About Indian Economy

India has been one of the best performers in the world economy in recent years, but rapidly rising inflation and the complexities of running the worlds biggest democracy are proving challenging. Indias economy has been one of the stars of global economics in recent years, growing 9.2% in 2007 and 9.6% in 2006. Growth had been supported by markets reforms, huge inflows of FDI, rising foreign exchange reserves, both an IT and real estate boom, and a flourishing capital market. Like most of the world, however, India is facing testing economic times in 2008. The Reserve Bank of India had set an inflation target of 4%, but by the middle of the year it was running at 11%, the highest level seen for a decade. The rising costs of oil, food and the resources needed for Indias construction boom are all playing a part. India has to compete ever harder in the energy market place in particular and has not been as adept at securing new fossil fuel sources as the Chinese. The Indian Government is looking at alternatives, and has signed a wide-ranging nuclear treaty with the US, in part to gain access to nuclear power plant technology that can reduce its oil thirst. This has proved contentious though, leading to leftist members of the ruling coalition pulling out of the government. As part of the fight against inflation a tighter monetary policy is expected, but this will help slow the growth of the Indian economy still further, as domestic demand will be dampened. External demand is also slowing, further adding to the downside risks. The Indian stock market has fallen more than 40% in six months from its January 2008 high. $6b of foreign funds have flowed out of the country in that period, reacting both to slowing economic growth and perceptions that the market was over-valued. It is not all doom and gloom, however. A growing number of investors feel that the market may now be undervalued and are seeing this as a buying opportunity. If their optimism about the long term health of the Indian economy is correct, then this will be a needed correction rather than a downtrend. The Indian government certainly hopes that is the case. It views investment in the creaking infrastructure of the country as being a key requirement, and has ear-marked 23.8 trillion rupees, approximately $559 billion, for infrastructure upgrades during the 11th five year plan. It expects to fund 70% of project costs, with the other 30% being supplied by the private sector. Ports, airports, roads and railways are all seen as vital for the Indian Economy and have been targeted for investment.

Further hope comes from the confidence of Indias home bred companies. As well as taking over the domestic reins, where they now account for most of the economic activity, they are also increasingly expanding abroad. India has contributed more new members to the Forbes Global 2000 than any other country in the last four years. Recent Growth Trends in Indian Economy Indias Economy has grown by more than 9% for three years running, and has seen a decade of 7%+ growth. This has reduced poverty by 10%, but with 60% of Indias 1.1 billion population living off agriculture and with droughts and floods increasing, poverty alleviation is still a major challenge. The structural transformation that has been adopted by the national government in recent times has reduced growth constraints and contributed greatly to the overall growth and prosperity of the country. However there are still major issues around federal vs state bureaucracy, corruption and tariffs that require addressing. Indias public debt is 58% of GDP according to the CIA World Fact book, and this represents another challenge. During this period of stable growth, the performance of the Indian service sector has been particularly significant. The growth rate of the service sector was 11.18% in 2007 and now contributes 53% of GDP. The industrial sector grew 10.63% in the same period and is now 29% of GDP. Agriculture is 17% of the Indian economy. Growth in the manufacturing sector has also complemented the countrys excellent growth momentum. The growth rate of the manufacturing sector rose steadily from 8.98% in 2005, to 12% in 2006. The storage and communication sector also registered a significant growth rate of 16.64% in the same year. Additional factors that have contributed to this robust environment are sustained in investment and high savings rates. As far as the percentage of gross capital formation in GDP is concerned, there has been a significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal year 2006. Further, the gross rate of savings as a proportion to GDP registered solid growth from 23.5% to 34.8% for the same period.

After 1991
Major improvements in educational standards across India have helped its economic rise. Shown here is the Indian School of Business at Hyderabad, ranked number 15 in global MBA rankings by the Financial Times of London in 2009. In the late 80s, the government led by Rajiv Gandhi eased restrictions on capacity expansion for incumbents, removed price controls and reduced corporate taxes. While this increased the rate of growth, it also led to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading partner, and the first Gulf War, which caused a spike in oil prices, caused a major balance-of-payments crisis for India, which found itself facing the prospect of defaulting on its loans. India asked for a $1.8 billion bailout loan from IMF, which in return demanded reforms. In response, Prime Minister Narasimha Rao along with his finance minister Manmohan Singh initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall direction of liberalisation has remained the same, irrespective of the ruling party, although no party has tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies. Since 1990 India has emerged as one of the fastest-growing economies in the developing world; during this period, the economy has grown constantly, but with a few major setbacks. This has been accompanied by increases in life expectancy, literacy rates and food security. While the credit rating of India was hit by its nuclear tests in 1998, it has been raised to investment level in 2007 by S&P and Moody's. In 2003, Goldman Sachs predicted that India's GDP in current prices will overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035. By 2035, it was projected to be the third largest economy of the world, behind US and China.

Introduction Foreign Direct Investment

The 1991 economic reforms were to change all this. Along with the virtual abolition of the industrial licensing system, controls over foreign trade and foreign investment were considerably relaxed, including the removal of ceilings on equity ownership by foreign firms. The reforms did result in increased inflows of FDI during the decade of the nineties. Even so, the volume of FDI in India is relatively low compared with that in the East Asian countries and China. This relatively low volume of FDI, especially so in comparison with China, has attracted widespread comment and sweeping policy recommendations for increasing the volume of FDI in the country. If China, with its newfound faith in capitalism, can embrace and attract substantial volumes of FDI why cant India which is blessed with western institutions and capitalist organizations? This impassioned advocacy of increased flows of FDI into India is based on the well worn arguments that FDI is a rich source of technology and know how and capital to boot, it can invigorate the labour intensive export oriented industries of India, promote technological change in the science based industries and put India on a growth path on par with China. As the fourth-largest economy in the world, India is undoubtedly one of the most preferred destinations for foreign direct investments (FDI); India has strength in information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals and jewellery. India has always held promise for global investors, but its rigid FDI policies were a significant hindrance in this regard. However, as a result of a series of ambitious and positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has a large pool of skilled managerial and technical expertise. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has in a lot of ways enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country. Consistent economic growth, de-regulation, liberal investment rulse, and operational flexibility are all the factors that help increase the inflow of Foreign Direct Investment.

Foreign direct investment (FDI) has increased tenfold over the last 20 years. This kind of investment brings private overseas funds into a country for investments in manufacturing or services. FDI can bring impressive growth, as in China's coastal provinces, but also instability and economic distress, as during the 1997-98 Asian financial crisis. Foreign Direct Investment (FDI) flows are usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology. In a world of increased competition and rapid technological change, their complimentary and catalytic role can be very valuable. Indias FDI inflow estimates, in the Balance of Payments do not include reinvested earnings (by foreign companies), inter-company debt transactions (subordinated debt) and overseas commercial borrowings by foreign direct investors in foreign invested firms, as per the standard IMF definitions. Methodologically, reinvested earnings are required to be shown notionally as dividends paid out under investment income in current account and as inflow of FDI. The other capital, in turn, covers the borrowing and lending of funds including debt securities and suppliers credit between direct investors and direct investment enterprises. Foreign Direct Investment inflow into the country will continue to show the robustness seen in the past couple of years despite the global financial crisis that many feel will impact economies across the world. Definition: -Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly. Foreign direct investment (FDI) is defined as an investment involving a long-term relationship and reflecting a lasting interest and control by 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 or affiliate enterprise or foreign affiliate). FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident

in the other economy. Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and unincorporated. Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor's country of origin. Direct investment is a category of cross-border investment made by a resident entity in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise resident in an economy other than that of the investor (the direct investment enterprise). The lasting interest is evidenced when the direct investor owns 10 per cent of the voting power of the direct investment enterprise. A foreign direct investor is an entity that has a direct investment enterprise operating in a country other than the economy of residence of the foreign direct investor. A direct investor could be: an individual (or a group of related individuals); an incorporated or unincorporated enterprise; public or private enterprise (or a group of related enterprises); a government; estates, or trusts or other organisations that own enterprises. A direct investment enterprise is as an incorporated or unincorporated enterprise in which a nonresident investor owns 10 per cent or more of the voting power of an incorporated enterprise or the equivalent of an unincorporated enterprise. Direct investment is composed of: equity capital, reinvested earning and other capital. Equity capital comprises: (i) equity in branches; (ii) all shares in subsidiaries and associates (except non-participating, preferred shares that are treated as debt securities and included under direct investment, other capital); and (iii) other capital contributions. Reinvested earnings of a direct investment enterprise reflect earnings on equity accruing to direct investors less distributed earnings; they are income to the direct investor. However, reinvested earnings are not actually distributed to the direct investor but rather increase direct investors investment in its affiliate.

Other capital or inter-company debt transactions is defined as borrowing and lending of funds between direct investors and subsidiaries, associates and branches.

Types of FDI based on the motives of the investing firm FDI is categorized based on the motive behind the investment from the perspective of the investing firm: Resource Seeking: Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. Some of these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). Market Seeking: Investments which aim at either penetrating new markets or maintaining existing ones. FDI of this kind may also be employed as defensive strategy, it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one. This type of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980s by Accounting, Advertising and Law firms. Efficiency Seeking: Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. Typically, this type of FDI is mostly widely practiced between developed economies; especially those within closely integrated markets. Strategic Asset Seeking: A tatical investment to prevent the loss of resource to a competitor. Easily compared to that of the oil producers, whom may not need the oil at present, but look to prevent their competitors from having it.

The impact of FDI on country in following way: 1. Growth 2. Trade

3. Employment & Skill Level 4. Technology Diffusion 5. Linkage. FDI has an impact on country's trade balance, Increasing labor standards and skills, Transfer of new technology and innovative ideas, Improving infrastructure, skills and the general business climate. With the integration of international capital markets, world FDI flows grew strongly in the 1990s at rates well above those of global economic growth or trade. This has placed the activities of direct investors and direct investment enterprises under increasing scrutiny by international organizations, and presented new challenges for statistical recording, balance of payments projections, surveillance, and vulnerability analysis. Assessing the medium-term sustainability of recent flows and the implications for financial vulnerability will be particularly important for the surveillance work of the IMF. These developments have raised demands for new statistical work in industrial and developing countries and in international organizations. "The returns on investment for the foreign players may not be sufficiently attractive. Returns on retail and commercial projects in the US and Europe are much higher than foreign players can earn in India," Foreign investment can supplement domestic investible resources in a developing economy, enabling higher rates of growth. As a source of foreign exchange, it can relax potential balance of payments constraints on growth. Profit remittances on account of foreign equity are related to the performance of investment projects, unlike the inflexible repayment obligations of foreign debt: this risk-sharing feature makes foreign equity preferable to foreign debt. Foreign firms contribute to the technological base of the host economy, directly and through technological spillovers to other firms in the industry. Besides, in the right circumstances, the presence of foreign firms reduces market concentration and promotes a more competitive market structure. The reliance on FDI is rising heavily due to its all round contributions to the economy. The important effect of FDI is its contributions to the growth of the economy. Table: 1 FDI limits in India in various sectors are as follows:

Sector Banking Non-banking financial companies (stock broking, credit cards, financial consulting, etc.) Insurance Telecommunications Private petrol refining Construction development Coal & lignite Trading Electricity Pharmaceuticals Transportation infrastructure Tourism Mining Advertising Airports Films Domestic airlines Mass transit Pollution control Print media newspapers and current events scientific and technical periodicals

Permitted Percentage 74% 100% 26% 74% 100% 100% 74% 51% 100% 100% 100% 100% 74% 100% 74% 100% 49% 100% 100%

26% 100%

Table: 2

Flow of FDI and Growth of Country (GDP) Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 FDI Inflow 2144 2821 3557 2462 2155 4029 6130 5035 4322 6051 7722 17,745 GDP at factor Cost 917058 1073271 1243547 1390148 1598127 1761838 1902999 2081474 2254888 2519785 2830465 2848157
FDI Figure in US $ million GDP figure in Rs. Crore

[Sources: RBI Bulletin]

Figure: 1
20000 18000 16000 14000

Flow of FDI and GDP Growth of Country

3000000 2500000 2000000 1500000 1000000 500000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year FDI Inflow GDP at factor Cost

12000 10000 8000 6000 4000 2000 0

GDP at Factor Cost

FDI Inflow

FDI Inflow from various countries during year 2008-09

2008-09 , GERMANY , 2,331, 4% 2008-09 , FRANCE2008-09 2008-09 , , 1,804, 3% U.A.E. , 938, 2008-09 , CYPRUS 1% , 4,486, 7% MAURITIUS 2008-09 , JAPAN , 989, 1% 2008-09 , NETHERLANDS , 3,344, 5% 2008-09 , U.K. , 3,191, 5% 2008-09 , U.S.A. , 5,506, 8% 2008-09 , MAURITIUS , 35,172, 53% SINGAPORE U.S.A. U.K. NETHERLANDS JAPAN GERMANY CYPRUS FRANCE U.A.E. 2008-09 , SINGAPORE , 8,512, 13%

Sector in which FDI attract in India during year 2008-09

2008-09 , METALLURGICA L INDUSTRIES , 3,420, 6% 2008-09 , PETROLEUM & NATURAL GAS , 947, 2% 2008-09 2008-09 , CEHMICALS , SERVICES SECTOR 1,991, 3% COMPUTER SOFTWARE & HARDWARE TELECOMMUNICATIONS CONSTRUCTION ACTIVITIES 2008-09 , SERVICES SECTOR , 15,919, 27% HOUSING & REAL ESTATE AUTOMOBILE INDUSTRY 2008-09 , COMPUTER POWER SOFTWARE & HARDWARE , METALLURGICAL INDUSTRIES 6,670, 11% PETROLEUM & NATURAL GAS 2008-09 , CONSTRUCTION ACTIVITIES , 7,490, 12% 2008-09 , CEHMICALS TELECOMMUNICAT IONS , 9,231, 15%

2008-09 , POWER , 2,467, 4% 2008-09 , AUTOMOBILE INDUSTRY , 3,401, 6%

2008-09 , HOUSING & REAL ESTATE , 8,353, 14%

Consistent economic growth, de-regulation, liberal investment rulse, and operational flexibility are all the factors that help increase the inflow of Foreign Direct Investment. FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor. FDIs require a business relationship between a parent company and its foreign subsidiary. Foreign direct business relationships give rise to multinational corporations. India sees huge jump in FDI inflows despite global woes, the cumulative FDI of $17.21 billion during the April-September (2007-08) period also showed an impressive growth rate of 137% against $7.25 billion in the first half of the previous fiscal. India received foreign direct investment of $2.56 billion in September 2007, showing an increase of 259% over the FDI inflows in the same month in 2007-08, despite the global credit squeeze. The manufacturing sector received $5 billion during the April-August period, showing a rise 41% over inflows in the 2006-07 period.

About Foreign Institutional Investment

An investment in strong companies means that the threat of capital flight and volatility of flows is smaller than what would have been the case if the investments were in weaker opportunities. Foreign Investment refers to investments made by residents of a country in financial assets and production process of another country. After the opening up of the borders for capital movement these investments have grown in leaps and bounds. But it had varied effects across the countries. Post 1991, our country has succeeded in striking the right chord with foreign investors, though the pace of such development was slow. FII money flowing into the Indian stock markets is definitely not a new phenomenon, and much is written about this issue in the media as well as academia. Positive tidings about the Indian economy combined with a fast-growing market have made India an attractive destination for foreign institutional investors (FIIs). Though valuations are very attractive on a selective basis, but stock picking has to be done based on evaluation of business fundamentals. As India is in the process of liberalizing the capital account, it would have significant impact on the foreign investments and particularly on the FII, as this would affect short-term stability in the financial markets. Hence, there is a need to determine the push and pull factors behind any change in the FII, so that we can frame our policies to influence the variables which drive-in foreign investment. FIIs showed huge interest in 2007, pumping in the highest ever net investment of US$ 17.2 billion in the equity markets and were instrumental in the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) clocking record index levels of over 20,000 and 6,000, respectively. In fact, during the year, FIIs were net buyers in 10 out of 12 months, turning net sellers in the rest, primarily to make up the losses on account of the sub-prime crisis in the US. Foreign Institutional Investors (FIIs.) including institutions such as Pension Funds, Mutual Funds, Investment Trusts, Asset Management or their power of attorney holders (providing discretionary and non-discretionary portfolio management services) are invited 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.

The General Permission from RBI shall also enable the FII to: 1. Open foreign currency denominated account(s) in a designated bank. (These can even be more than one account in the same bank branch each designated in difference foreign currencies, if it is so required by FII for its operational purposes); 2. 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; 3. Transfer sums from the foreign currency accounts to the rupee account and vice-versa, at the market rates of exchange; 4. Make investments in the securities in India out of the balances in the rupee account; 5. Transfer repatriatable (after tax) proceeds from the rupee account to the foreign currency accounts); 6. 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 authorised to deduct withholding tax on capital gains and arranging to pay such tax and remitting the net proceeds at market rates of exchange; 7. Register FII's holdings without any further clearance under FERA.

There is no restriction on the volume of investment minimum or maximum for the purpose of entry of FIIs, in the primary/secondary market. Also, there is no lock in period for the purpose of such investments made by FIIs. Portfolio investments in primary or secondary markets will be subject to a ceiling of 24% of issued share capital for the total holdings of all registered FIIs, in any one company. The ceiling would apply 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 5% of total issued capital. For this purpose, the holdings of a FII ground will be counted as holdings of a single FII. The maximum holding of 24% for all non-resident portfolio investments, including those of the registered FIIs, will also include NRI corporate and non-corporate investments, but will not include the following: 1. Foreign investments under financial collaborations (direct foreign investments), which are permitted upto 51% in all priority areas. 2. Investments by FIIs through the following alternative routes : Offshore single/regional Funds; Global Depository Receipts; Euro-convertibles.

These would include shares, debentures, warrants, and the schemes floated by domestic Mutual Funds. To be eligible to do so, the FIIs would be required to obtain registration with Securities and Exchange Board of India (SEBI). FIIs are also required to file with SEBI another application addressed to RBI for seeking various permissions under FERA. Disinvestment will be allowed only through stock exchanges 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. All secondary market operations would be only through the recognised intermediaries on the Indian Stock Exchange, including OTC Exchange of India. A registered FII will not engage in

any short selling in securities and to take delivery of purchased and give delivery of sold securities.

Figure: 2 No. of FII Registered during the last two year.

No. of FII Registered

Value

Month
Sources: www.rbi.org.in Figure: 3 FII inflows from January 1993 to July 2008.

FII inflow from Jan. 1993 to July 2008 FII Inflow (Rs. in Cr.)

Sources: www.rbi.org.in A registered FII can appoint as Custodian an agency approved by SEBI to act as a custodian of securities and for confirmation of transactions in securities, settlement of purchase and sale, and for information reporting. Such custodian shall establish separate accounts for detailing on a daily basis the investment capital utilisation and securities held by each FII for which it is acting as custodian. The Custodian will report to the RBI and SEBI semi-annually as part of its disclosure and reporting guidelines. The RBI shall 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 24% having been reached under the portfolio investment scheme. The RBI 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. RBI and/or SEBI may also at any time conduct a direct inspection of the records and accounting books of a registered FII. 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 of more) capital gains.

Consequent to the liberalisation of registration norms, the number of foreign institutional investors (FIIs) registered with the Securities and Exchange Board of India (SEBI) has increased to 1403 as on June 27, 2008 as compared with just 1051 FIIs a year back. It is always good to keep an eye on what the big movers are doing and plan individual strategy accordingly. There are several reasons on FIIs selling, but there are three predominant factors that are cited as being largely responsible. 1. The swings in the market forced several FIIs to withdraw from India and invest their dollars in other emerging markets. Some of the other markets include Uruguay, Russia, the Ukraine, and several other former Soviet countries. Though there have been swings in the past too but FII response this time was different because of margin pressures back home as even they have to provide regular returns to their investors. 2. The Indian markets are not seen as a good short-term bet any more. India is seen as a good investment for the medium to long term. FIIs seem to fear the pace of growth and the fundamentals of the markets. 3. Most FIIs are looking at corporate governance and execution abilities, which could be significant drivers in creating a strong portfolio of Indian stocks. Recent action taken by the market regulator indicates that the Indian government would like to moderate the inflow of FII money.

Some of other Facts about FII Investment in India. The ceiling for overall investment for FIIs is 24 per cent of the paid-up capital of the Indian company, and limit is 20 per cent of the paid-up capital in the case of public sector banks. The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. Continuous liberalization in foreign investment policy and simplification of procedures are contributing immensely to attracting increased foreign investment into India. The fact that the Government is now annually conducting a review of the Foreign Investment Policy &

Procedures has given an added confidence to the foreign investors that their concerns are addressed on a continuous basis. Globalization eventually has a positive impact as no country that is fully protected can grow. Individuals and countries flourish only when there is competition. No country can afford to remain isolated. The FII investments have been the corner stone in the phenomenal rise of the Indian stock markets. According to a study by Citigroup Research, the holding of FIIs in Indian companies exceeds that of domestic financial institutions, including mutual funds and insurance companies, retail and high-net worth-investors (HNIs) all put together. Consequent to the liberalisation of registration norms, the number of foreign institutional investors (FIIs) registered with the Securities and Exchange Board of India (SEBI) has increased to 1403 as on June 27, 2008 as compared with just 1051 FIIs a year back. In a significant step towards market reforms, the Securities and Exchange Board of India is considering sweeping changes in the norms governing the participation of foreign institutional investors in the securities market. FIIs are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment for FIIs is 24 per cent of the paid-up capital of the Indian company, and limit is 20 per cent of the paid-up capital in the case of public sector banks. The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect. Continuous liberalization in foreign investment policy and simplification of procedures are contributing immensely to attracting increased foreign investment into India. The fact that the Government is now annually conducting a review of the Foreign Investment Policy & Procedures has given an added confidence to the foreign investors that their concerns are addressed on a continuous basis.

Globalization eventually has a positive impact as no country that is fully protected can grow. Individuals and countries flourish only when there is competition. No country can afford to remain isolated. The FII investments have been the corner stone in the phenomenal rise of the Indian stock markets. According to a study by Citigroup Research, the holding of FIIs in Indian companies exceeds that of domestic financial institutions, including mutual funds and insurance companies, retail and high-net worth-investors (HNIs) all put together. The total investment of FIIs in Indian stocks was almost ten times that of the net investment of the domestic mutual funds. Total net investments of FIIs amounted to about US$ 17.2 billion at the end of 26 December, 2007 as against about US$ 1.7 billion by the domestic mutual funds. In fact, as of 31 March, 2008 FIIs owned about 15 per cent of the BSE-500 basket, reflecting the magnitude of interest shown by this class of investors in the Indian financial market. There is little doubt that FII inflows have significantly grown in importance over the last few years. In the absence of any other substantial form of capital inflows, the potential ill effects of a reduction in the FII flows into the Indian economy can be severe. Thus, while I do not indicate that FII inflows are per-se bad, there is possibly a need to gear up macro-economic policies to target other form of foreign investments into the economy and reduce the over-reliance of the economy on portfolio flows. Potential for investment in India According to Investment Commission of India, investment opportunity of US $ 500 billion would emerge in India in the next 5 years in major economic sectors, of which US $ 250 billion investment opportunities exist in the infrastructure sector alone. The Infrastructure sector including roads, power, railways, aviation require an enormous amount of $320-350 billion by 2012 to raise rate of investment in key areas at par with economic growth and 20 per cent of which will have to be chipped in by the private sector. Huge private sector funding is required since public investment in the area is constrained by limitations on the government-borrowing programme imposed by the FRBM Act and demand for investment by other growing sectors of the economy.

Huge investment potential exists in the Indian retail industry. According to the estimates by the consultancy firm KSA Technopak around $25 billion will flow into the retail sector in the next five years taking the organized portion of the business from a measly 3 percent to 14 percent.

The Indian real estate industry is poised to emerge as one of the most preferred investment destinations for global realty and investment firms. The industry is poised to experience a landscape change and the key trends that will shape the business in the next three to five years are enlargement of project size with focus on product differentiation and quality, expansion in geographical coverage from metros to smaller cities, shift from regional developers to national developers, movement of construction giants up the value chain and the emergence of strong real estate capital market. The domestic real estate sector may emerge a US$ 50 billion industry by 2010 and prove one of the most attractive sectors for foreign investments.