Y TI CA L ST U DY O F FO R E I G N

“ AN AN AL
S TM E N T I N IN D IA
DIRECT INVE SUBMITTED TO – DR. DEEP
IKA PRAKASH
DEVA
SUBMITTED BY- NEHA SACH
LLM SEC A (CBIL)
2025
 ACKNOWLEDGMENT
• Development of this project was a meticulous job and requires lot of commitment. It is a
pleasure for me to express thanks and heartiest gratitude to all those who helped me
directly or indirectly during the development of this challenging project. I would like to
take this opportunity to thank them all.
While I cheerfully share the credit for the accurate aspect of this project report. The
mistakes and omissions I have to claim as are my alone. Please bring them to my attention.
I would like to thank DR. DEEPIKA PRAKASH for providing me the required useful
information and guiding me through this project. I would also like to express my sincere
gratitude to Amity Law School, Noida in general, for providing excellent study material,
with all facilities for project development.
• Foreign direct investment (FDI) is a
measure of foreign ownership of
productive assets, such as factories,
mines and land. Increasing foreign
investment can be used as one measure
of growing economic globalization.
• There are two types of FDI:
inward foreign direct investment
and outward foreign direct
investment, resulting in a net
FDI inflow (positive or negative).
Introduction and
Overview
 “AN ANALYTICAL STUDY OF FOREIGN DIRECT INVESTMENT IN
INDIA”

 This study aims to provide a perspective on to know in which sector we can get more foreign currency
in terms of investment in India. It Examine the trends and patterns in the FDI across different sectors
and from different countries in India.
 Statement of the Problem- To analyse FDI across different sectors from different countries in India and which sector we
can get more foreign currency in terms of investment in India.

objective
 To know in which sector we can get more foreign currency in terms of investment in India.
 To know the flow of investment in India  To know how can India Grow by Investment.
 To Examine the trends and patterns in the FDI across different sectors and from different countries in
India Secondary objectives
 To know the reason for investment in India
 Influence of FII on movement of Indian stock exchange
 To understand the FII & FDI policy in India
 INTRODUCTION

One of the most striking developments during the last two decades is the spectacular growth of FDI in the global
economic landscape. This unprecedented growth of global FDI in 1990 around the world make FDI an important and
vital component of development strategy in both developed and developing nations and policies are designed in
order to stimulate inward flows.
In fact, FDI provides a win – win situation to the host and the home countries. Both countries are directly interested
in inviting FDI, because they benefit a lot from such type of investment. The ‘home’ countries want to take the
advantage of the vast markets opened by industrial growth. On the other hand the ‘host’ countries want to acquire
technological and managerial skills and supplement domestic savings and foreign exchange.
Moreover, the paucity of all types of resources viz. financial, capital, entrepreneurship, technological know- how,
skills and practices, access to markets- abroad- in their economic development, developing nations accepted FDI as a
sole visible panacea for all their scarcities. Further, the integration of global financial markets paves ways to this
explosive growth of FDI around the globe.
The historical background of FDI in India can be traced back with the establishment of East India Company of Britain.
British capital came to India during the colonial era of Britain in India. However, researchers could not portray the
complete history of FDI pouring in India due to lack of abundant and authentic data. Before independence major
amount of FDI came from the British companies.
 Foreign Investment Promotion Board

• The FIPB (Foreign Investment Promotion Board) is a government body that offers a single window
clearance for proposals on foreign direct investment in the country that are not allowed access through
the automatic route. Consisting of Senior Secretaries drawn from different ministries with
Secretary ,Economic Affairs in the chair, this high powered body discusses and examines proposals for
foreign investment in the country for restricted sectors ( as laid out in the Press notes and extant foreign
investment policy) on a regular basis.
• Currently proposals for investment beyond 600 crores require the concurrence of the CCEA (Cabinet
Committee on Economic Affairs). The threshold limit is likely to be raised to 1200 crore soon. The
Board thus plays an important role in the administration and implementation of the Government’s FDI
policy.
METHODS OF FOREIGN DIRECT INVESTMENTS

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy
through any of the following methods:
 by incorporating a wholly owned subsidiary or company
 by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated
enterprise
 participating in an equity joint venture with another investor or enterprise
Foreign direct investment incentives may take the following forms
 • tax holidays
 • other types of tax concessions
 • preferential tariffs
 • special economic zones
 • investment financial subsidies
 • soft loan or loan guarantees
 ENTRY MODE

• The manner in which a firm chooses to enter a foreign market through FDI.
– International franchising
– Branches – Contractual alliances
– Equity joint ventures
– Wholly foreign-owned subsidiaries
• Investment approaches:
– Greenfield investment (building a new facility)
– Cross-border mergers
– Cross-border acquisitions
– Sharing existing facilities.
 WHY IS FDI IMPORTANT FOR ANY
CONSIDERATION OF GOING GLOBAL?
The simple answer is that making a direct foreign investment allows companies to accomplish several tasks:
1 .Avoiding foreign government pressure for local production.
2. Circumventing trade barriers, hidden and otherwise.
3. Making the move from domestic export sales to a locally-based national sales office.
4. Capability to increase total production capacity.
5.Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc.

The Strategic Logic behind FDI

• Resources seeking – looking for resources at a lower real cost.
• Market seeking – secure market share and sales growth in target foreign market.
• Efficiency seeking – seeks to establish efficient structure through useful factors, cultures, policies, or markets
. • Strategic asset seeking – seeks to acquire assets in foreign firms that promote corporate long term objectives.
 INVESTMENT RISKS IN INDIA

Sovereign Risk
 India is an effervescent parliamentary democracy since its political
freedom from British rule more than 50 years ago. The country does not
face any real threat of a serious revolutionary movement which might
lead to a collapse of state machinery. Sovereign risk in India is hence nil
for both "foreign direct investment" and "foreign portfolio investment.“
Political Risk
 India has enjoyed successive years of elected representative
government at the Union as well as federal level. India suffered political
instability for a few years in the sense therewas no single party which
won clear majority and hence it led to the formation of coalition
Governments.
Commercial Risk
 Commercial risk exists in any business ventures of a country. Not each
and every product or service is profitably accepted in the market
Risk Due To Terrorism
 In the recent past, India has witnessed several terrorist attacks on its soil
which could have a negative impact on investor confidence. Not only
business environment and return on investment, but also the overall
security conditions in a nation have an effect on FDI's.
Foreign Direct Investments In India Are Approved Through Two Routes
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 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.
 GOVERNMENT APPROVALS FOR FOREIGN COMPANIES DOING BUSINESS IN INDIA

A foreign company planning to set up business operations in India has the following options:

• Investment under automatic route; and

• Investment through prior approval of Government.

Procedure under automatic route

• FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by
the Government or RBI.
Procedure under Government approval
• FDI in activities not covered under the automatic route, requires prior Government approval and are considered by
the Foreign Investment Promotion Board (FIPB).
FOREIGN DIRECT INVESTMENT: INDIAN SCENARIO

FDI is permitted as under the following forms of investments –

 · Through financial collaborations.
 · Through joint ventures and technical collaborations.
 · Through capital markets via Euro issues.
 · Through private placements or preferential allotments.

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time.
Insurance Sector
FDI in Insurance sector in India
FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance
Regulatory & Development Authority (IRDA).
 FDI in Trading Companies in India

 Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities,
and the undertaking is an export house/trading house/super trading house/star trading house. However,
under the FIPB route:-
100% FDI is permitted in case of trading companies for the following activities:
· exports;
· bulk imports with ex-port/ex-bonded warehouse sales;
· cash and carry wholesale trading;
· Other import of goods or services provided at least 75% is for procurement and sale of goods and services
among the companies of the same group and not for third party use or onward transfer/distribution/sales.
FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest
26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the
world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.
 FDI and Indian Economy
 The results of Foreign Direct Investment Model shows that all variables included in the study are statistically
significant. Except the two variables i.e. Exchange Rate and Research and Development expenditure (R&DGDP)
which deviates from their predicted signs.
 Exchange rate shows positive sign instead of expected negative sign
 Research and Development expenditure shows unexpected negative sign as of expected positive sign.
 Another important factor which influenced FDI inflows is the Trade GDP.
 The next important factor which shows the predicted positive sign is Reserves GDP.
 Another important factor which shows the predicted positive sign is FIN. Position i.e. financial
position.
 In the Economic Growth Model, the variable GDPG (Gross Domestic Product Growth i.e. level
of economic growth) which shows the market size of the host economy revealed that FDI is a
vital and significant factor influencing the level of economic growth in India.
Trends and patterns of FDI flows at Sectoral level of Indian
Economy:

Infrastructure Sector:
Initially, the inflows were low but there is a sharp rise in FDI inflows from 2005 onwards. Among the subsectors
of Infrastructure sector, telecommunications received the highest percentage of FDI inflows.
Services sector:
There is a continuously increasing trend of FDI inflows in services sector with a steep rise in the inflows from 2005
onwards.. In India, Mumbai and Delhi are the two most attractive locations which receives heavy investment in
services sector.
Trading sector:
The sector shows a trailing pattern upto 2005 but there is an exponential rise in inflows from 2006 onwards.
Consultancy Sector:
Among the subsectors of consultancy sector management services received highest amount of FDI inflows apart
from marketing and design and engineering services.
Housing and Real Estate Sector:
Housing and Real Estate sector received of total FDI inflows in India upto 2008. Major investment in this sector
came from Mauritius. New Delhi and Mumbai are the two top cities which received highest percentage of FDI
inflows. Housing sector shows an exponentially increasing trend after 2005.
Automobile Sector:
Earlier Automobile Industry was the part of transportation sector but it became an independent sector in 2000.
 Trends and patterns of FDI flows at Indian level:

Although India’s share in global FDI has increased considerably, but the pace of FDI in flows has been slower
than China, Singapore, Brazil, and Russia.
 India has received increased NRI’s deposits and commercial borrowings largely because of its rate of
economic growth and stability in the political environment of the country.
 During the period under study it is found that India’s GDP crossed one trillion dollar mark in 2011.
 An analysis of last eighteen years of trends in FDI inflows in India shows that initially the inflows were low
but there is a sharp rise in investment flows from 2005 onwards.
 A comparative analysis of FDI approvals and inflows reveals that there is a huge gap between the amount of
FDI approved and its realization into actual disbursements It is observed that major FDI inflows in India are
concluded through automatic route and acquisition of existing shares route than through FIPB, SIA route
during 1991- 2008.
 State- wise FDI inflows show that Maharashtra, New Delhi, Karnataka, Gujarat and Tamil Nadu received
major investment from investors because of the infrastructural Facilities and favorable business environment
provided by these states.
 It is observed that among Indian cities Mumbai received maximum numbers of foreign collaborations.
Difference between FDI and FII
  A large number of changes that were introduced in the country’s regulatory
economic policies heralded the liberalization era of the FDI policy regime in
India and brought about a structural breakthrough in the volume of the FDI
inflows into the economy maintained a fluctuating and unsteady trend
during the study period. It might be of interest to note that more than 50% of
the total FDI inflows received by India came from Mauritius, Singapore and
the USA.
 The main reason for higher levels of investment from Mauritius was that the
fact that India entered into a double taxation avoidance agreement (DTAA)
CONCLUSION with Mauritius were protected from taxation in India. Among the different
sectors, the service sector had received the larger proportion followed by
computer software and hardware sector and telecommunication sector.
 According to findings and results, we have concluded that FII did have
significant impact on Sensex but there is less co-relation with Bankex and
IT. One of the reasons for high degree of any linear relation can also be due
to the sample data. The data was taken on monthly basis. The data on daily
basis can give more positive results (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.
 RECOMMENDATIONS
 Thus, it is found that FDI as a strategic component of investment is needed by India for
its sustained economic growth and development. FDI is necessary for creation of jobs,
expansion of existing manufacturing industries and development of the new one.
 The study urges the policy makers to focus more on attracting diverse types of FDI.
 It is suggested that the government should push for the speedy improvement of
infrastructure sector’s requirements which are important for diversification of business
activities.
 Government must target at attracting specific types of FDI that are able to generate
spillovers effects in the overall economy. This couldbe achieved by investing in human
capital, R&D activities,environmental issues, dynamic products, productive capacity,
infrastructure and sectors with high income elasticity of demand.
 The government must promote policies which allow development process starts from
within (i.e. through productive capacity and by absorptive capacity).
 Government must pay attention to the emerging Asian continent as the new economic
power – house of business transaction and try to boost the trade within this region
through bilateral, multilateral agreements.
 Finally, it is suggested that the policy makers should ensure optimum utilization of funds
and timely implementation of projects. It is also observed that the realization of approved
FDI into actual disbursement is quite low.