stock exchange during the post liberalization period that is 1991 to 2007.

Subsection I: objective 1: Examine the trends and patterns in the foreign direct investment (FDI) across different sectors and from different countries in India during 1991-2007 period means during post liberalization period.

2.1 About foreign direct investment. Is the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution, and other activities of a firm in another country (the host country). The international monetary fund’s balance of payment manual defines FDI as an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investors’ purpose being to have an effective voice in the management of the enterprise’. The united nations 1999 world investment report defines FDI as ‘an investment involving a long term relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor ( FDI enterprise, affiliate enterprise or foreign affiliate).

2.2 Foreign direct investment: Indian scenario Foreign Direct Investment (FDI) is permitted as under the following forms of investments – •

Through financial collaborations. 10 | P a g e

•

Through joint ventures and technical collaborations.

•

Through capital markets via Euro issues.

•

Through private placements or preferential allotments.

Forbidden Territories – FDI is not permitted in the following industrial sectors: Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc. Retail Trading (except single brand product retailing). Lottery Business Gambling and Betting Business of chit fund Nidhi Company Trading in Transferable Development Rights (TDRs). Activity/sector not opened to private sector investment. Foreign Investment through GDRs (Euro Issues) – Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDR investments are treated as FDI and are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads. 1. Clearance from FIPB – There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year. A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance. 2. Use of GDRs – The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India. 3. Restrictions – However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticipation of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India. 11 | P a g e

2.3 Foreign direct investments in India are approved through two routes – 1. Automatic approval by RBI – The Reserve Bank of India accords automatic approval within a period of two weeks (subject to compliance of norms) to all proposals and permits foreign equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the category of industries and the sectoral caps applicable. The lists are comprehensive and cover most industries of interest to foreign companies. Investments in highpriority industries or for trading companies primarily engaged in exporting are given almost automatic approval by the RBI. 2. The FIPB Route – Processing of non-automatic approval cases – FIPB stands for Foreign Investment Promotion Board which approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

2.4 Analysis of sector specific policy for FDI Table no. 1: Sector-specific policy for FDI: (source of following table is http://dipp.nic.in/fdi_statistics/india_fdi_index.htm) Sector-specific policy for FDI: Sr. No. A)

Sector/Activity

FDI Cap /Equity

Entry/Route

1.

Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture, Aqua-culture and Cultivation of Vegetables & Mushrooms under controlled conditions and services related to agro and allied sectors.

100%

Automatic

2.

Tea Sector, including tea plantation

100%

FIPB

B) B) 1 3.

INDUSTRY MINING Mining covering exploration and mining of diamonds & precious stones; gold, silver and minerals. Coal & Lignite mining for captive consumption by power projects, and iron & steel, cement production and other eligible activities permitted under the Coal Mines (Nationalization) Mining and mineral separation of titanium bearing minerals and ores, its

100%

Automatic

100%

Automatic

100%

FIPB

4.

5.

AGRICULTURE

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B) 2. 6.

value addition and integrated activities MANUFACTURING Alcohol- Distillation & Brewing

100%

Automatic

7.

Cigars & Cigarettes- Manufacture

100%

FIPB

8.

Coffee& Rubber processing & warehousing

100%

Automatic

9.

Defense production

26%

FIPB

10.

Hazardous chemicals, viz., hydrocyanic acid and its derivatives; phosgene and its derivatives; and isocyanates and diisocyantes of hydrocarbon.

100%

Automatic

11.

Industrial explosives - Manufacture

100%

Automatic

12.

Drugs & Pharmaceuticals including those involving use of recombinant DNA technology

100%

Automatic

B) 3.

POWER

13.

100%

Automatic

C)

Power including generation (Except Atomic energy); transmission, distribution and Power Trading. SERVICES

14.

CIVIL AVIATION SECTOR

i.

Airports-

a.

Greenfield projects

100%

Automatic

b.

Existing projects

100%

FIPB

ii.

Air Transport Services including Domestic Scheduled Passenger Airlines; Non-Schedules Airlines; Chartered Airlines; Cargo Airlines; Helicopter and Seaplane Services

c.

Scheduled Air Transport Services/ Domestic Scheduled Passenger Airline

49%- FDI; 100%- for NRI investment

Automatic

d.

Non-Scheduled Air Transport Service/ Non-Scheduled airlines, Chartered airlines, and Cargo airlines

74%- FDI 100%- for NRIs investment

Automatic

e.

Helicopter Services/Seaplane services requiring DGCA approval

100%

Automatic

iii.

Other services under Civil Aviation Sector

f.

Ground Handling Services

Beyond 74%

74%- FDI, 100%- for

Automatic

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NRIs investment

g.

Maintenance and Repair organizations; flying training institutes; and technical training institutions

100%

Automatic

15.

Asset Reconstruction Companies

49% (only FDI)

FIPB

16.

Banking - Private sector

74% (FDI+FII)

Automatic

17.

Broadcasting

a.

FM Radio

FDI +FII investment up to 20%

FIPB

b.

Cable network

49% (FDI+FII)

FIPB

c.

Direct-To-Home

49% (FDI+FII). Within this limit, FDI component not to exceed

FIPB

20% d.

Setting up hardware facilities such as uplinking, HUB, etc

49% (FDI+FII)

FIPB

e.

Up-linking a News & Current Affairs

26% FDI+FII

FIPB

TV Channel f.

Up-linking a Non- news & Current Affairs TV Channel

100%

FIPB

18.

Commodity Exchanges

49% (FDI+FII)

FIPB

Investment by Registered FII under PIS will be limited to 23% and Investment under FDI Scheme limited to 26%. 19.

Construction Development projects, including housing, commercial premises, resorts, educational institutions, recreational facilities, city and regional level infrastructure, townships.

100%

Automatic

20.

Courier services for carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898.

100%

FIPB

21.

Credit Information Companies

49 % (FDI+FII)

FIPB

Investment by Registered FII under PIS will be limited to 24% only in the CICs listed at the Stock Exchanges within the overall limit of 49% foreign investment. 14 | P a g e

22.

Industrial Parks both setting up and in established Industrial Parks

100%

Automatic

23.

Insurance

26%

Automatic

24.

Investing companies in infrastructure / 100% services sector (except telecom sector) Non Banking Finance Companies

25.

i) Merchant Banking ii)Underwriting Portfolio Management Services iii)Investment Advisory Services iv) Financial Consultancy v) Stock Broking vi) Asset Management vii) Venture Capital viii) Custodial Services ix) Factoring x) Credit Rating Agencies xi) Leasing & Finance xii) Finance xiii) Housing Finance xiv) Forex Broking xv) Credit card Business xvi) Money changing business xvii) Micro credit

FIPB

100%

Automatic

49% in case of PSUs 100% in case of Private

Automatic (in case of private companies)

companies

FIPB (in case of PSUs

100%

Automatic

26%

FIPB

100%

FIPB

74% (Including FDI, FII, NRI, FCCBs, ADRs, GDRs, convertible preference

Automatic up to 49%.

xviii) Rural credit 26.

Petroleum & Natural Gas sector

a.

Refining

b.

Other than Refining and including market study and formulation; investment/ financing; setting up infrastructure for marketing in Petroleum & Natural Gas

sector. 27.

Print Media

a.

Publishing of newspaper and periodicals dealing with news and current affairs Publishing of scientific magazines/ specialty journals/ periodicals

b. 28.

Telecommunications

a.

Basic and cellular, Unified Access Services, National/ International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global

FIPB beyond 49%.

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b.

Mobile Personal Communications Services (GMPCS) and other value added telecom services

shares, and proportionate foreign equity in Indian promoters/ Investing Company)

ISP with gateways, radio- paging, endto-

74%

Automatic up to 49%. FIPB beyond 49%.

a) ISP without gateway, (b) infrastructure provider providing dark fibre, right of way,duct space,tower (Category I); (c) electronic mail and voice mail Manufacture of telecom equipments Trading

100%

Automatic up to 49%. FIPB beyond 49%.

100%

Automatic

i) Wholesale/cash & carry trading ii) Trading for exports iii) Trading of items sourced from small scale sector iv) Test marketing of such items for which a company has approval for manufacture v)Single Brand product retailing Satellites - Establishment and operation

100%

Automatic

74%

FIPB

Special Economic Zones and Free Trade Warehousing Zones covering setting up of these Zones and setting up units in the Zones

100%

Automatic

end bandwidth. c.

d. 29.

30. 31.

2.5 Analysis of share of top ten investing countries FDI equity in flows Table no. 2: Share of top investing countries FDI equity inflows. (Source: http://dipp.nic.in/fdi_statistics/india_fdi_index.htm) Cumulative amount of FDI inflows (From Aug. 1991 to march 2007): Rs. 2,32,041 crore and US$ 54,628 million. Ranks Country

1. 2. 3. 4. 5. 6.

Mauritius U.S.A.

U.K Netherlands Japan Germany

Cumulative inflows (from Aug. 1991 to march 2007) Amount Rupees in crore. 79162 24536 16660 11402 9313 7060

%age with total inflows (in terms of rupees) 34.11 10.57 7.17 4.91 4.01 3.04 16 | P a g e

7. 8. 9. 10.

Singapore France South Korea Switzerland

TOTAL FDI INFLOWS

7050 3803 3234 2879 232041

3.03 1.63 1.39 1.24

Foreign investors have begun to take a more active role in the Indian economy in recent years. By country, the largest direct investor in India is Mauritius; largely because of the India-Mauritius double-taxation treaty. Firms based in Mauritius invested 79162 crores in India between Aug. 1991 and March 2007, equal to 34.11 percent of total FDI inflows. The second largest investor in India is the United States, with total capital flows of 24536 crore during the 1991–2007 periods, followed by the United Kingdom, the Netherlands, and Japan. Mauritius According to Indian government statistics, Mauritius accounts for the largest share of cumulative FDI inflows to India from 1991 to 2007, nearly 34.11 percent. Many companies based outside of India utilize Mauritian holding companies to take advantage of the India- Mauritius Double Taxation Avoidance Agreement (DTAA). The DTAA allows foreign firms to bypass Indian capital gains taxes, and may allow some India-based firms to avoid paying certain taxes through a process known as “round tripping.” The extent of round tripping by Indian companies through Mauritius is unknown. However, the Indian government is concerned enough about this problem to have asked the government of Mauritius to set up a joint monitoring mechanism to study these investment flows. The potential loss of tax revenue is of particular concern to the Indian government. The existence of the treaty makes it difficult to clearly understand the pattern of FDI flows, and likely leads to reduced tax revenues collected by the Indian government. United States The United States is the second largest source of FDI in India (10.57 % of the total), valued at 24536 crore in cumulative inflows between August 1991 and March 2007. According to the Indian government, the top sectors attracting FDI from the United States to India during 1991–2007 (latest available) are fuel (36 percent), telecommunications (11 percent), electrical equipment (10 percent), food processing (9 percent), and services (8 percent). According to the available M&A data, the two top sectors attracting FDI inflows from the United States are computer systems design and programming and manufacturing. Since 2002, many of the major U.S. software and computer brands, such as Microsoft, Honeywell, Cisco Systems, Adobe Systems, McAfee, and Intel have established R&D operations in India, primarily in Hyderabad or Bangalore. The majority of U.S. electronics companies that have announced greenfield projects in India are concentrated in the semiconductor sector. By far the largest such project is AMD’s chip manufacturing facility in Hyderabad, Andhra Pradesh. The largest share (36 percent) was found in the manufacturing sector, most prominently in the machinery, chemicals, and transportation equipment manufacturing segments. Other important categories of employment are professional, scientific, and technical services; and wholesale trade, with 29 percent and 18 percent of U.S. affiliate employment, respectively. 17 | P a g e

European Union Within the European Union, the largest country investors were the United Kingdom and the Netherlands, with 16660 crore and 11402 crore, respectively, of cumulative FDI inflows between Aug. 1991 and March 2007. The United Kingdom, the Netherlands, and Germany together accounted for almost 75 percent of all FDI flows from the EU to India. All EU countries together accounted for approximately 25 percent of all FDI inflows to India between August 1991 and March 2007. FDI from the EU to India is primarily concentrated in the power/energy, telecommunications, and transportation sectors. The top sectors attracting FDI from the European Union are similar to FDI from the United States. Manufacturing; information services; and professional, scientific, and technical services have attracted the largest shares of FDI inflows from the EU to India since 2000. Unilever, Reuters Group, P&O Ports Ltd, Vodafone, and Barclays are examples of EU companies investing in India by means of mergers and acquisitions. European companies accounted for 31 percent of the total number and 43 percent of the total value for all reported Greenfield FDI projects. The number of EU Greenfield projects was distributed among four major clusters: ICT (17 percent), heavy industry (16 percent), business and financial services (15 percent), and transport (11 percent). However, the heavy industry cluster accounted for the majority (68 percent) of the total value of these projects. Japan Japan was the Fifth largest source of cumulative FDI inflows in India between August 1991 and March 2007, i.e. the cumulative flow is 9313 crore and it is 4.01% of total inflow. FDI inflows to India from most other principal source countries have steadily increased since 2000, but inflows from Japan to India have decreased during this time period. There does not appear to be a single factor that explains the recent decline in FDI inflows from Japan to India. India is, however, one of the largest recipients of Japanese Official Development Assistance (ODA), through which Japan has assisted India in building infrastructure, including electricity generation, transportation, and water supply. It is possible that this Japanese government assistance may crowd out some private sector Japanese investment. The top sectors attracting FDI inflows from Japan to India are transportation (54 percent), electrical equipment (7 percent), telecommunications, and services (3 percent). The available M&A data corresponds with the overall FDI trends in sectors attracting inflows from Japan to India. Companies dealing in the transportation industry, specifically automobiles, and the auto component/peripheral industries dominate M&A activity from Japan to India, including Yamaha Motors, Toyota, Kirloskar Auto Parts Ltd., and Mitsubishi Heavy Industries Ltd. Japanese companies have also invested in an estimated 148 Greenfield FDI projects valued at least at $3.7 billion between 2002 and 2006. In April 2007, Japanese and Indian officials announced a major new collaboration between the two countries to build a new Delhi-Mumbai industrial corridor, to be funded through a public-private partnership and private-sector FDI, primarily from Japanese companies. The project was begun in January 2008 with initial investment of $2 billion from the two countries. The corridor will cross 6 states and extend for 1,483 km, in an area inhabited by 180 million people. At completion in 2015, the corridor is expected to include total FDI of $45–50 billion. A large share of that total is destined for infrastructure, including a 4,000 MW power plant, 3 ports, and 6 airports, along with additional connections to existing ports. Private investment is expected to fund 10-12 new industrial zones, upgrade 5–6 existing airports, and set up 10 logistics parks. The Indian government expects that by 2020, the industrial corridor will contribute to employment growth of 15 percent in the region, 28 percent growth in industrial output, and 38 percent growth in exports. 18 | P a g e

2.6 Analysis of sectors attracting highest FDI equity inflows Table no. 3: Sectors attracting highest FDI equity inflows :( source: http://dipp.nic.in/fdi_statistics/india_fdi_index.htm)

Ranks 1. 2. 3. 4 5. 6. 7. 8. 9. 10.

Sector Electrical Equipments (including computer software & electronics) Services Sector (financial & non-financial) Telecommunications (radio paging, cellular mobile, basic telephone services) Transportation Industry Fuels (power + oil refinery) Chemicals (other than fertilizers) Construction activities (including roads & highways) Drugs & Pharmaceuticals Food Processing Industries Cement and Gypsum Products TOTAL FDI INFLOWS

Cumulative Inflows (from August 1991 to March 2007) Amount in rupees in crore

%age with total inflows

36,034

18.77

34,238

17.84

16,691 15,427

8.7 8.04

12,105

6.31

9,510

4.95

6,396 5,281 5,143 4,329

3.33 2.75 2.68 2.26

2,32,041

The sectors receiving the largest shares of total FDI inflows between August 1991 and March 2007 were the electrical equipment sector and the services sector, each accounting for 18.77 and 17.84 percent respectively. These were followed by the telecommunications, transportation, fuels, and chemicals sectors. The top sectors attracting FDI into India via M&A activity were manufacturing; information; and professional, scientific, and technical services. These sectors correspond closely with the sectors identified by the Indian government as attracting the largest shares of FDI inflows overall. ICT and electronics have been the largest industry recipients of Greenfield FDI into India in recent years, but have seen the number of new Greenfield projects plateau since 2004. Rather, the size of the projects in these industries has increased substantially. For example, global semiconductor manufacturers Advanced Micro Devices (AMD - United States) and Flextronics (Singapore) have entered into separate joint ventures with SemIndia to build semiconductor manufacturing facilities in Hyderabad. The $3 billion AMD-SemIndia joint venture will produce semiconductor chips which can then be used to manufacture electronic products in the Flextronics-SemIndia $3 billion joint venture. The chip fabrication facility will manufacture chips for cell phones, set-top boxes, personal computers, and similar products. The heavy industry and transport equipment sectors together attracted over FDI of 15427 crore in Greenfield FDI projects during 1991 to 2007. The cluster with the highest reported value during 19 | P a g e

2002–06 is heavy industry. Projects in this sector tend to be highly capital intensive, with single projects frequently requiring upwards of $6 billion in startup investment costs. The largest recent examples include the POSCO and Arcelor-Mittal Steel projects, and Vedanta Resources’ (United Kingdom) aluminum smelter project, all planned for the state of Orissa.

3. MAIN TEXT (FIIS) Subsection II: objective 2: Pertaining to FII: influence of FII on movement of Indian stock exchange during the post liberalization period that is 1991 to 2007. 3.1 Introduction to FII Since 1990-91, the Government of India embarked on liberalization and economic reforms with a view of bringing about rapid and substantial economic growth and move towards globalization of the economy. As a part of the reforms process, the Government under its New Industrial Policy revamped its foreign investment policy recognizing the growing importance of foreign direct investment as an instrument of technology transfer, augmentation of foreign exchange reserves and globalization of the Indian economy. Simultaneously, the Government, for the first time, permitted portfolio investments from abroad by foreign institutional investors in the Indian capital market. The entry of FIIs seems to be a follow up of the recommendation of the Narsimhan Committee Report on Financial System. While recommending their entry, the Committee, however did not elaborate on the objectives of the suggested policy. The committee only suggested that the capital market should be gradually opened up to foreign portfolio investments. From September 14, 1992 with suitable restrictions, FIIs were permitted to invest in all the securities traded on the primary and secondary markets, including shares, debentures and warrants issued by companies which were listed or were to be listed on the Stock Exchanges in India. While presenting the Budget for 1992-93, the then Finance Minister Dr. Manmohan Singh had announced a proposal to allow reputed foreign investors, such as Pension Funds etc., to invest in Indian capital market. To operationalise this policy announcement, it had become necessary to evolve guidelines for such investments by Foreign Institutional Investors (FIIs). The policy framework for permitting FII investment was provided under the Government of India guidelines vide Press Note date September 14, 1992. The guidelines formulated in this regard were as follows: 1) Foreign Institutional Investors (FIIs) including institutions such as Pension Funds, Mutual Funds, Investment Trusts, Asset Management Companies, Nominee Companies and Incorporated/Institutional Portfolio Managers or their power of attorney holders (providing discretionary and non-discretionary portfolio management services) would be welcome to make investments under these guidelines.

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2) FIIs would be welcome to invest in all the securities traded on the Primary and Secondary markets, including the equity and other securities/instruments of companies which are listed/to be listed on the Stock Exchanges in India including the OTC Exchange of India. These would include shares, debentures, warrants, and the schemes floated by domestic Mutual Funds. Government would even like to add further categories of securities later from time to time. 3) FIIs would be required to obtain an initial registration with Securities and Exchange Board of India (SEBI), the nodal regulatory agency for securities markets, before any investment is made by them in the Securities of companies listed on the Stock Exchanges in India, in accordance with these guidelines. Nominee companies, affiliates and subsidiary companies of a FII would be treated as separate FIIs for registration, and may seek separate registration with SEBI. 4) Since there were foreign exchange controls in force, for various permissions under exchange control, along with their application for initial registration, FIIs were also supposed to file with SEBI another application addressed to RBI for seeking various permissions under FERA, in a format that would be specified by RBI for the purpose. RBI's general permission would be obtained by SEBI before granting initial registration and RBI's FERA permission together by SEBI, under a single window approach. 5) For granting registration to the FII, SEBI should take into account the track record of the FII, its professional competence, financial soundness, experience and such other criteria that may be considered by SEBI to be relevant. Besides, FII seeking initial registration with SEBI were be required to hold a registration from the Securities Commission, or the regulatory organization for the stock market in the country of domicile/incorporation of the FII. 6) SEBI's initial registration would be valid for five years. RBI's general permission under FERA to the FII would also hold good for five years. Both would be renewable for similar five year periods later on. 7) RBI's general permission under FERA would enable the registered FII to buy, sell and realize capital gains on investments made through initial corpus remitted to India, subscribe/renounce rights offerings of shares, invest on all recognized stock exchanges through a designated bank branch, and to appoint a domestic Custodian for custody of investments held. 8) This General Permission from RBI would also enable the FII to: a. Open foreign currency denominated accounts in a designated bank. (There could even be more than one account in the same bank branch each designated in different foreign currencies, if it is so required by FII for its operational purposes); b. Open a special non-resident rupee account to which could be credited all receipts from the capital inflows, sale proceeds of shares, dividends and interests; c. Transfer sums from the foreign currency accounts to the rupee account and vice versa, at the market rate of exchange; d. Make investments in the securities in India out of the balances in the rupee account; e. Transfer repairable (after tax) proceeds from the rupee account to the foreign currency account(s); 21 | P a g e

f. Repatriate the capital, capital gains, dividends, incomes received by way of interest, etc. and any compensation received towards sale/renouncement of rights offerings of shares subject to the designated branch of a bank/the custodian being authorized to deduct withholding tax on capital gains and arranging to pay such tax and remitting the net proceeds at market rates of exchange; g. Register FII's holdings without any further clearance under FERA. 9) There would be no restriction on the volume of investment minimum or maximum-for the purpose of entry of FIIs, in the primary/secondary market. Also, there would be no lock-in period prescribed for the purposes of such investments made by FIIs. It was expected that the differential in the rates of taxation of the long term capital gains and short term capital gains would automatically induce the FIIs to retain their investments as long term investments. 10) Portfolio investments in primary or secondary markets were subject to a ceiling of 30% of issued share capital for the total holdings of all registered FIIs, in any one company. The ceiling was made applicable to all holdings taking into account the conversions out of the fully and partly convertible debentures issued by the company. The holding of a single FII in any company would also be subject to a ceiling of 10% of total issued capital. For this purpose, the holdings of an FII group would be counted as holdings of a single FII. 11) The maximum holdings of 24% for all non-resident portfolio investments, including those of the registered FIIs, were to include NRI corporate and non-corporate investments, but did not include the following: a. Foreign investments under financial collaborations (direct foreign investments), which are permitted up to 51% in all priority areas. b. Investments by FIIs through the following alternative routes: i. Offshore single/regional funds; ii. Global Depository Receipts; iii. Euro convertibles. 12) Disinvestment would be allowed only through stock exchange in India, including the OTC Exchange. In exceptional cases, SEBI may permit sales other than through stock exchanges, provided the sale price is not significantly different from the stock market quotations, where available. 13) All secondary market operations would be only through the recognized intermediaries on the Indian Stock Exchange, including OTC Exchange of India. A registered FII would be expected not to engage in any short selling in securities and to take delivery of purchased and give delivery of sold securities. 14) A registered FII can appoint as Custodian an agency approved by SEBI to act as custodian of Securities and for confirmation of transactions in Securities, settlement of purchase and sale, and for information reporting. Such custodian should establish separate accounts for detailing on a daily basis the investment capital utilization and securities held by each FII for which it is acting as custodian. The custodian was supposing to report to the RBI and SEBI semi-annually as part of its disclosure and reporting guidelines. 22 | P a g e

15) The RBI should make available to the designated bank branches a list of companies where no investment will be allowed on the basis of the upper prescribed ceiling of 30% having been reached under the portfolio investment scheme. 16) Reserve Bank of India may at any time request by an order a registered FII to submit information regarding the records of utilization of the inward remittances of investment capital and the statement of securities transactions. Reserve Bank of India and/or SEBI may also at any time conduct a direct inspection of the records and accounting books of a registered FII. 17) FIIs investing under this scheme will benefit from a concessional tax regime of a flat rate tax of 20% on dividend and interest income and a tax rate of 10% on long term (one year or more) capital gains. These guidelines were suitably incorporated under the SEBI (FIIs) Regulations, 1995. These regulations continue to maintain the link with the government guidelines through an inserted clause that the investment by FIIs should also be subject to Government guidelines. This linkage has allowed the Government to indicate various investment limits including in specific sectors.

3.2 Market design in India for foreign institutional investors Foreign Institutional Investors means an institution established or incorporated outside India which proposes to make investment in India in securities. A Working Group for Streamlining of the Procedures relating to FIIs, constituted in April, 2003, inter alia, recommended streamlining of SEBI registration procedure, and suggested that dual approval process of SEBI and RBI be changed to a single approval process of SEBI. This recommendation was implemented in December 2003. Currently, entities eligible to invest under the FII route are as follows: i) As FII: Overseas pension funds, mutual funds, investment trust, asset management company, nominee company, bank, institutional portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies, a trustee or power of attorney holder incorporated or established outside India proposing to make proprietary investments or with no single investor holding more than 10 per cent of the shares or units of the fund). (ii) As Sub-accounts: The sub account is generally the underlying fund on whose behalf the FII invests. The following entities are eligible to be registered as sub-accounts, viz. partnership firms, private company, public company, pension fund, investment trust, and individuals. FIIs registered with SEBI fall under the following categories: a) Regular FIIs- those who are required to invest not less than 70 % of their investment in 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 23 | P a g e

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.

3.3 Registration Process of FIIs A FII is required to obtain a certificate by SEBI for dealing in securities. SEBI grants the certificate SEBI by taking into account the following criteria: i)

The applicant's track record, professional competence, financial soundness, experience, general reputation of fairness and integrity.

ii)

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

iii)

Whether the applicant has been granted permission under the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973) by the Reserve Bank of India for making investments in India as a Foreign Institutional Investor.

iv)

Whether the applicant is a) an institution established or incorporated outside India as a pension fund, mutual fund, investment trust, insurance company or reinsurance company. b) an International or Multilateral Organization or an agency thereof or a Foreign Governmental Agency or a Foreign Central Bank. c) an asset management company, investment manager or advisor, nominee company, bank or institutional portfolio manager, established or incorporated outside India and proposing to make investments in India on behalf of broad based funds and its proprietary funds in if any or d) university fund, endowments, foundations or charitable trusts or charitable societies.

v)

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

vi)

Whether the applicant is a fit and proper person.

The SEBIs initial registration is valid for a period of three years from the date of its grant of renewal. Investment Conditions and Restrictions for FIIs: A Foreign Institutional Investor may invest only in the following:-

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(a) Securities in the primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India. (b) units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed or not listed on a recognised stock exchange. (c) Dated Government securities. (d) Derivatives traded on a recognised stock exchange. (e) Commercial paper. (f) Security receipts. The total investments in equity and equity related instruments (including fully convertible debentures, convertible portion of partially convertible debentures and tradable warrants) made by a Foreign Institutional Investor in India, whether on his own account or on account of his sub- accounts, should not be less than seventy per cent of the aggregate of all the investments of the Foreign Institutional Investor in India, made on his own account and on account of his sub-accounts. However, this is not applicable to any investment of the foreign institutional investor either on its own account or on behalf of its sub-accounts in debt securities which are unlisted or listed or to be listed on any stock exchange if the prior approval of the SEBI has been obtained for such investments. Further, SEBI while granting approval for the investments may impose conditions as are necessary with respect to the maximum amount which can be invested in the debt securities by the foreign institutional investor on its own account or through its sub-accounts. A foreign corporate or individual is not eligible to invest through the hundred percent debt route. Even investments made by FIIs in security receipts issued by securitization companies or asset reconstruction companies under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 are not eligible for the investment limits mentioned above. No foreign institutional should invest in security receipts on behalf of its sub-account.

3.4 Prohibitions on Investments: FIIs are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities: 1) 2) 3) 4)

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. 5) Trading in Transferable Development Rights (TDRs).

3.5 Trends of Foreign Institutional Investments in India. Portfolio investments in India include investments in American Depository Receipts (ADRs)/ Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in offshore funds. 25 | P a g e

Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets were opened up for direct participation by FIIs. They were allowed to invest in all the securities traded on the primary and the secondary market including the equity and other securities/instruments of companies listed/to be listed on stock exchanges in India. It can be observed from the table below that India is one of the preferred investment destinations for FIIs over the years. As of March 2007, there were 996 FIIs registered with SEBI.

Table no. 4: 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

3.6 Analysis of trends in FII investment

Table no. 5: Trends in FII Investment

Year 1992-93 1993-94 1994-95 1995-96 1996-97

Gross Purchases (a) (Rs.crore) 17 5593 7631 9694 15554

Gross Sales (b) Net Investment (a-b) (Rs.crore) (Rs.crore) 4 13 466 5127 2835 4796 2752 6942 6979 8575

% increase 39338.46154 -6.456017164 44.74562135 23.52348027 26 | P a g e

1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

18695 16115 56856 74051 49920 47061 144858 216953 346978 520508

12737 17699 46734 64116 41165 44373 99094 171072 305512 489667

5958 -1584 10122 9935 8755 2688 45764 45881 41466 30841

-30.51895044 -126.5861027 739.0151515 -1.847460976 -11.87720181 -69.29754426 1602.529762 0.25565947 -9.622719644 -25.62340231

During the initial year 1992-93, the FII flows started in September, 1992 which amounted to Rs. 13 crore because at this moment government was framing policy guidelines for FIIs. However, within a year, the FIIs rose 39338.46% of 1992-93 during 1993-94 because government had opened door for investment in India. Thereafter, the FII inflows witnessed a dip of 6.45%. The year 1995-1996 witnessed a turnaround, gliding up the contribution of FII to a massive of Rs. 6942 crore. Investment by FIIs during 1996-1997 rose a little i.e. 23.52% of the preceding year. This period was ripe enough for FII Investments because at that time where international capital markets were in the phase of overheating; the Indian economy posted strong fundamentals, stable exchange rate expectations and offered investment incentives and congenial climate for investment of these funds in India. During 1997-98, FII inflows posted a fall of 30.51%. This slack in investments by FIIs was primarily due to the South-East Asian Crisis and the period of volatility experienced between November 1997 and February 1998. The net investment flows by FIIs have always been positive from the year of their entry. Only in the year 1998-99, an outflow to the tune of Rs. 17699 crore was witnessed for the first time. This was primarily because of the economic sanctions imposed on India by the US, Japan and other industrialized economies. These economic sanctions were the result of the testing of series of nuclear bombs by India in May 1998. Thereafter, the FII portfolios investments quickly recovered and showed positive net investments for all the subsequent years. FIIs investments declined from Rs. 10122 crore during 1999-2000 to Rs. 9935 crore during 2000-01. FII investment posted a year-on-year decline of 1.8 % in 2000-01, 11.87 % in 2001-02 and 69.29 % in 2002-03. Investments by FII posted a fall of 80 % in 2002-03 as compared with investments in the period of 1999-00. Investments by FIIs rebounded from depressed levels from the year 2003-04 and witnessed an unprecedented surge. FIIs flows were recycled to India following readjustment of global portfolios of institutional investors, triggered by robust growth in Indian economy and attractive valuations in the Indian equity market as compared with other emerging market economies in Asia. The slowdown in 2004-05 was on account of global uncertainties caused by hardening of crude oil prices and the upturn in the interest rate cycle. The resumption in the net FII inflows to India from August 2004 continued till end 2004-05. The inflows of FIIs during the year 2004-05 was Rs. 45881 crore. During 2006-07 the foreign institutional investors continued to invest large funds in Indian securities market. However, due to global developments like meltdown in global commodities markets and equity market during the three month period between May 2006 to July 2006, fall in Asian Equity markets, tightening of capital controls in Thailand and its spillover effects, there was a slack in FII investments.

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As I had discussed FIIs environment in India like what is FII in India, policy framework for FIIs, market design in India for foreign institutional investors, registration process in India, Trends of Foreign Institutional Investments in India. Now to fulfill the objective of this project i.e. influence of FII on movement of Indian stock exchange (national stock exchange of India) during the post liberalization period that is 1991 to 2007, the following research methodology is designed. This project, in a way, reveals the influence of FIIs investment on movement of Indian stock exchange (national stock exchange of India) during the post liberalization period that is 1991 to 2007. I have applied a simple linear model to estimate the effect of FII on the stock index. The data analysis tools used in the research is correlation and regression. I have taken six indices to study the impact of FII on Indian bourses. One of these indices is Nifty while other five are some specific index of NSE. These six indices give the close picture of Indian stock exchanges. I have taken average monthly data of FIIs and monthly closing index of all the indices. There may be many other factors on which a stock index may depend i.e. Government policies, budgets, bullion market, inflation, economic and political condition of the country, FDI, Re./Dollar exchange rate etc. But for my study I have selected only one independent variable i.e. FII and dependent variable is indices of nifty. This study uses the concept of correlation and regression to study the relationship between FII and stock index. The FII started investing in Indian capital market from September 1992 when the Indian economy was opened up in the same year. Their investments include equity only. The sample data of FIIs investments consists of monthly average from April 1992 to March 2007 and indices value consist monthly closing value with period of study and various observations which is given below in table.

Table no. 6: indices period of study and observations. Indices S&P CNX NIFTY BANK NIFTY CNX 100 CNX IT CNX NIFTY JUNIOR S&P CNX 500

Period of study

30/Apr/91- 30/Mar/07 31/Jan/00- 30/Mar/07 31/Jan/03- 30/Mar/07 31/Jan/96- 30/Mar/07 31/Oct/95- 30/Mar/07 30/Jun/99- 30/Mar/07

Observation 180 87 51 135 138 94

3.7 Details of indices taken: The CNX 100 tracks the behavior of combined portfolio of two indices viz. S&P CNX Nifty and CNX Nifty Junior. It includes 100 of the 935 companies currently listed on the NSE. CNX 100 is computed using market capitalisation weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock 28 | P a g e

splits, rights, etc without affecting the index value. The CNX 100 Index has a base date of Jan 1, 2003 and a base value of 1000. The S&P CNX 500 is India's first broad-based benchmark of the Indian capital market for comparing portfolio returns vis-à-vis market returns. The S&P CNX 500 represents about 92.66% of total market capitalization and about 86.44% of the total turnover on the NSE. The S&P CNX 500 Equity Index is desegregated into 72 Industry sectors, which are separately maintained by IISL. These industry indices are derived out of the S&P CNX 500 and care is taken to see that the industry representation in the entire universe of securities is reflected in the S&P CNX 500. e.g., if in the entire universe of securities, banking sector has a 5% weightage then the Banking sector (as determined by the Banking stocks in S&P CNX 500) would have a 5% weightage in the S&P CNX 500. The Banking sector index would be derived out of the Banking stocks in the S&P CNX 500. The changes to the weightage of various sectors in the S&P CNX 500 would dynamically reflect the changes in the entire universe of securities. The calendar year 1994 has been selected as the base year for S&PCNX 500. The base value of the index is set at 1000. The CNX Bank Index is an index comprised of the most liquid and large capitalized Indian Banking stocks. It provides investors and market intermediaries with a benchmark that captures the capital market performance of Indian Banks. The Index has 12 stocks from the banking sector, which trade on the National Stock Exchange. The CNX Bank Index has a base date of Jan 1, 2000 and base value of 1000. The CNX IT Companies in this index are those that have more than 50% of their turnover from IT related activities like software development, hardware manufacture, vending, support and maintenance. The CNX IT Index constituents represent about 12.80% of the total market capitalization as on September 1, 2006. The CNX IT Index has a base date of Jan 1, 1996 and a base value of 1000. The Base Value of the index was revised from 1000 to 100 w.e.f. May 28, 2004. The CNX Nifty Junior Index comprises of the next rung of liquid securities after those forming part of S&P CNX Nifty. It may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as making up the 100 most liquid stocks in India. CNX Nifty Junior represents about 8.98% of the total market capitalization as on September 1, 2006. The average traded value for the last six months of all Junior Nifty stocks is approximately 9.17% of the traded value of all stocks on the NSE. Impact cost for CNX Nifty Junior for a portfolio size of RS.2.50 million is 0.15%. The CNX Nifty Junior was introduced on January 1, 1997, with base date and base value being November 03, 1996 and 1000 respectively and a base capital of Rs.0.43 trillion. The S&P CNX Nifty is a well-diversified 50 stock index accounting for 22 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. S&P CNX Nifty is based upon solid economic research and is well respected internationally as a pioneering effort in better understanding how to make a stock market index. The average total traded value for the last six months of all S&P CNX Nifty stocks is approximately 56.31 % of the traded value of all stocks on the NSE. S&P CNX Nifty stocks represent about 59.91 % of the total market capitalization as on September 1, 2006. The base period selected for S&P CNX Nifty index is the close of prices on November 3, 1995, which marks the completion of one year of 29 | P a g e

operations of NSE's Capital Market Segment. The base value of the index has been set at 1000 and a base capital of RS.2.06 trillion.

3.8 Framing of hypothesis: Null Hypothesis (Ho): The various NSE indices do not rise with the increase in FIIs investment means FIIs have no influence on Indian stock exchange. Alternate Hypothesis (H1): The various NSE indices rise with the increase in FIIs investment means FIIs have influence on Indian stock exchange. The data regarding indices of NSE was taken from the site of NSE (the data for monthly closing value is given in appendice 1). I got the data on FIIs investment from “HANDBOOK OF STATISTICS ON THE INDIAN SECURITIES MARKET 2008”.

3.9 Recording of observation: I have taken the monthly closing index of all the indices. For FIIs I have recorded monthly average of the net investments made by them in the Indian capital market. Net Investments = gross purchases – gross sales (fig. is in Rs crore) Use of Model: A simple linear relationship has been shown between two variables using correlation and regression as the data analysis tools. One variable is dependent and the other is independent. I have taken FII as the independent variable while the stock index has been taken as dependent variable. The impact of FII has been separately analyzed with each of the index. So, correlation and regression has been separately run between FII and six indices taking one index at a time with help of Microsoft excel. Inference: If the hypothesis holds good then we can infer that FIIs have significant impact on the Indian capital market. This will help the investors to decide on their investments in stocks and shares. If the hypothesis is rejected, or in other words if the null hypothesis is accepted, then FIIs will have no significant impact on the Indian bourses. Regression Analysis: This analysis tool performs linear regression analysis by using the "least squares" method to fit a line through a set of observations. I can analyze how a single dependent variable is affected by the values of one or more independent variables — for example, how an athlete's performance is affected by such factors as age, height, and weight. Correlation: This analysis tool and its formulas measure the relationship between two data sets that are scaled to be independent of the unit of measurement. The population correlation calculation returns the covariance of two data sets divided by the product of their standard deviations. I can use the Correlation tool to determine whether two ranges of data move together — that is, whether large values of one set are associated with large values of the other (positive correlation), whether small values of one set are associated with large values of the other (negative correlation), or whether values in both sets are unrelated (correlation near zero).

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4. KEY FINDING: For objective 1 a) Net FDI in India was valued at $4.7 billion in the 2005–06 Indian fiscal year, and more than tripled, to $15.7 billion, in the 2006–07 fiscal year. Almost one-half of all FDI is invested in the Mumbai and New Delhi regions. b) By country, the largest investors in India are Mauritius, the United States, and the United Kingdom. Investors based in many countries have taken advantage of the India-Mauritius bilateral tax treaty to set up holding companies in Mauritius which subsequently invest in India, thus reducing their tax obligations. c) By industry, the largest destinations for FDI are electrical equipment (including computer software and electronics), services, telecommunications, and transportation.

For objective 2 Table no. 7: correlation and regression matrix S&P CNX NIFTY

observatio Correlation with FII Multiple R R2 Standard Error n 0.651 0.651 0.423 575.658 180

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BANK NIFTY CNX 100 CNX IT CNX NIFTY JUNIOR S&P CNX 500

0.634 -0.159 -0.191 0.656 0.540

0.634 0.159 0.191 0.656 0.540

0.402 0.025 0.036 0.431 0.292

1229.644 898.820 12896.703 1319.629 670.583

87 51 135 138 94

1. Impact of FII on S&P CNX Nifty: The effect of FII on Nifty is positive and the co-efficient of correlation is high so the effect is also high. The standard error comes out to be 575.658 which are high. This does not mean the relation is false but we can say that the error in linear relation is high. 2. Impact of FII on Bank Nifty: The effect of FII on Bank Nifty is positive. So, FII is directly related to Bank Nifty. But the co-efficient of correlation is high so the effect is also high. The standard error comes out to be 1229.644 which are very high. This means that the deviation from the mean value is high. This does not mean the relation is false but we can say that the error in linear relation is high. The value of multiple-R is also high. We can say that FII have significant impact on Bank Nifty during the period of 31-January-2000- 30-March-07. 3. Impact of FII on CNX 100: CNX 100 is inversely related to FII for the period of 31-January03- 30-March-2007. But the extent of impact is low as co-efficient of correlation is -0.159. 4. Impact of FII on CNX IT: FII has inversely little significant relation with CNX IT, as the value of correlation is -0.191. This does not mean that there is no relation at all between them. It shows the absence of linear relation between the two variables but not a lack of relationship altogether. 5. Impact of FII on CNX NIFTY JUNIOR: CNX NIFTY JUNIOR directly related to FII for the period of 31-Oct-1995- 30-March-2007. But the value of R is high so the degree of relation is also high low. Standard error in this case is 1319.6 which is high compared to other standard errors between FII and other stock indices. 6. Impact of FII on S&P CNX 500: S&P CNX 500 is also highly correlated with FII. In this case again the degree of relation is high.

5. CONCLUSION: For objective 1: The process of economic reforms which was initiated in July 1991 to liberalize and globalize the economy had gradually opened up many sectors of its economy for the foreign investors. A large number of changes that were introduced in the 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 during the period from 1991-2007 came from Mauritius and the USA. The main reason for 32 | P a g e

higher levels of investment from Mauritius was that the fact that India entered into a double taxation avoidance agreement (DTAA) with Mauritius were protected from taxation in India. Among the different sectors, the electrical and equipment had received the larger proportion followed by service sector and telecommunication sector.

For objective 2: According to findings and results, I concluded that FII did have high significant impact on the Indian capital market. Therefore, the alternate hypothesis is accepted. S&P CNX NIFTY, BANK NIFTY, CNX NIFTY JUNIOR, S&P CNX 500 showed positive correlation but CNX 100, CNX IT showed negative correlation with FII. Also the degree of relation was high in all the case. It shows high degree of linear relation between FII and stock index. This shows that there is relationship between them. One of the reasons for high degree of any linear relation can also be due to the sample data. The data was taken on monthly basis. The data on daily basis can give more positive results (may be). Also FII is not the only factor affecting the stock indices. There are other major factors that influence the bourses in the stock market. I also analyzed that FII had significant impact on the stock index for the period starting from January 1991 to March 2007. The sample data available for other indices like BANK NIFTY, CNX 100, S&P CNX 500 was low with just 51, 87 and 94 respectively observations that have also hampered the results.

6 APPENDICES 1 Table no. 8: DATA OF MONTHLY CLOSING INDICES OF VARIOUS NIFTY INDEX.

Date 30-Apr-91 31-May-91 28-Jun-91 31-Jul-91 30-Aug-91 30-Sep-91 31-Oct-91 29-Nov-91 24-Dec-91 31-Jan-92 29-Feb-92 31-Mar-92

S&P CNX NIFTY MAIN Monthly closing 389.01 403.18 391.96 498.71 531.97 553.79 554.4 563.17 558.63 684.93 889.3 1261.65

BANK NIFTY

CNX 100

CNX IT

CNX NIFTY JUNIOR

S&P CNX 500

Monthly closing

Monthly closing

Monthly closing

Monthly closing

Monthly closing

_ _ _ _ _ _ _ _ _ _ _ _

_ _ _ _ _ _ _ _ _ _ _ _

_ _ _ _ _ _ _ _ _ _ _ _

_ _ _ _ _ _ _ _ _ _ _ _

_ _ _ _ _ _ _ _ _ _ _ _ 33 | P a g e

30-Apr-92 29-May-92 26-Jun-92 31-Jul-92 28-Aug-92 30-Sep-92 30-Oct-92 30-Nov-92 24-Dec-92 29-Jan-93 27-Feb-93 31-Mar-93 30-Apr-93 31-May-93 30-Jun-93 30-Jul-93 30-Aug-93 30-Sep-93 29-Oct-93 26-Nov-93 24-Dec-93 31-Jan-94 28-Feb-94 31-Mar-94 29-Apr-94 31-May-94 30-Jun-94 29-Jul-94 31-Aug-94 30-Sep-94 31-Oct-94 30-Nov-94 23-Dec-94 31-Jan-95 28-Feb-95 31-Mar-95 28-Apr-95 31-May-95 30-Jun-95 31-Jul-95 31-Aug-95 29-Sep-95 31-Oct-95 30-Nov-95 29-Dec-95 31-Jan-96 29-Feb-96 29-Mar-96

1105.55 826.16 855.84 767.94 850.86 938.14 809.87 726.38 761.31 785.28 774.18 660.51 622.42 656.16 667.5 706.83 799.65 827.13 817.18 988.88 1042.59 1246.59 1349.49 1177.11 1150.66 1187.19 1249.44 1278.54 1373.29 1290.53 1267.21 1245.75 1182.28 1071.23 1014.72 990.24 941.83 997.4 961.23 994.25 971.74 1011.97 988.26 862.1 908.53 848.42 992.51 985.3

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 922.44 1023.85 1012.78

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 1167.18 991.7 1057.86 989 1152.08 1151.15

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 34 | P a g e

30-Apr-96 31-May-96 28-Jun-96 31-Jul-96 30-Aug-96 30-Sep-96 31-Oct-96 29-Nov-96 31-Dec-96 31-Jan-97 28-Feb-97 31-Mar-97 30-Apr-97 30-May-97 30-Jun-97 31-Jul-97 29-Aug-97 30-Sep-97 30-Oct-97 28-Nov-97 31-Dec-97 30-Jan-98 27-Feb-98 31-Mar-98 30-Apr-98 29-May-98 30-Jun-98 31-Jul-98 31-Aug-98 30-Sep-98 31-Oct-98 30-Nov-98 31-Dec-98 29-Jan-99 27-Feb-99 31-Mar-99 30-Apr-99 31-May-99 30-Jun-99 30-Jul-99 31-Aug-99 30-Sep-99 29-Oct-99 30-Nov-99 30-Dec-99 31-Jan-00 29-Feb-00 31-Mar-00

1114.36 1089.92 1122 1042.81 1029 943.96 909.29 830.32 899.1 972.65 998.65 968.3 1079.85 1050.9 1192.4 1221.5 1105 1123.8 1085.25 1023.95 1079.4 963.45 1060.75 1116.9 1159.35 1063.15 941.65 931.4 852.8 904.95 824 817.75 884.25 966.2 981.3 1078.05 978.2 1132.3 1187.7 1310.15 1412 1413.1 1325.45 1376.15 1480.45 1546.2 1654.8 1528.45

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 1148.89 1075.15 1106.83

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

1144.16 1068.8 1122.31 980.02 973.15 878.9 849.73 811.14 835.01 922.71 1046.02 1049.07 1324.93 1330.07 1574.84 2017.48 2171.41 2680.7 2646.56 2447.39 2399.71 2324.85 2755.26 3422.16 5383.9 6919.05 5989.93 6513.97 6589.55 6581.99 6404.64 5894.12 7051.82 11244.07 12545.26 14081.01 11357.5 13318.37 13575.23 16489.64 17911.89 22528.22 20330.09 25468.88 41742.03 50705.62 74537.88 65240.55

1273.72 1238.8 1297.27 1198.72 1155.67 1041.61 1018.7 960.45 1035.07 1067.8 1053.11 1032.95 1104.65 1116.15 1163.9 1322 1255.15 1261.55 1246 1159.2 1189 1106.3 1213.15 1339.4 1588.9 1620.2 1342.2 1450.45 1483.65 1538.5 1419.75 1379.5 1519 1692.5 1773.45 2069.2 1809 1968.45 1955.6 2227.65 2524.4 2763.6 2588.55 3057.45 3983.8 4351.9 4447.25 3695.75

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 806.1 905.05 999.65 1025.1 972.6 1039.1 1205 1316.25 1486.65 1322.9 35 | P a g e

28-Apr-00 31-May-00 30-Jun-00 31-Jul-00 31-Aug-00 29-Sep-00 31-Oct-00 30-Nov-00 29-Dec-00 31-Jan-01 28-Feb-01 30-Mar-01 30-Apr-01 31-May-01 29-Jun-01 31-Jul-01 31-Aug-01 28-Sep-01 31-Oct-01 29-Nov-01 31-Dec-01 31-Jan-02 28-Feb-02 28-Mar-02 30-Apr-02 31-May-02 28-Jun-02 31-Jul-02 30-Aug-02 30-Sep-02 31-Oct-02 29-Nov-02 31-Dec-02 31-Jan-03 28-Feb-03 31-Mar-03 30-Apr-03 30-May-03 30-Jun-03 31-Jul-03 29-Aug-03 30-Sep-03 31-Oct-03 28-Nov-03 31-Dec-03 30-Jan-04 27-Feb-04 31-Mar-04

1406.55 1380.45 1471.45 1332.85 1394.1 1271.65 1172.75 1268.15 1263.55 1371.7 1351.4 1148.2 1125.25 1167.9 1107.9 1072.85 1053.75 913.85 971.9 1067.15 1059.05 1075.4 1142.05 1129.55 1084.5 1028.8 1057.8 958.9 1010.6 963.15 951.4 1050.15 1093.5 1041.85 1063.4 978.2 934.05 1006.8 1134.15 1185.85 1356.55 1417.1 1555.9 1615.25 1879.75 1809.75 1800.3 1771.9

1056.2 1001.24 1087.18 993.58 1003.07 907.53 861.27 941.08 971.73 1094.09 1171.65 991.51 992.76 1034.54 986.95 960.83 939.57 797.97 875.15 928.1 868.61 917.79 1028.48 1033.58 1044.13 1039.46 1094.7 1055.87 1073.63 1045.23 1011.86 1094.95 1226.5 1273.62 1306.02 1265.19 1314.71 1630.94 1657.56 1807.94 1940.75 2029.28 2294.55 2202.46 2588.78 2639.88 2603.97 2813.7

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 963.55 982.26 902.42 872.71 959.99 1073.41 1135.3 1296.31 1361.52 1491.08 1551.99 1819.59 1760.02 1749.02 1731.29

45085.8 32394.06 42411.04 34587.23 42979.41 36285.95 32309.49 33382.18 29383.46 33896.98 30116.65 17468.25 17267.4 18982.64 16302.17 15972.81 15724.37 10902.19 12139.67 16778.78 18282.17 18362.8 17554.44 18557.8 17936.8 16828.27 16561.81 13652.87 15543.52 15273 15702.7 18909.9 19073.4 16624.71 17109.16 14966.88 11351.13 10993.4 13002.4 13675.94 15056.3 17315.55 18550.6 20644.8 23542.25 21370.45 20599.2 19372.9

2788.65 2448.7 2672.45 2464.95 2548.25 2369.3 2234.3 2477.25 2426.05 2407.7 2141.45 1601.8 1525.2 1627.15 1415.4 1342.55 1277.35 1084.4 1174.2 1334.15 1298.3 1348.55 1495.55 1566.95 1607.75 1497.1 1617.4 1455.85 1452.6 1257.85 1255.3 1337.1 1413.05 1376.85 1387.1 1259.55 1339.75 1664.15 1783.7 2012.3 2275.25 2456.95 2656.15 2801.2 3405.7 3367.65 3330.6 3392.05

1067.6 967.6 1073.7 959.7 1026.45 925.4 851.05 920.9 912.85 981.2 950.53 754.2 746.2 791 725.85 697.05 684.2 583.55 622.2 703.2 700.6 714.5 767.6 775.5 771.3 739.55 772.85 706.65 737.15 691 691.95 741.55 772.85 749.1 762 701.35 697.2 807.2 894.5 938.55 1100.45 1138.55 1218.3 1285.4 1531.35 1459.8 1442.8 1457.5 36 | P a g e

30-Apr-04 31-May-04 30-Jun-04 30-Jul-04 31-Aug-04 30-Sep-04 29-Oct-04 30-Nov-04 31-Dec-04 31-Jan-05 28-Feb-05 31-Mar-05 29-Apr-05 31-May-05 30-Jun-05 29-Jul-05 31-Aug-05 30-Sep-05 31-Oct-05 30-Nov-05 30-Dec-05 31-Jan-06 28-Feb-06 31-Mar-06 29-Apr-06 31-May-06 30-Jun-06 31-Jul-06 31-Aug-06 29-Sep-06 31-Oct-06 30-Nov-06 29-Dec-06 31-Jan-07 28-Feb-07 30-Mar-07

1796.1 1483.6 1505.6 1632.3 1631.75 1745.5 1786.9 1958.8 2080.5 2057.6 2103.25 2035.65 1902.5 2087.55 2220.6 2312.3 2384.65 2601.4 2370.95 2652.25 2836.55 3001.1 3074.7 3402.55 3557.6 3071.05 3128.2 3143.2 3413.9 3588.4 3744.1 3954.5 3966.4 4082.7 3745.3 3821.55

3059.79 2243.9 2256.12 2332.29 2345.16 2505.7 2466.96 2997.66 3497.36 3429.6 3676.5 3536.64 3162.21 3467.72 3638.4 4361.15 4062.6 4622.1 4003.85 4298.2 4534.2 4617.6 4579.05 4661.5 4549.8 4123.55 3708.9 4078.8 4594.85 5276.25 5588.7 6198.3 6008.75 5953.95 5240.3 5308.5

1770.36 1450.66 1473.22 1592.43 1600.42 1717.99 1751.04 1924.45 2067.62 2033.62 2082.2 2017.21 1887.3 2067.26 2181.42 2295.81 2366.23 2566.58 2330.81 2647.93 2781.55 2944.15 3011.8 3318.45 3481.3 2998.25 3003.15 3020.85 3291.7 3479.75 3633.1 3818.55 3839.3 3948.25 3626.2 3701.55

20687 2042.15 2115.2 2269.2 2340.15 2496.2 2667.15 2996.5 2936.9 2849.4 2919.05 2923.15 2539.75 2933 3072.1 2985.95 3177.15 3296.5 3211.95 3533.95 3906.9 4010.3 3972.9 4352.9 4341.85 3869.65 3957.55 4113.55 4445.6 4540.5 4888.95 5267.85 5432.25 5535 5129.6 5180.7

3639.8 2846.9 2903.35 3082.1 3199 3504.25 3481.55 3884.55 4453.3 4247.8 4388.2 4275.15 4024.4 4364.55 4393.25 4919.1 5053 5303.5 4714.45 5242 5541.45 5882.9 5966.65 6412.1 6856 5827.4 5264.3 5335.1 5940.5 6510.4 6823.15 6967.25 7106.35 7268.05 6722.1 6878.05

1507.55 1226.55 1248 1351.45 1377.2 1478.75 1502.05 1653.2 1804.9 1768.25 1827.4 1772.85 1688.65 1834.85 1906.2 2027.4 2126.35 2274 2067.8 2306.15 2459.2 2585.95 2658.95 2910.35 3064.7 2635.25 2562.5 2562.55 2807.95 2988.25 3114.55 3280.45 3295.05 3393.1 3107.75 3145.35

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7 REFERENCES A number of websites, newspaper article annual reports of RBI, magazines etc. 7.1 Internet sites: a) www.rbi.org.in/home.aspx b) www.google.com c) www.fdimagazine.com d) www.members.aol.com/RTMadaan1/sectors e) http://dipp.nic.in/fdi_statistics/india_fdi_index.htm f) www.nseindia.com g) www.sebi.gov.in

7.2 Journals: a) ICFAI Journal: E.g. the ICFAI journal of public finance, issue- February, vol. VI. b) Handbook of statistics on the Indian securities market 2008. 7.3 Books: a) Foreign direct investment in India by Lata Chakravarthy. b) FDI (issues in emerging economies) by K. Seethe Pathi. c) Foreign institutional investors by G Gopal Krishna Murthy.

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