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NAGINDAS KHANDWALA COLLEGE OF

COMMERCE ARTS AND MANAGEMENT STUDIES
MALAD (WEST), MUMBAI-400064.

A PROJECT REPORT ON:

ROLE OF FDI IN INDIAN BANKING SECTOR

IN PARTIAL FULFILLMENT
OF T.Y.BCOM
(BANKING AND INSURANCE)
SEMESTER V

PRESENTED BY:
RITIKA SHARMA

PROJECT GUIDE:
PROF. RUPALI JAIN

UNIVERSITY OF MUMBAI
ACADEMIC YEAR 2014-2015

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ACKNOWLEDGEMENT

I would like to thank the University Of Mumbai for giving me this

opportunity of taking up such a challenging project which has enhanced my
knowledge about the modern banking products and services offered by
banks.

I am very grateful to PROF. RUPALI JAIN under whose guidance I was

successfully able to complete my project. I wish to thank her for all the
suggestions and guidance on the related topic of my work. I am thankful to
her because of her friendly approach and kindness to me.

I would also like to thank the librarian of our college for providing me
relevant information and books in the library.

I would like to express my gratitude to PRINCIPAL DR. MRS. ANCY JOSE.

Last but not the least, thank you to my colleagues.

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SR
TOPIC
NO.
1.
Introduction And Types Of FDIs
2.
Methods And History Of FDI
3.
Govt. Approval For Foreign Companies Doing
Business In India
4.
FDI Policy And Scope Of FDI In India
5.
Current Banking Scenario In India
6.
Current Status Of FDI In India
7.
Authorities Dealing With Foreign Investments
8.
FDI In Indian Banking Sector
9.
Guidelines For Investment In Banking Sector
10.
Indian operations by foreign banks can be executed
by any one of the following 3 channels
11.
Problems Faced By Indian Banking Sector
12.
Benefits Of FDI In Indian Banking Sector
13.
Foreign Portfolio Investment & FDI v/s FPI
14.
Advantages And Disadvantages Of FDI
15.
Importance Of FDI And FDI Policy In India
16.
Impact Of FDI And Downfall Of FDI
17.
Statutory Limits
18.
Voting Rights Of Foreign Investors
19.
RBI Approval
20.
Disinvestment By Foreign Investors
21.
Case Study
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Conclusion

49

INDEX

Executive Summary
Foreign direct investment (FDI) has played an important role in the process
of globalisation during the past two decades. The rapid expansion in FDI by
multinational enterprises since the mid-eighties may be attributed to
significant changes in technologies, greater liberalisation of trade and
investment regimes, and deregulation and privatisation of markets in
developing countries like India.
The present study aims at providing detailed information about FDI inflows
in India during the subsequent years. The analysis is fully based on secondary
data collected through different website and journals.
The project aims at providing information of present FDI policy, year wise
FDI inflows, advantages and disadvantages of FDI, RBI policy, foreign
portfolio investment, impact and importance of FDI in banking sector, etc.
And thus different suggestion and recommendation are given to improve the
present condition of FDI in India.

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Introduction
The Foreign Direct Investment means cross border investment made by a
resident in one economy in an enterprise in another economy, with the
objective of establishing a lasting interest in the investee economy. FDI is
also described as investment into the business of a country by a company in
another country. Mostly the investment is into production by either buying a
company in the target country or by expanding operations of an existing
business in that country.
Such investments can take place for many reasons, including taking
advantage of cheaper wages, special Investment privileges (e.g. tax
exemptions) offered by the country. Foreign Direct Investment (FDI) broadly
encompasses any long-term investments by an entity that is not a resident of
the host country. Typically, the investment is over a long duration of time and
the idea is to make an initial investment and then subsequently keep investing

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to leverage the host countrys advantages which could be in the form of

access to better (and cheaper) resources, etc.
This long-term relationship benefits both the investor as well as the host
country. The investor benefits in getting higher returns for his investment
than he would have gotten for the same investment in his country and the
host country can benefit by the increased know how or technology transfer to
its workers, increased pressure on its domestic industry to compete with the
foreign entity thus making the industry improve as a whole or by having a
demonstration effect on other entities thinking about investing in the host
country.

Types Of FDIs
By Direction
Outward FDI - An outward-bound FDI is backed by the government against
all types of associated risks. This form of FDI is subject to tax incentives as
well as disincentives of various forms. Risk coverage provided to the
domestic industries and subsidies granted to the local firms stand in the way
of outward FDIs, which are also known as 'direct investments abroad.'
Inward FDIs - Different economic factors encourage inward FDIs. These
include interest loans, tax breaks, subsidies, and the removal of restrictions
and limitations. Factors detrimental to the growth of FDIs include necessities
of differential performance and limitations related with ownership patterns.
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Horizontal FDIs - Investment in the same industry abroad as a firm operates

in at home.
Vertical FDIs
Backward Vertical FDI: Where an industry abroad provides inputs for a
firm's domestic production process.
Forward Vertical FDI: Where an industry abroad sells the outputs of a
firm's domestic production.

BY TARGET
Greenfield Investment: - Direct investment in new facilities or the
expansion of existing facilities. Greenfield investments are the primary target
of a host nations promotional efforts because they create new production
capacity and jobs, transfer technology and know-how, and can lead to
linkages to the global marketplace. The Organization for International
Investment cites the benefits of Greenfield investment (or in sourcing) for
regional and national economies to include increased employment (often at
higher wages than domestic firms); investments in research and development;
and additional capital investments. Disadvantage of Greenfield investments
include the loss of market share for competing domestic firms.
Mergers And Acquisitions:- Transfers of existing assets from local firms to
foreign firm takes place; the primary type of FDI. Cross-border mergers
occur when the assets and operation of firms from different countries are
combined to establish a new legal entity. Cross-border acquisitions occur
when the control of assets and operations is transferred from a local to a
foreign company, with the local company becoming an affiliate of the foreign
company.

BY MOTIVE
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FDI can also be 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 those are more
efficient than those obtainable in the home economy of the firm. In some
cases, these resources may not be available in the home economy at all. For
example seeking natural resources in the Middle East and Africa, or cheap
labour in Southeast Asia and Eastern Europe.
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.
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.

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.
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Foreign direct investment incentives may take the following forms:

Low corporate tax and income tax rates.
Tax holidays.
Preferential tariffs.
Special economic zones.
Investment financial subsidies.
Soft loan or loan guarantees.
Free land or land subsidies.
Relocation & expatriation subsidies.
Job training & employment subsidies.
Infrastructure subsidies.
R&D support.

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History Of FDI In India

India intent to open its markets to foreign investment can be traced back to
the economic reforms adopted during two prime periods- pre- independence
and post-independence.
Pre- independence, India was the supplier of foodstuff and raw materials to
the industrialised economies of the world and was the exporter of finished
products- the economy lacked the skill and means to convert raw materials to
finished products. International trade grew with the establishment of the
WTO. India is now a part of the global economy. Every sector of the Indian
economy is now linked with the world outside either through direct
involvement in international trade or through direct linkages with export and
import.
Development pattern during the 1950-1980 periods was characterised by
strong centralised planning, government ownership of basic and key
industries, excessive regulation and control of private enterprise, trade
protectionism through tariff and non-tariff barriers and a cautious and
selective approach towards foreign capital. It was a quota, permit, licence
regime which was guided and controlled by a bureaucracy trained in colonial
style.
Consequently economic reforms were introduced initially on a moderate
scale and controls on industries were substantially reduced by 1985 industrial
policy. The 1991 reforms ensured that the way for India to progress will be
through globalization, privatisation, and liberalisation. In this new regime,
the government is now assuming the role of a promoter, facilitator and
catalyst agent instead of the regulator and India has a number of advantages
which make it an attractive market for foreign capital namely, political
stability in democratic polity, steady and sustained economic growth and
development, significantly huge domestic market, access to skilled and
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technical manpower at competitive rates, fairly well developed infrastructure.

FDI has attained the status of being of global importance because of its
beneficial use as an instrument for global economic integration.
Pre-Independence Reforms:
Under the British colonial rule, the Indian economy suffered a major setback. An economy with rich natural resources was left plundered and
exploited to the hilt under the English regime. India is originally an agrarian
economy. Indias cottage industries and trade were abused and exploited as
means to pave the way for European manufactured goods. Under the British
rule the economy stagnated and on the eve of independence India was left
with a poor economy and the textile industry as the only life support of the
industrial economy.
Post-Independence Reforms:
Indias struggle post-independence has been an excruciating financial battle
with a slow economic growth and development which were largely due to the
political climate and impact of the economic reforms. The country began it
transformation from a native agrarian to industrial to commercial and open
economy in the post-independence era. India in the post-independence era
followed what can be best called as a trial and error path. During the postindependence era, the Indian Economy geared up in favour of central
planning and resource allocation.
The government tailored policies that focussed a great deal on achieving
overall economic self-reliance in each state and at the same time exploit its
natural resource. In order to augment trade and investments, the government
sought to play the role of custodian and trustee by intervening in the practice
of crucial sectors such as aviation, telecommunication, banking, energy
mainly electricity, petrol and gas.
The policy of central planning adopted by the government sought to ensure
that the government laid down marked goals to be achieved by the economy
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thereby establishing a regime of checks and balances. The government also

encouraged self-sufficiency with the intent to encourage the domestic
industries and enterprises, thereby reducing the dependence on foreign trade.
Although, initially these policies were extremely successful as the economy
did have a steady economic growth and development, they werent sustained.
In the early, 1970s, India had achieved self-sufficiency in food production.
During the 1970s, the government still continued to retain and wield a
significant spectre of control over key.
In the Early 1980s-Macro-Economic Policies were conservative.
Government control of industries continued. There was marginal economic
growth & development courtesy of the development projects funded by
foreign loans. The financial crisis of 1991 compelled drafting and
implementation of economic reforms. The government approached the World
Bank and the IMF for funding. In keeping with their policies there was
expectation of devaluation of the rupee. This lead to a lack of confidence in
the investors and foreign exchange reserves declined. There was a withdrawal
of loans by Non Resident Indians.

Economic reforms of 1991:

India has been having a robust economic growth since 1991 when the
government of India decided to reverse its socially inspired policy of a
retaining a larger public sector with comprehensive controls on the private
sector and eventually treaded on the path of liberalization, privatisation and
globalisation.
During early 1991, the government realised that the sole path to India
enjoying any status on the global map was by only reducing the intensity of
government control and progressively retreating from any sort of intervention
in the economy thereby promoting free market and a capitalist regime
which will ensure the entry of foreign players in the market leading to
progressive encouragement of competition and efficiency in the private
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sector. In this process, the government reduced its control and stake in
nationalized and state owned industries and enterprises, while simultaneously
lowered and deescalated the import tariffs.
All of the reforms addressed macroeconomic policies and affected balance of
payments. There was fiscal consolidation of the central and state
governments which lead to the country viewing its finances as a whole. There
were limited tax reforms which favoured industrial growth. There was a
removal of controls on industrial investments and imports, reduction in
import tariffs. All of this created a favourable environment for foreign capital
investment. As a result of economic reforms of 1991, trade increased by leaps
and bounds. India has become an attractive destination for foreign direct and
portfolio investment.

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Government Approvals for Foreign Companies

Doing Business in India
Government Approvals for Foreign Companies Doing Business in India or
Investment Routes for Investing in India, Entry Strategies for Foreign
Investors India's foreign trade policy has been formulated with a view to
invite and encourage FDI in India. The Reserve Bank of India has prescribed

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the administrative and compliance aspects of FDI. A foreign company

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

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 high-priority industries or for trading companies primarily
engaged in exporting are given almost automatic approval by the RBI.

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.

FOREIGN DIRECT INVESTMENT POLICY

IN INDIA
FDI is prohibited in sectors like
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(a) Retail Trading (except single brand product retailing)

(b) Lottery Business including Government /private lottery, online lotteries,
etc.
(c) Gambling and Betting including casinos etc.
(d) Chit funds
(e) Nidhi Company
(f) Trading in Transferable Development Rights (TDRs)
(g) Real Estate Business or Construction of Farm Houses
(h) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or
of tobacco substitutes
(i) Activities / sectors not open to private sector investment e.g. Atomic
Energy and Railway Transport (other than Mass Rapid Transport Systems).
Foreign technology collaboration in any form including licensing for
franchise, trademark, brand name, management contract is also prohibited for
Lottery Business and Gambling and Betting activities.
PERMITTED SECTORS
In the following sectors/activities, FDI up to the limit indicated against each
sector/activity is allowed, subject to applicable laws/ regulations; security
and other conditionality. In sectors/activities not listed below, FDI is
permitted up to 100% on the automatic route, subject to applicable laws/
regulations; security and other conditionality. Wherever there is a
requirement of minimum capitalization, it shall include share premium
received along with the face value of the share, only when it is received by
the company upon issue of the shares to the non-resident investor. Amount
paid by the transferee during post-issue transfer of shares beyond the issue
price of the share, cannot be taken into account while calculating minimum
capitalization requirement;

Scope Of FDI In India

India is the 3rd largest economy of the world in terms of purchasing power
parity and thus looks attractive to the world for FDI. Even Government of
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India, has been trying hard to do away with the FDI caps for majority of the
sectors, but there are still critical areas like retailing and insurance where
there is lot of opposition from local Indians / Indian companies.
Some of the major economic sectors where India can attract investment are as
follows:

Telecommunications

Apparels

Information Technology

Pharma

Auto parts

Jewellery

Chemicals
In last few years, certainly foreign investments have shown upward trends
but the strict FDI policies have put hurdles in the growth in this sector. India
is however set to become one of the major recipients of FDI in the AsiaPacific region because of the economic reforms for increasing foreign
investment and the deregulation of this important sector. India has technical
expertise and skilled managers and a growing middle class market of more
than 300 million and this represents an attractive market.

Current Banking Scenario In India

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In recent times economy is been pushing to increase the role of multi-national

banks in the banking and insurance sector, despite, the concern expressed by
the left communist parties are opposing the finance minister move to raise
overseas investment limits in the insurance business. The government wants
to fulfil a pledge to allow companies like New York Life Insurance, Met Life
Insurance to raise investment in local companies to 49 per cent from 26 per
cent.
But it is opposed on the front that it will lead to state run insurers losing
business and workers their job. Left do not want foreign investors to have
greater voting rights in private banks and oppose the privatization of state run
pension fund.
There are several reasons why such move is fraught with dangers. When
domestic or foreign investors acquire a large shareholding in any bank and
exercise proportionate voting rights, it creates potential problems not only of
excursive concentration in the banking sector but also can expose the
economy to more intensive financial crises at the slightest hint of panic.
Opposition is not considering the need of present situation. FDI in banking
sector can solve various problems of the overall banking sector. Such as

Innovative Financial Products

Technical Developments in the Foreign Markets
Problem of Inefficient Management
Non-performing Assets
Financial Instability
Poor Capitalization
Changing Financial Market Conditions

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If we consider the root cause of these problems, the reason is low-capital base
and all the problems is the outcome of the transactions carried over in a bank
without a substantial capital base.

Current Status Of FDI In India

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Authorities Dealing With Foreign

Investment
Foreign Investment Promotion Board (popularly known as FIPB): The
Board is responsible for expeditious clearance of FDI proposals and
review of the implementation of cleared proposals. It also undertakes
investment promotion activities and issue and review general and
sectorial policy guidelines;
Secretariat for Industrial Assistance (SIA): It acts as a gateway to
industrial investment in India and assists the entrepreneurs and
investors in setting up projects. SIA also liaison with other government
bodies to ensure necessary clearances;

Foreign Investment Implementation Authority (FIIA) : The authority

works for quick implementation of FDI approvals and resolution of
operational difficulties faced by foreign investors;
Investment Commission

Project Approval Board

Reserve Bank of India

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FDI In Indian Banking Sector

In the private banking sector of India, FDI is allowed up to a
maximum limit of 74 % of the paid-up capital of the bank. On
the other hand, Foreign Direct Investment and Portfolio
Investment in the public or nationalized banks in India are
subjected to a limit of 20 % in totality. This ceiling is also
applicable to the investments in the State Bank of India and
its associate banks. FDI limits in the banking sector of India
were increased with the aim to bring in more FDI inflows in
the country along with the incorporation of advanced
Technology and Management practices. The objective was to
make the Indian banking sector more competitive. The
Reserve Bank of India governs the investment matters in the
banking sector.
The global banking industry weathered turbulent times in
2007 and 2008. The impact of the economic slowdown on the
banking and insurance services sector in India has so far
been moderate. The Indian financial system has very little
exposure to foreign assets and their derivative products and
it is this feature that is likely to prove an antidote to the
financial sector ills that have plagued many other emerging
economies. Owing to at least a decade of reforms, the
banking sector in India has seen remarkable improvement in
financial health and in providing jobs. Even in the wake of a
severe economic downturn, the banking sector continues to
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be a very dominant sector of the financial system. The

aggregate foreign investment in a private bank from all
sources is allowed to reach as much as 74% under Indian
regulations.
A foreign bank or its wholly owned subsidiary regulated by a financial sector
regulator in the host country can now invest up to 100% in an Indian private
sector bank. This option of 100% FDI will be only available to a regulated
wholly owned subsidiary of a foreign bank and not any investment
companies. Other foreign investors can invest up to 74% in an Indian private
sector bank, through direct or portfolio investment.
The Government has also permitted foreign banks to set up wholly owned
subsidiaries in India. The government, however, has not taken any decision
on raising voting rights beyond the present 10% cap to the extent of
shareholding.
The new FDI norms will not apply to PSU banks, where the FDI ceiling is
still capped at 20%. Foreign investment in private banks with a joint venture
or subsidiary in the insurance sector will be monitored by RBI and the IRDA
to ensure that the 26 per cent equity cap applicable for the insurance sector is
not breached.
All entities making FDI in private sector banks will be mandatorily required
to have credit rating. The increase in foreign investment limit in the banking
sector to 74% includes portfolio investment [ie, foreign institutional investors
(FIIs) and non-resident Indians (NRIs)], IPOs, private placement, ADRs or
GDRs and acquisition of shares from the existing shareholders. This will be
the cap for any increase through an investment subsidiary route as in the case
of HSBC-UTI deal.
In real terms, the sectorial cap has come down from 98% to 74% as the
earlier limit of 49% did not include the 49% stake that FII investors are
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allowed to hold. That was allowed through the portfolio route as the sector
cap for FII investment in the banking sector was 49%.
The decision on foreign investment in the banking sector, the most radical
since the one in 1991 to allow new private sector banks, is likely to open the
doors to a host of mergers and acquisitions. The move is expected to also
augment the capital needs of the private banks.

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Guidelines For Investment In Banking

Sector
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The limits of FDI in the banking sector has been increased to 74% of the
paid up capital of bank.
FDI in the banking sector is allowed under the automatic route in India.
FDI and portfolio investment in the public or nationalised banks in India
are subject to limit of 20% in totality.
This ceiling is also applicable to the investors in SBI and its associated
banks.
FDI limits in banking sector of India were increased with the aim to bring
in more FDI inflows in the country along with the incorporation of advanced
technology and management practices.
The objective was to make the Indian banking sector more competitive.
The RBI of India governs the investment matters in the banking sector.

Indian Operations By Foreign Banks Can

Be Executed By Any One Of The Following
Three Channels:
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Branches in India.
Wholly owned subsidies.
Other subsidies.
In case of wholly owned subsidies (WOS), the guidelines for FDI in the
banking sector specified that the WOS must involve a capital of minimum
300 crores and should ensure proper corporate governance.

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Problem Faced By Indian Banking Sector

Inefficiency in management.
Instability in financial matters.
Innovativeness in financial products or schemes.
Technical developments happening across various foreign markets.
Non-performing areas or properties.
Poor marketing strategies.
Changing financial market conditions.

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Benefits Of FDI In Banking Sector In India

Technology Transfer
As due to the globalization local banks are competing in the global market,
where innovative financial products of multinational banks is the key limiting
factor in the development of local bank. They are trying to keep pace with the
technological development in the banks. Nowadays banks have been
prominent and prudent in the rapid expansion of consumer lending in
domestic as well as in foreign markets. It needs appropriate tools to assess
(how such credit is managed) credit management of the banks and authorities
in charge of financial stability.
Better Risk Management
As the banks are expanding their area of operation, there is a need to change
their strategies exert competitive pressures and demonstration effect on local
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institutions, often including them to reassess business practices, including

local lending practices as the whole banking sector is crying for a strategic
policy for risk management. Through FDI, the host countries will know
efficient management technique. The best example is Basel II. Most of the
banks are opting Basel II for making their financial system safer.
Financial Stability and Better Capitalization
Host countries may benefit immediately. From foreign entry, if the foreign
bank re-capitalize a struggling local institution. In the process also provides
needed balance of payment finance. In general; more efficient allocation of
credit in the financial sector, better capitalization and wider diversification of
foreign banks along with the access of local operations to parent funding,
may reduce the sensitivity of the host country banking system and lead
towards financial stability.

Foreign Portfolio Investment

Foreign portfolio investment typically involves short-term positions in
financial assets of international markets, and is similar to investing in
domestic securities. FPI allows investors to take part in the profitability of
firms operating abroad without having to directly manage their operations.
This is a similar concept to trading domestically: most investors do not have
the capital or expertise required to personally run the firms that they invest in.
The Reserve Bank of India (RBI) has simplified foreign portfolio investment
(FPI) norms by putting in place an easier registration process and operating
framework with an aim to attract inflows. "The portfolio investor registered
in accordance with SEBI guidelines shall be called Registered Foreign
Portfolio Investor (RFPI)," the RBI said in a notification on Tuesday.
The notification is effective from March 19. The existing portfolio investor
class - namely, foreign institutional investors (FIIs) and qualified foreign
investors (QFIs) - registered with market watchdog Securities and Exchange
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Board of India (SEBI) shall be subsumed under RFPIs, it said. The guidelines
for the Portfolio Investment Scheme for foreign institutional investors (FIIs)
and qualified foreign investors (QFIs) have since been reviewed and it has
been decided to put in place a framework for investments under a new
scheme called Foreign Portfolio Investment scheme, it said. An RFPI may
purchase and sell shares and convertible debentures of an Indian company
through a registered broker on recognised stock exchanges in India as well as
purchases shares and convertible debentures which are offered to public in
terms of relevant SEBI guidelines, the RBI said. Such investors "may also
acquire shares or convertible debentures in any bid for, or acquisition of,
securities in response to an offer for disinvestment of shares made by the
Central Government or any State Government", it said. These entities would
be eligible to invest in government securities and corporate debt subject to
limits specified by the RBI and SEBI from time to time, it added.

FDI v/s FPI

FDI

FPI

Volatility Having smaller in net inflows

Having larger net inflows

Management Projects are efficiently managed

Projects are less efficiently

managed

Involvement Involved in management and ownership

- direct or control; long-term interest
indirect

No active involvement in
management. Investment
instruments that are more
easily traded, less
permanent and do not
represent a controlling

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stake in an enterprise.

Sell off

It is more difficult to sell off or pull out.

Comes from Tends to be undertaken by Multinational

organisations

What is Involves the transfer of non-financial

invested assets e.g. technology and intellectual
capital, in addition to financial assets.

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It is fairly easy to sell

securities and pull out
because they are liquid.

Comes from more diverse

sources e.g. a small
company's pension fund or
through mutual funds held
by individuals; investment
via equity instruments
(stocks) or debt (bonds) of
a foreign enterprise.

Only investment of
financial assets.

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Advantages Of FDI
Many countries still have several import tariffs in place, so reaching
these countries through international trade is difficult. There are certain
industries that require being present in international markets in order to
succeed, and they are the ones who then provide FDI to industries in
such countries, so that they can increase their sales presence there.
Many parent enterprises provide FDI because of the tax incentives that
they get. Governments of certain countries invite FDI because they get
additional expertise, technology and products.
Foreign investment reduces the disparity that exists between costs and
revenues, especially when they are calculated in different currencies.
By controlling an enterprise in a foreign country, a company is ensuring
that the costs of production are incurred in the same market where the
goods will ultimately be sold.
Different international markets have different tastes, different
preferences and different requirements. By investing in a company in
such a country, an enterprise ensures that its business practices and
products match the needs of the market in that country specifically.
Though this is not such a big factor, some markets prefer locally
produced goods due to a strong sense of patriotism and nationalism,
making it very hard for international enterprises to penetrate such a
market. FDI helps enterprises enter such markets and gain a foothold
there. From the foreign affiliate's point of view, FDI is beneficial

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because they get advanced resources and additional capital at their

disposal.

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Disadvantages Of FDI
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While all these advantages are well and good, the fact is that there are
certain cons that come along with them as well. Every industry, and
every country, deals with these cons differently, and is also affected in
varying degrees, so they are not meant to discourage foreign investors
in any way. But every parent enterprise should be aware of these points.
Foreign investments are always risky because the political situation in
some countries can change in an instant. The investor could suddenly
find his investment in serious jeopardy due to several different reasons,
so the risk factor is always extremely high.
In certain cases, political changes could lead to a situation of
'Expropriation'. This refers to a scenario where the government can take
control of a firm's property and assets, if it feels that the enterprise is a
threat to national security.
Many times, the cultural differences between different countries prove
insurmountable. Major differences in the philosophy of both the parties
lead to several disagreements, and ultimately a failed business venture.
So it is necessary for both the parties to understand each other and
compromise on certain principles. This point is directly related to
globalization as well.
Investing in foreign countries is infinitely more expensive than
exporting goods. So an investor should be prepared to spend a lot of
money for the purpose of setting up a good base of operations.

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This is something that parent enterprises know and are well prepared
for, in most cases. From the point of view of foreign affiliates, FDI is
ill-advised because they lose their national identity.
They have to deal with interference from a group of people who do not
understand the history of the company. They have unreal expectations
placed on them, and they have to handle several cultural clashes at the
same time.
Enterprises go down this path after carefully studying the advantages
and disadvantages of foreign direct investment, so they are always well
prepared for the worst.
When handled properly, FDI can prove to be beneficial to both the
parties and the economies of both the party's countries as well. But if it
goes wrong, then things can get very ugly for everyone involved as
well.
So this is a double-edged sword that needs to be handled with lots of
caution.

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Importance Of FDI
FDI plays a major role in developing countries like India. They act as a long
term source of capital as well as a source of advanced and developed
technologies. The investors also bring along best global practices of
management. As large amount of capital comes in through these investments
more and more industries are set up. This helps in increasing employment.
FDI also helps in promoting international trade. This investment is a nondebt, non-volatile investment and returns received on these are generally
spent on the host country itself thus helping in the development of the
country. India needs inflows to drive investment in infrastructure, a lack of
which is often cited as restricting the country's economic growth. Investment
is also needed to expand capacity and technology in sectors such as autos and
steel, as well as to offset a big current account deficit. In 2009, India attracted
$36.6 billion in FDI funds, equivalent to 2.7% of its gross domestic product.
China attracted $95 billion, or 1.9% of GDP. But foreign direct investment
flows into India fell by over 24% in the first seven months this year to $12.56
billion, putting pressure on domestic investment to take up the slack.

Railway.
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Atomic energy.

Defence.

Coal and lignite.

FDI In

The financial crisis in global markets has made the outlook of Indian
economy grim. While the consistently volatile markets and the rupee
plunging to an all-time low against the USD are some major concern at this
moment, natural calamities and economic scandals seem to be the icing on
the cake. Two decades ago, in the early 90s, India faced a similar crisis. At
that time Indias major concerns were the problem in balance of payments
and poor foreign exchange reserves.
During the crisis, Dr. Manmohan Singh, the Finance Minister of India at that
time, came up with a solution to reform the Indian economy. He liberalized
the economy by ending the license raj and gave rise to the phenomena of
foreign investments in India. Thus, opening the gates for foreign players to
come and invest in India.

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License Raj: A term used to describe the regulation of the private sector in
India between 1947 and the early 1990s. In India at that time, one needed the
approval of numerous agencies in order to set up a business legally.
Since then, foreign investments have been the backbone of the Indian
economy and like the 90s this time too, it would seem that foreign
investments might be holding the magic wand that may be able to pull India
out of the current economic slump.
Foreign investments are flows of capital from one nation to another in
exchange for significant ownership stakes in domestic companies or other
domestic assets. There are two types of foreign investments that play a major
role in the growth of Indian economy; Foreign Direct Investments (FDI) and
Foreign Institutional Investments (FII)

FDI Policy In India

FDI as defined in Dictionary of Economics is investment in a foreign country
through the acquisition of a local company or the establishment there of an
operation on a new site. To put in
Simple words, FDI refers to capital inflows from abroad that is invested in or
to enhance the production capacity of the economy.
Foreign Investment in India is governed by the FDI policy announced by the
Government of India and the provision of the Foreign Exchange Management
Act (FEMA) 1999. The Reserve Bank of India (RBI) in this regard had
issued a notification, which contains the Foreign Exchange Management
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(Transfer or issue of security by a person resident outside India) Regulations,

2000. This notification has been amended from time to time.
The Ministry of Commerce and Industry, Government of India is the nodal
agency for motoring and reviewing the FDI policy on continued basis and
changes in sectorial policy/ sectorial equity cap. The FDI policy is notified
through Press Notes by the Secretariat for Industrial Assistance (SIA),
Department of Industrial Policy and Promotion (DIPP).The foreign investors
are free to invest in India, except few sectors/activities, where prior approval
from the RBI or Foreign Investment Promotion Board (FIPB) would be
required.

Impact Of FDI On Indian Banks

The RBI's decision to allow foreign direct investment in Indian banks, the
lifting of sectorial caps on foreign institutional investors and a series of other
policy measures could ultimately lead to the privatisation of public sector
banks. The series of policy announcements in recent weeks promises to
unleash a shakeout in the Indian banking industry. A major policy change,
effected through an innocuous "clarification" issued by the Reserve Bank of
India (RBI) a few weeks ago, set the stage for the increased presence of
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foreign entities in the industry. The RBI's move to allow foreign direct
investment (FDI) in Indian banks has been followed by the announcement in
the Union Budget lifting sectorial caps on foreign institutional investors (FII).
There are also reports that the RBI's forthcoming credit policy may feature
more sops for private and foreign banks. These changes are likely to hasten
the process of consolidation of the banking industry. Although there is some
doubt over whether the moves will have any immediate impact, there is
consensus that the changes are merely a prelude to the wholesale
privatisation of the public sector banks (PSBs). IDBI, the promoter of IDBI
Bank, has already announced its intention to relinquish control of the bank.
Foreign banks have also mounted pressure on the Finance Ministry, seeking
the removal of legislative hurdles that set limits to private and foreign
holdings in PSBs. In the short term, the action is likely to be focussed on the
Indian private banks. Of the 100 banks in India, 27 are PSBs (including eight
in the State Bank of India group). There are 31 private sector banks, of which
eight are of recent vintage (for example, ICICI Bank and HDFC Bank); and
there are 42 foreign banks with branches in India. The RBI's decision is seen
as enabling foreign banks to extend their operations, primarily by acquiring
other banks.

Downfall In FDI
(Reuters) - Foreign direct investment (FDI) in India fell by nearly a quarter in
the first seven months of 2010 and the much-publicised chaos around
preparations for the Commonwealth games has added to worries foreign
firms could put off further investment. A UN survey found investors ranked
India as the second top-priority destination for FDI this year, replacing the
United States, after China.

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Physical infrastructure is the biggest hurdle that India currently faces, to the
extent that regional differences in infrastructure concentrates FDI to only a
few specific regions. While many of the issues that plague India in the
aspects of telecommunications, highways and ports have been identified and
remedied, the slow development and improvement of railways, water and
sanitation continue to deter major investors.

Federal legislation is another perverse impediment for India. Local

authorities in India are not part of the approval process and the large
bureaucratic structure of the central government is often perceived as a
breeding ground for corruption. Foreign investment is seen as a slow and
inefficient way of doing business, especially in a paperwork system that is
shrouded in red tape.

Statutory Limits
Foreign direct investment (FDI) up to 49% is permitted in Indian private
sector banks under automatic route which includes Initial Public Issue
(IPO), Private Placements, ADR/GDRs; and Acquisition of shares from
existing shareholders.
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Automatic route is not applicable to transfer of existing shares in a

banking company from residents to non-residents. This category of
investors require approval of FIPB, followed by in principle approval
by Exchange Control Department (ECD), Reserve Bank of India (RBI).
The fair price for transfer of existing shares is determined by RBI,
broadly on the basis of Securities Exchange Board of India (SEBI)
guidelines for listed shares and erstwhile CCI guidelines for unlisted
shares. After receipt of in principle approval, the resident seller can
receive funds and apply to ECD, RBI, for obtaining final permission for
transfer of shares.
Foreign banks having branch-presence in India are eligible for FDI in
private sector banks subject to the overall cap of 49% with RBI
approval.
Issue of fresh shares under automatic route is not available to those
foreign investors who have a financial or technical collaboration in the
same or allied field. Those who fall under this category would require
Foreign Investment Promotion Board (FIPB) approval for FDI in the
Indian banking sector.
Under the Insurance Act, the maximum foreign investment in an
insurance company has been fixed at 26%. Application for foreign
investment in banks which have joint venture/subsidiary in insurance
sector should be made to RBI. Such applications would be considered
by RBI in consultation with Insurance regulatory and Development
Authority (IRDA).
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FDI and Portfolio Investment in nationalized banks are subject to

overall statutory limits of 20%.
The 20% ceiling would apply in respect of such investments in State
Bank of India and its associate bank.

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VOTING RIGHTS OF FOREIGN INVESTORS

Private Sector Banks

Not more than 10 % of the total voting

rights of all the shareholders

Nationalized Banks

Not more than 1 % of the total voting

rights of all the shareholders of the
nationalized bank.

State Bank of India

Not more than 10 % of the issued capital

This does not apply to Reserve Bank of
India (RBI) as a shareholder. However,
government in consultation with RBI,
ceiling for foreign investors can be raised.

SBI Associates

Not more than 1%. This ceiling will not be

applied to State Bank of India. If any
person holds more than 200 shares,
he/she will not be registered as a
shareholder.

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RBI Approval
Transfer of shares of 5% and more of the paid-up capital of a private
sector bank requires prior acknowledgement of RBI.
For FDI of 5% and more of the paid-up capital, the private sector bank
has to apply in the prescribed form to RBI.
Under the provision of Foreign Exchange Management Act (FEMA),
1999, any fresh issue of shares of a bank, either through the automatic
route or with the specific approval of FIPB, does not require further
approval of Exchange Control department (ECD) RBI from the
exchange control angle.
The Indian banking company is only required to undertake two-stage
reporting to the ECD of RBI as follows:
The Indian company has to submit a report within 30 days of the
date of receipt of amount of consideration indicating the name
and address of foreign investors, date of receipt of funds and their
rupee equivalent, name of bank through whom funds were
received and details of govt. approval, if any.
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Indian banking company is required to file within 30 days from

the date of issue of shares, a report in form FC-GPR (Annexure
II) together with a certificate from the company secretary of the
concerned company certifying that various regulations have been
complied with.

Disinvestment By Foreign Investors

Sale of shares by non-residents on a stock exchange and remittance of the
proceeds there of through an authorized dealer does not require RBI
approval.
Sale of shares by private arrangement requires RBIs prior approval.
Sale of shares by non-residents on a stock exchange and remittance of
the proceeds thereof through an authorized dealer does not require RBI
approval.
A foreign bank or its wholly owned subsidiary regulated by a financial sector
regulator in the host country can now invest up to 100% in an Indian private
sector bank. This option of 100% FDI will be only available to a regulated
wholly owned subsidiary of a foreign bank and not any investment
companies. Other foreign investors can invest up to 74% in an Indian private
sector bank, through direct or portfolio investment. The Government has also
permitted foreign banks to set up wholly owned subsidiaries in India. The
government, however, has not taken any decision on raising voting rights
beyond the present 10% cap to the extent of shareholding. All entities making
FDI in private sector banks will be mandatory required to have credit rating.
The increase in foreign investment limit in the banking sector to 74%
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includes portfolio investment [i.e., foreign institutional investors (FIIs) and

non-resident Indians (NRIs)], IPOs, private placement, ADRs or GDRs and
acquisition of shares from the existing shareholders.

Case Study
HDFC BANK (INDIA) CASE STUDY
Since its incorporation in 1994, HDFC Bank has grown to become one of the
Big Four banks in India. Its three main lines of business are wholesale
banking, retail banking and treasury. This Mumbai-based company operates
more than 2,500 branches across India and caters to a customer base of 26
million.
HDFC BANKTREASURY
The treasury arm of HDFC Bank manages both in-house and corporate client
accounts. Internally, the team manages net interest earnings from the banks
investment portfolio, money market borrowing and lending, and gains or
losses on investment operations, including those from trading foreign
exchange and derivative contracts. Treasury advisory services for corporate
clients involve hedging currency risks and raising loans in foreign currencies.
Accordingly, improved trade volumes and better trading execution is the key
to the success of the group.
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CUSTOMER CHALLENGE
HDFC Bank Treasury group was using a desktop solution for FX
derivative trading. The system could not keep up with the increasing
volume of trades or easily generate reports.
Data is essential, but the desktop solution had limited views and
analytic capabilities.
Many processes were manual and required time-consuming data entry.
A tight budget made the idea of an enterprise-wide solution
unthinkable.

We realized that the turnaround time for client FX options queries is the key
to success in getting the client flow and the multi-scenario analysis tools
available to assist in effective management of the FX option book. These
issues were impacting business growth.
-Akshat LakheraHead of Interest Rates and Options
THE BLOOMBERG SOLUTION
The Bloomberg team provided a free consultation to HDFC Bank to
understand the customers needs and challenges. Several pieces of
functionality already included in the Bloomberg Professional service were
highlighted to meet the teams needs. These included a robust solution that
helped them monitor real-time environments with relation to:
FX options
Access to data and analytics to analyse market performance and
quantify risk in real-time
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WHAT IS BLOOMBERG?
Bloomberg L.P. is a privately held financial software, data and media
company headquartered in New York City. Bloomberg L.P. was founded by
Michael Bloomberg in 1981 with the help of Thomas Secunda, Duncan
MacMillan, Charles Zegar and a 30% ownership investment by Merrill
Lynch. Bloomberg L.P. provides financial software tools such as an analytics
and equity trading platform, data services and news to financial companies
and organizations through the Bloomberg terminal (via its Bloomberg
Professional Service), its core money-generating product. Bloomberg L.P.
also includes a wire service (Bloomberg News), a global television network
(Bloomberg Television), a radio station (WBBR), websites, subscription-only
newsletters and three magazines: Bloomberg BusinessWeek, Bloomberg
Markets and Bloomberg Pursuit.

THE RESULT

The Bloomberg team immediately set to work to implement the new

system.
Bloomberg was our partner every step of the wayfrom our early
discussions with sales to implementation and training. We received customer
service support till we had comfortably transitioned into using the new
functionalities.
-Akshat Lakhera Head of Interest Rates and Options
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The amount of time spent on laborious tasks was greatly reduced,

which freed the team to focus on their core job. Report generation is
now fast and seamless, with detailed analyses across multiple
parameters/variables. Traders are able to price option structures in a
matter of seconds on a real-time basis.

ABOUT BLOOMBERG DERIVATIVES

Bloomberg offers a superior portfolio of high-quality data and dealer-quality
models for analysing and pricing the full range of derivatives and structured
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notes across foreign exchange, interest rate, inflation, credit, equity and
commodity markets. This solution is fully integrated with the robust
communication and additional analytical tools of the Bloomberg Professional
service so you can accurately quantify your market exposures manage your
workflow and communicate with your colleagues and customers, all from
one supremely capable desktop.

Conclusion

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At the outset, foreign direct investment is playing a important role in case

banking industry by providing investment, modern technology, best practices,
innovative ideas, creative atmosphere and so on. FDI also extended its
interest towards banking employees to feel free, work without stress, good
ambiance, and job satisfaction. FDI also facilitate banking management to
take right decision at the right time through best guidelines. Eventually, FDI
must take care of social responsibility of the society.

Bibliography
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www.rbi.org.in
www.banknetindia.com
Currentaffairs-businessnews.com
www.hindustantimes.com
Foreign Direct Investment In India By Bhasin, Niti.
FDI in Retail Sector, India by Arpita Mukherjee, Nitisha Patel.

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