“FOREIGN DIRECT INVESTMENT IN BANK”

Bachelor of Commerce

Banking & Insurance

Semester V

2017-2018

Submitted by

Rohan Chavan

Roll No – 23

Lords Universal College

Topiwala, Goregaon (W)

Mumbai 400 104

1
 “Foreign Direct Investment”

Bachelor of Commerce

Banking & Insurance

Semester V

2017-2018

Submitted

In partial fullment of requirements

For the award of degree of

Bachelor of commerce-Banking & Insurance

By

Rohan Chavan

Roll No – 04

Lords Universal College

Topiwala, Goregaon (W)

Mumbai 400

2
 DECLARATION

I ROHAN CHAVAN the student of B.Com. Banking &

Insurance Semester V (2017- 2018) hereby declare that I have
completed the Project on “Foreign Direct Investment”.
The information submitted is true and original to the best
of my knowledge.

_____________________
(Signature of Student)
ROHAN CHAVAN
Roll No - 23

Lords Universal College

Topiwala, Goregaon (W)

Mumbai 400 104

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 ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are so numerous and the depth is so
enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions
in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this
project.

I would like to thank my Principal, for providing the necessary

facilities required for completion of this project.

I take this opportunity to thank our Coordinator , for her moral support and
guidance.

I would also like to express my sincere gratitude towards my project guide _____________
whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books and
magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in
the completion of the project especially my Parents and Peers who supported me throughout my
project.

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 Index

SR TOPIC
NO.
1. Introduction And Types Of FDIs 7&
8
2. Methods And History Of FDI 12
3. Govt. Approval For Foreign Companies Doing 16
Business In India
4. FDI Policy And Scope Of FDI In India 17
5. Current Banking Scenario In India 18
6. Current Status Of FDI In India 20
7. Authorities Dealing With Foreign Investments 21
8. FDI In Indian Banking Sector 22
9. Guidelines For Investment In Banking Sector 24
10. Indian operations by foreign banks can be 25
executed by any one of the following 3 channels
11. Problems Faced By Indian Banking Sector 26
12. Benefits Of FDI In Indian Banking Sector 27
13. Foreign Portfolio Investment & FDI v/s FPI 28
14. Advantages And Disadvantages Of FDI 31
15. Importance Of FDI And FDI Policy In India 35
16. Impact Of FDI And Downfall Of FDI 37
17. Statutory Limits 39
18. Voting Rights Of Foreign Investors 41
19. RBI Approval 43
20. Disinvestment By Foreign Investors 44
21. Case Study 45
22. Conclusion 49
0362

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 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 to take advantage of
cheaper wages, special investment privileges (e.g. tax exemptions) offered by the
country .India, the largest democracy in the world, with its consistent
growth/performance and abundant skilled manpower provides enormous
opportunities for investment, both domestic and foreign. Foreign direct investment
(certain degree of financial stability, growth and development. This money has
allowed India to focus on the areas that may have needed economic attention and
address the various problems that continue to challenge the country.

India has continually sought to attract FDI from the world’s major investors. In 1998
and 1999 the Indian national government announced a number of reforms designed to
encourage FDI and present a favorable FDI) in India has played an important role in
the development of the Indian economy. FDI in India has, in a lot of ways, enabled
India to achieve a scenario to investors. FDI investments are permitted through
financial collaborations, through private equity or preferential allotments, by way of
capital markets through Euro issues, and in joint ventures.

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 Types Of FDI’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 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.

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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.

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 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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11
 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.

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:

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 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 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

13
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.

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15
 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;
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

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 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.

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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

20
 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.

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%

22
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.

24
 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.

26
 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.

27
 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.

28
 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 Comes from more diverse

Multinational 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.

29
30
 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.

31
32
 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.

33
 Enterprises go down this path after carefully studying the advantages and
disadvantages of foreign direct investment, so they are always well prepared
for the worst.

 When handled properly, FDI can prove to be beneficial to both the parties and
the economies of both the party's countries as well. But if it goes wrong, then
things can get very ugly for everyone involved as well.

 So this is a double-edged sword that needs to be handled with lots of caution.

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 Importance Of FDI

FDI plays a major role in developing countries like India. They act as a long term
source of capital as well as a source of advanced and developed technologies. The
investors also bring along best global practices of management. As large amount of
capital comes in through these investments more and more industries are set up. This
helps in increasing employment. FDI also helps in promoting international trade.
This investment is a 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 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.

35
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)

36
 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.

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).

37
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

38
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

39
 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.

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.

41
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.

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.

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.

“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

45
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 Option

46
 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.

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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.

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.

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 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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