FDI in Indian Banking Sector

TYBBI FDI In Banking Sector
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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INDEX
SR TOPIC PG NO.
NO.
1. Introduction And Types Of FDIs 5-7
2. Methods And History Of FDI 8-13
3. Govt. Approval For Foreign Companies Doing 14
Business In India
4. FDI Policy And Scope Of FDI In India 15-16
5. Current Banking Scenario In India 17
6. Current Status Of FDI In India 18
7. Authorities Dealing With Foreign Investments 19
8. FDI In Indian Banking Sector 20-22
9. Guidelines For Investment In Banking Sector 23
10. Indian operations by foreign banks can be executed 24
by any one of the following 3 channels
11. Problems Faced By Indian Banking Sector 25
12. Benefits Of FDI In Indian Banking Sector 26
13. Foreign Portfolio Investment & FDI v/s FPI 27-29
14. Advantages And Disadvantages Of FDI 30-33
15. Importance Of FDI And FDI Policy In India 34-36
16. Impact Of FDI And Downfall Of FDI 37-38
17. Statutory Limits 39-40
18. Voting Rights Of Foreign Investors 41-42
19. RBI Approval 43
20. Disinvestment By Foreign Investors 44
21. Case Study 45-48
22. Conclusion 49
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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,specialInvestment 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 to leverage the host country’s
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.
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Types OfFDI’s
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.
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 nation’s 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
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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
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.
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Methods OfForeign Direct Investments

The foreign direct investor may acquire 10% or more of the voting
power of an enterprise in an economy through any of the following
methods:
•By incorporating a wholly owned subsidiary or company.

• By acquiring shares in an associated enterprise.
•Through a merger or an acquisition of an unrelated enterprise.
•Participating in an equity joint venture with another investor or
enterprise.
Foreign direct investment incentives may take the following forms:

 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 andIndia 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 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.
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Pre-Independence Reforms:
Under the British colonial rule, the Indian economy suffered a major
set-back. An economy with rich natural resources was left plundered
and exploited to the hilt under the English regime. India is originally
an agrarian economy. India’s 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:
India’s struggle post-independence has been an excruciating financial
battle with a slow economic growth and development which were
largely due to the political climate andimpact of the economic
reforms. The country began it transformation from a native agrarianto
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 post-independence 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 thegovernment laid down marked goals to be achieved by
the economy thereby establishing aregime of checks and balances.
The government also encouraged self-sufficiency with theintent 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
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economic growth and development, they weren’t sustained. In the

early, 1970’s, India had achieved self-sufficiency in food production.
During the 1970’s, the government still continued to retain and wield
a significant spectre of control over key.
In the Early 1980’s-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 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
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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 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.
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FOREIGN DIRECT INVESTMENT

POLICY IN INDIA
FDI is prohibited in sectors like

(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;
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Scope OfFDI 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 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 Asia-Pacific 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.
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Current Banking Scenario In India

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
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.
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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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FDIIn 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 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
portfolioinvestment.
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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-UTIdeal.
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 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
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.
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Indian Operations By Foreign Banks

Can Be Executed By Any One Of The
Following Three Channels:
Branches in India.
Wholly owned subsidies.
Other subsidies.
Incase 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 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.
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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 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.
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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 No active involvement in

- direct or control; long-term interest management. Investment
indirect instruments that are more
easily traded, less
permanent and do not
represent a controlling
stake in an enterprise.
Sell off It is more difficult to sell off or pull out. It is fairly easy to sell
securities and pull out
because they are liquid.
Comes from Tends to be undertaken by Multinational Comes from more diverse

organisations 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.
What is Involves the transfer of non-financial Only investment of

invested assets e.g.technology and intellectual financial assets.
capital, in addition to 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 because they get advanced
resources and additional capital at their disposal.
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Page 31
Disadvantages Of FDI
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.
Page 32
 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.
Page 33
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 non-debt, 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.
 Atomic energy.
 Defence.
 Coal and lignite.
Page 34
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 90’s, India faced
a similar crisis. At that time India’s major concerns were the problem
in balance of payments and poorforeign 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.
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 90’s 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)
Page 35
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 (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.
Page 36
ImpactOf 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 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.
Page 37
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.
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.
Page 38
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.
 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
Page 39
in insurance sector should be made to RBI. Such applications

would be considered by RBI in consultation with Insurance
regulatory and Development Authority (IRDA).
 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.
Page 40
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.
Page 41
Page 42
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.
 Indian banking company is required to file within 30days

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.
Page 43
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 RBI’s 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% includes portfolio investment [i.e., foreign institutional
investors (FIIs) and non-resident Indians (NRIs)], IPO’s, private
placement, ADRs or GDRs and acquisition of shares from the existing
shareholders.
Page 44
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 bank’s 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.
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.
Page 45
“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 Lakhera—Head of Interest Rates and Options
THE BLOOMBERG SOLUTION
The Bloomberg team provided a free consultation to HDFC Bank to

understand the customer’s needs and challenges. Several pieces of
functionality already included in the Bloomberg Professional®
service were highlighted to meet the team’s 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
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.
Page 46
THE RESULT
 The Bloomberg team immediately set to work to implement the

new system.
“Bloomberg was our partner every step of the way—from 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
 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.
Page 47
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 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.
Page 48
Conclusion
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.
Page 49
Bibliography
 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.
Page 50

FDI in Indian Banking Sector

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TYBBI FDI In Banking Sector

NAGINDAS KHANDWALA COLLEGE OF

COMMERCE ARTS AND MANAGEMENT STUDIES

MALAD (WEST), MUMBAI-400064.

A PROJECT REPORT ON:

ROLE OF FDI IN INDIAN BANKING SECTOR

(BANKING AND INSURANCE)

PROF. RUPALI JAIN

ACADEMIC YEAR 2014-2015

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

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

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

Foreign direct investment (FDI) has played an important role in the

The present study aims at providing detailed information about FDI

The project aims at providing information of present FDI policy, year

And thus different suggestion and recommendation are given to

This long-term relationship benefits both the investor as well as the

Outward FDI - An outward-bound FDI is backed by the government

Inward FDIs - Different economic factors encourage inward FDIs.

Horizontal FDIs- Investment in the same industry abroad as a firm

Greenfield Investment:- Direct investment in new facilities or the

than domestic firms); investments in research and development; and

Mergers And Acquisitions:-Transfers of existing assets from local

Methods OfForeign Direct Investments

•By incorporating a wholly owned subsidiary or company.

Foreign direct investment incentives may take the following forms:

 Special economic zones.

 Investment financial subsidies.

 Soft loan or loan guarantees.

 Free land or land subsidies.

 Relocation & expatriation subsidies.

 Job training & employment subsidies.

History Of FDI In India

Pre- independence, India was the supplier of foodstuff and raw

Development pattern during the 1950-1980 periods was characterised

Consequently economic reforms were introduced initially on a

The government tailored policies that focussed a great deal on

The policy of central planning adopted by the government sought to

economic growth and development, they weren’t sustained. In the

In the Early 1980’s-Macro-Economic Policies were conservative.

Economic reforms of 1991:

state governments which lead to the country viewing its finances as a

Government Approvals for Foreign

Government Approvals for Foreign Companies Doing Business in

 Automatic approval by RBI:

 The FIPB Route – Processing of non-automatic

FOREIGN DIRECT INVESTMENT

FDI is prohibited in sectors like

Scope OfFDI In India

Some of the major economic sectors where India can attract

Current Banking Scenario In India

Opposition is not considering the need of present situation. FDI in

 Innovative Financial Products

If we consider the root cause of these problems, the reason is low-

Current Status Of FDI In India

Authorities Dealing With Foreign

 Secretariat for Industrial Assistance (SIA): It acts as a gateway

 Foreign Investment Implementation Authority (FIIA) : The

 Project Approval Board

 Reserve Bank of India

FDIIn Indian Banking Sector

The global banking industry weathered turbulent times in 2007 and

A foreign bank or its wholly owned subsidiary regulated by a