This paper analyzes the trends and determinants of foreign capital financing and estimates panel data models. More specifically, it looks into the fixed effect firm and time models by using data for 787 companies for the period 1992-93 to 2003-04, for empirically identifying the factors which affect the demand for foreign capital of the private corporate sector in India. The paper finds that there is an increasing trend in foreign capital financing in India; and size of the firm, liquidity and market risk are the major determinants of the demand for foreign capital of the Indian corporate sector.

In the process of economic development, foreign capital is said to relax the domestic savings constraint, to help overcome the foreign exchange barrier, provide access to the superior technology, superior management skills and bigger markets, provide risk-sharing capital financing, furnish the funds needed for the full utilization of the existing production capacity and promote efficiency and productivity through international competition. Therefore, the beneficial role of the foreign capital no longer appears to be in doubt now. Looking at all these advantages, the perceptions and policies with reference to the role of foreign capital in the process of industrial and overall growth have changed in India since the beginning of economic liberalization. During the recent period the government, business and industry have shown a pitched foreign capital, particularly private foreign capital enthusiasm and optimism. Some micro units or individual companies have now begun to view it as a substitute rather than as a supplementary source of funds.

In India the foreign capital is available from private individual and institutional investors on commercial terms in the form of ero-issues comprising External Commercial Borrowings (ECBs), Portfolio Investment (PI), Foreign Direct Investment (FDI), deposits and investments by Non-Resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) and Investments by Foreign Financial Institutions (FIIs). The government has recently introduced a number of policy measures to attract these various types of foreign investment and various organized efforts are being made to convince foreign investors that India is a good marketplace. However, foreign capital is of a different genre from domestic capital. Its use involves not only the commercial, financial and economic considerations but also wider concerns such as systematic volatility, national sovereignty, dependency and the ultimate resources drain. In this context, the basic objectives of this paper are to analyze the trends in foreign capital financing of corporate sector and toempirically determine the factors that determine the demand for foreign capital of the private corporate sector in India. While the trends in foreign capital financing have been studied during the period from 1966-67 to 2003-2004, the determinants of foreign capital financing have been studied by using panel data pertaining to 787 companies belonging to the manufacturing industries during the liberalization period, i.e., 1992-93 to 2003-2004. The major sources of data are the company finance studies by the Reserve Bank of India (RBI), PROWESS data base maintained by CMIE.