Fdi in indian_banking_sector

A PROJECT REPORT
ON
FOREIGN DIRECT INVESTMENT IN INDIAN
BANKING SECTOR
Submitted to University Of Mumbai in
Partial Fulfilment
Of the requirement of the Degree of
TY BACHELOR OF FINANCIAL MARKET
Under guidance of
PROF. MRS.MRUNMAYEE THATTE
VPM’s
K.G. Joshi College of Arts
N.G. Bedekar College of Commerce
Thane (W)
Academic Year: - 2017 – 18
By-
SANDEEP YADAV
Roll No.: – 28

DECLARATION
I, SANDEEP YADAV, studying in T.Y. Financial Market hereby declares that I have done a
project on FOREIGN DIRECT INVESTMENT IN INDIAN BANKING SECTOR. As
required by University rules, I state that work presented in this thesis is original in nature and
to my best knowledge, has not been submitted so far to any other university.

ACKNOWLEDGEMENT
It gives me great pleasure to declare that my project on “FOREIGN DIRECT
INVESTMENT IN INDIAN BANKING SECTOR” have been prepared purely from the
point of view of students requirements.
This project covers all the information pertaining to “FOREIGN DIRECT INVESTMENT
IN INDIAN BANKING SECTOR”. I tried my best to write project in simple and lucid
manner. I have tried to avoid unnecessary discussions and details. At the same time it
provides all the necessary information. I feel that it would be of immense help to the students
as well as all others referring in updating their knowledge.
I am indebted to our principal Dr. Mrs. Suchitra Naik Ma‘am for giving us such an
amazing opportunity. I am so thankful to our coordinator Mrs. Mrunmayee Thatte Ma’am
and also librarian and my colleagues for their valuable support, cooperation and
encouragement in completing my project.
Special thanks to Prof. Mrs. Mrunmayee Thatte, my internal guide for this project for
giving me expert guidance, full support and encouragement in completing my project
successfully.
PLACE:
DATE:
SIGNATURE OF STUDENT
SANDEEP YADAV
(T.Y.B.COM FINANCIAL MARKET)

Index
SR NO. TOPIC PG NO.
1. Introduction And Types Of FDIs 6-8
2. Methods And History Of FDI 9-13
3. Govt. Approval For Foreign Companies Doing
Business In India
14
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 20-21
9. Guidelines For Investment In Banking Sector 22
10. Indian operations by foreign banks can be executed
by any one of the following 3 channels
23
11. Problems Faced By Indian Banking Sector 24
12. Benefits Of FDI In Indian Banking Sector 25
13. Foreign Portfolio Investment & FDI v/s FPI 26-28
14. Advantages And Disadvantages Of FDI 29-32
15. Importance Of FDI And FDI Policy In India 33-34
16. Impact Of FDI And Downfall Of FDI 35-36
17. Statutory Limits 37-38
18. Voting Rights Of Foreign Investors 39-40
19. RBI Approval 41
20. Disinvestment By Foreign Investors 42
21. Case Study 43-45
22. Conclusion 46
23. Bibliography 47

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.

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 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.

Types of FDI’s
By Direction
Outward FDI’s:- 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 FDI’s:- 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 FDI’s:- 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 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.

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.
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.

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 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 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 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 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 the
government laid down marked goals to be achieved by the economy 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 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 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.

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.

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.

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 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.

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.

Current Status of FDI in India

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

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 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 [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. 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 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.

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.
.
and portfolio investment in the public or nationalised banks in India are subject to
limit of 20% in totality.
with the aim to bring in more FDI
inflows in the country along with the incorporation of advanced technology and management
practices.
matters in the banking sector.

Indian Operations by Foreign Banks Can Be Executed By Any
One of the Following Three Channels:-
.
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.

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.

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.

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.

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 -
direct or indirect
Involved in management and ownership
control; long-term interest
No active involvement in
management. Investment
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
organisations
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.
What is invested Involves the transfer of non-financial assets
e.g. technology and intellectual capital, in
addition to financial assets.
Only investment of financial
assets.

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.

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.
 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.

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.
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 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.
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).
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.

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 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.
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.
 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).
 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.

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.

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 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 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.

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.
“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.
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.

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.

Conclusion
At the outset, foreign direct investment is playing an 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
 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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