Portfolio investment flows at $3 billion regained their dominance over the capital account, benifitting from the renewal of international investor confidence in stock markets in emerging economies, said the RBI in its Report on Currency and Finance (1999-2000).

During the year, forward cover for FIIs was enhanced to 15 per cent of their outstanding investment as on March 1999 and all incremental investments thereafter. FIIs were also allowed to raise their participation in the equity capital of Indian companies to 40 per cent of the total. They were also allowed to invest in Indian mutual funds and to invest in Indian stock exchanges on behalf of foreign corporates and high net-worth non-residents.

Additionally, Indian companies were allowed to issue ADRs/GDRs without prior aprroval of the government. Acquisition of overseas companies by Indian entities through ADR/GDR issues was liberalised.

"Net inflows in the form of foreign direct investment, however, declined moderately from $2.5 billion to $2.2 billion, reflecting the weakness in domestic investment demand as well as the lack of appetite of direct investors for Asian economies other than those recovering from the financial crises", said the RBI in its report.

The policy response was in the form of releasing procedural constraints - establishment of the foreign investment implementation authority, automatic route approval for all investment proposals except for a short negative list, special economic zones with tax breaks and relative freedom from implementation bottlenecks and opening up new areas for FDI - such as foreign equity participation in insurance up to 26 per cent.

In the case of external commercial borrowing (ECB), the policy framework was liberalised during the year in the form of transfer of approval formalities for also ECBs up to $100 million to the Reserve Bank, freeing end-use restriction except for real estate and equity market investment, specific incentives for the infrastructure sector in the form of raising equity investment out of ECB in joint ventures in the infrastructure sector and greater flexibility in ECB exposure for infrastructure projects. Prepayment of ECB from funds under EEFC accounts were allowed as a boost to the export sector, which is another thrust area in the deployment of ECB policy.