Muskan Lakhwani - 1-19-095 - GP Report Final

Comparative Analysis of Foreign Direct Investment in Indian Banking Sector
Grand Project Report
COMPARATIVE ANALYSIS OF FOREIGN

DIRECT INVESTMENT IN INDIAN
BANKING SECTOR
MUSKAN LAKHWANI
Enrolment №: 1-19-095
2019 – 21
Shanti Business School
A Project Report
Submitted to Shanti Business School as a Part of the Grand Project
undertaken in this Institute
Date: 15/05/2021
Under guidance of : Dr. SHREYA BISWAS

Area of Specialisation : FINANCE
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Undertaking
I, MUSKAN LAKHWANI, the author of the Grand Project (GP) titled

COMPARATIVE ANALYSIS OF FOREIGN DIRECT INVESTMENT IN INDIAN
BANKING SECTOR, hereby declare that this is an independent work of mine carried
out towards partial fulfilment of the requirements for the award of the PGDM/PGDM
– C diploma by Shanti Business School (SBS), Ahmedabad, India. All views and
opinions expressed in this report are my mine, and do not necessarily represent those
of the institute and/or (Name of the company where the student has done his/her GP).
Signature of the Student: _________________

Name of student : MUSKAN LAKHWANI
Enrolment №: : 1-19-095
Date : 15-05-2021
Place : Ahmedabad
Certificate
This is to certify that the Grand Project (GP) titled “COMPARATIVE ANALYSIS OF
FOREIGN DIRECT INVESTMENT IN INDIAN BANKING SECTOR” has been
submitted by MUSKAN LAKHWANI towards partial fulfilment of the requirements
for the award of PGDM/PGDM-C diploma at Shanti Business School and has been
carried out under my/our supervision.
Guide (Name) : DR. SHREYA BISWAS
Guide Signature :
Date :
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Acknowledgments
I MUSKAN LAKHWANI, would like to take this opportunity to express my deepest

gratitude to my faculty guide DR. SHREYA BISWAS, for the continuous support and
follow up during the entire process of GP without which the successful completion of
GP would not have been possible.
I am also grateful to our institute Shanti Business School (SBS) and its director
Dr. Neha Sharma for providing us with this wonderful opportunity to work in the
corporate sector and thus providing us with the first-hand experience to understand the
corporate sector by being a part of it.
Finally, I would like to thank my family, friends and peers for being a constant source
of support during the process of GP leading to its effective completion.
Executive Summary
In the rapidly changing economic environment, Foreign Direct Investment (FDI) is

used as the stimulus for growth in the most of developing countries including India.
Globalization has engulfed all the sectors into its fold, out of which the banking sector
is a crucial one. FDI in Indian banking sector has a lot of opportunities as well as
challenges. This report explores the opportunities for FDI in Indian banking sector and
highlights its various forms of presence in India. It further investigates the trends in FDI
into Indian banking sector and attempts to reckon the impact of presence of foreign
banks on Indian domestic banks. The study also throws light on RBI’s amendments and
recent foreign policy with respect to FDI in India. Foreign Direct Investment in India
is one of the major monetary sources for economic development in India.
The Indian banking system consists of 12 public sector banks, 22 private sector banks,
44 foreign banks, 43 regional rural banks, 1,484 urban cooperative banks and 96,000
rural cooperative banks in addition to cooperative credit institutions. As of November
2020, the total number of ATMs in India increased to 209,282. According to RBI,
India’s foreign exchange reserves reached US$ 590.18 billion, as of February 5, 2021.
According to RBI, bank credit and deposits stood at Rs. 106.40 trillion (US$ 1.45
trillion) and Rs. 146.24 trillion (US$ 2.00 trillion), respectively, as of January 15, 2021.
Credit to non-food industries stood at Rs. 105.53 trillion (US$ 1.44 trillion), as of
January 15, 2021. Asset of public sector banks stood at Rs. 107.83 lakh crore (US$ 1.52
trillion) in FY20. Total assets across the banking sector (including public, private sector
and foreign banks) increased to US$ 2.52 trillion in FY20. Indian banks are increasingly
focusing on adopting integrated approach to risk management. The NPAs (Non-
Performing Assets) of commercial banks has recorded a recovery of Rs. 400,000 crores
(US$ 57.23 billion) in FY19, which is highest in the last four years.
Foreign direct investment is treated as an important mechanism for channelizing
transfer of capital and technology and thus perceived to be a potent factor in promoting
economic growth in the host countries. Moreover, multinational corporations consider
FDI as an important means to reorganise their production activities across borders in
accordance with their corporate strategies and the competitive advantage of host
countries.
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Comparative Analysis of Foreign Direct Investment in the Indian

Banking Sector-
Analysis of Foreign Direct Investment in Indian Banking sector have been done by
using graphical, tabular method of representation and interpretations had been done by
taking into consideration overall Foreign banks in India, Foreign Branches, Capital
inflow, and impact of foreign direct investment in private sector banks and public sector
banks.
Findings - Foreign banks bring modern technology and new financial services to
home country as a spill over effect. In India, foreign banks introduced the sophisticated
technology and products.
Conclusion – Foreign direct investment is necessary for the growth of any sector and
proven beneficial for the development of developing countries like India to increase
flow of funds.
Further the increase of limit will be there that is from 70% to 100% foreign direct
investment in private sector banks and in public sector banks from 20% to 40% to
develop and help companies and individuals with requirements of funds and
technology.
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.
Table of contents
Chapters Page No.

1 Introduction (Including Objectives) 1-35
2 Background Study/Literature Review 36-42
3 Hypothesis/ Research Model 43-44
4 Methodology 45-55
5 Findings 56-59
6 Limitations 60-61
7 Conclusion and Recommendations 62-64
Bibliography 65-66
Annexure 67
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Acronyms (if any)
Acronym Full Form

FDI Foreign Direct Investment
RBI Reserve Bank of India
FII Foreign Institutional Investors
GDP Gross Domestic Product
CAGR Compounded Annual Growth Rate
PSU Public Sector Units
ATM Automatic Teller Machine
WTO World Trade Organisation
WOS Wholly Owned Subsidiary
UNCTAD United Nations Conference on Trade and Development
HDFC Housing Development Finance Corporation
Chapter 1
Introduction
HOW TO INVEST IN INDIA
I. Foreign Direct Investment (FDI)
Forms in which business can be conducted by a foreign company in India
A foreign company planning to set up business operations in India may:
● Incorporate a company under the Companies Act, 1956, as a Joint Venture or a

Wholly Owned Subsidiary.
● Set up a Liaison Office / Representative Office or a Project Office or a Branch
Office of the foreign company which can undertake activities permitted under the
Foreign Exchange Management (Establishment in India of Branch Office or Other
Place of Business) Regulations, 2000.
Procedure for receiving Foreign Direct Investment in an Indian company
An Indian company may receive Foreign Direct Investment under the two routes as
given under:
i. Automatic Route
FDI up to 100 per cent is allowed under the automatic route in all activities/sectors
except where the provisions of the consolidated FDI Policy, paragraph on 'Entry Routes
for Investment' issued by the Government of India from time to time, are attracted.
FDI in sectors /activities to the extent permitted under the automatic route does not
require any prior approval either of the Government or the Reserve Bank of India.
ii. Government Route
FDI in activities not covered under the automatic route requires prior approval of the
Government which are considered by the Foreign Investment Promotion Board (FIPB),
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Department of Economic Affairs, Ministry of Finance. Application can be made in
Form FC-IL, which can be downloaded from http://www.dipp.gov.in. Plain paper
applications carrying all relevant details are also accepted. No fee is payable.
Indian companies having foreign investment approval through FIPB route do not
require any further clearance from the Reserve Bank of India for receiving inward
remittance and for the issue of shares to the non-resident investors.
The Indian company having received FDI either under the Automatic route or the
Government route is required to report in the Advance Reporting Form, the details of
the receipt of the amount of consideration for issue of equity instrument viz. shares /
fully and mandatorily convertible debentures / fully and mandatorily convertible
preference shares through an AD Category –I Bank, together with copy/ ies of the FIRC
evidencing the receipt of inward remittances along with the Know Your Customer
(KYC) report on the non-resident investors from the overseas bank remitting the
amount, to the Regional Office concerned of the Reserve Bank of India within 30 days
from the date of receipt of inward remittances.
Further, the Indian company is required to issue the equity instrument within 180 days,
from the date of receipt of inward remittance or debit to NRE/FCNR (B) account in
case of NRI/ PIO.
BANKING INDUSTRY GLOBALLY-

In last year’s Global Banking Outlook, forecast challenges to banks that could threaten
their revenue generation. Covid-19 has been an unprecedented challenge for all sectors
across Financial Services, including banking, but the industry has shown a remarkable
ability to manage change and to play a leading role in sustaining the economy. Banks
now have a once-in-a-generation opportunity to accelerate transformation and cultivate
the innovation that will build a more successful future.
The market capitalization of the global banking sector was 7.3 trillion euros in the first
quarter of 2021.
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The leading banks worldwide each have a market cap up to hundreds of billions of U.S.
dollars. Naturally, the metric can mostly measure publicly traded companies as they are
obliged to publish financial reports. The major international banks are already publicly
traded, as opposed to smaller financial institutions or fintech companies operating in
the banking sector.
TRENDS IN BANKING INDUSTRY GLOBALLY-

FinTech
The sustained rising popularity of FinTech, or Financial Technology, has contributed
to the huge technological changes of how banking and financial sector provide services
to its customers. It allows organization to create innovative financial products, services,
and business models through leverage technology. It is revolutionizing the banking
industry’s landscape. It calls for secured innovation although it still there’s still much
work to do.
It aims to change how a traditional wire transfer is done. Let’s talk about how most
banks still use the SWIFT system. It’s a type of electronic international wire transfer.
It is widely used if you want to send a relatively big amount of money to another person
internationally. It was introduced in 1970 and has been helpful.
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Online Banking
We are in a technological era where computers and software dominate society. It’s an
era of accelerated technological progress characterized by new and fast innovations.
This causes an abrupt change in society since one or more technologies are replaced by
another technology in just a short span of time. Online banking can be done using a
mobile app or through the bank’s website.
Banks and other financial institutions introduced online banking to ease the
inconvenience brought by physical bank transactions. They create their own mobile app
where their customer can log in. Customers can now transfer, send, receive payments
and remittance and pay their bills using the system. Online banking eliminates the need
to go to the physical bank. Basically, it means a convenient but secure way of making
bank transactions online.
Mobile Banking
You might think that mobile banking and online banking are the same. There’s a mere
difference in their purpose. Online banking caters to sending and transferring payments
or paying bills online without the need of going to the physical banks. On the other
hand, mobile banking is about making sure that it’s the rightful owner of the account is
the one doing the transactions.
The earliest mobile banking used SMS and has since developed to other means of
verifications. One Time Pin is the code that the customer receives when making a
transaction. It is often valid for only 5 minutes then expires. The pin is to be encoded
to continue or verify the transaction, making it more secure. It can be done without the
use of the internet thus it differs from online banking. Though both online and mobile
banking provides real-time transactions.
Investment Banking
Investment banking, however, is a type of financial service in which a person or
company advises individuals, businesses, or even governments on how and where to
invest their money. For many years, this has been a human-to-human process that led
to a mutually beneficial relationship. We are talking about the stock market, mutual
funds, hedge funds, and the likes.
But now, with the rise of artificial intelligence (AI) and robo-advisors, they are starting
to infiltrate the money management and investment banking systems. Predictive
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analytics can help investors make wiser and more profitable decisions before the market
moves. AI can also, but not all the time, identify the movement of the market.
Better Customer Service
With all the technology (FinTech), software, online and mobile banking services, the
banking industry sure increased the satisfaction rate from its customers. Better services,
real-time transactions just to name a few. Aside from all of these advancements, the
banking sector also made sure that its customers can reach them easily through social
media pages and channels and websites.
SMS and emails have been flooding the customers to give reminders and useful tips.
The fast response through their customer service representatives changed the game plan
on how to give excellent customer services. An increase in the number of customers
reaching them through social media platforms is a good sign to reach the customers.
INDIAN BANKING INDUSTRY IN INDIA

▪ The Indian banking system consists of public sector banks, private sector banks,
foreign banks, regional rural banks, urban cooperative banks and rural
cooperative banks, in addition to cooperative credit institutions.
▪ India's Credit-to-Gross Domestic Product (GDP) ratio is 56%, lower than most
advanced economies or even China where it is in the range of 150-200%.
However, demand for credit has surged over the past decade, aided by strong
economic growth, rising disposable incomes, increasing consumerism & easier
access to credit.
▪ Indian banks are increasingly focusing on adopting integrated approach to risk
management. Banks have already embraced the international banking
supervision accord of Basel II, and majority of the banks already meet capital
requirements of Basel III.
▪ The increasingly dynamic business scenario and financial sophistication has
increased the need for customized exotic financial products. Banks are
developing innovative financial products and advanced risk management
methods to capture market share.
▪ Access to the banking system has improved over the years due to persistent
effort from the Government to promote banking technology and promote
expansion in unbanked and metropolitan regions. The Ministry of Finance
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launched the Jan Dhan Yojana in 2014, a financial inclusion program to expand
affordable access to financial services such as bank accounts, credit, insurance
and pensions in all parts of India.
▪ Digital influence in the Indian banking sector has also grown due to rising
digital footprint. Real Time Gross Settlement (RTGS) and National Electronic
Funds Transfer (NEFT) have been implemented by Indian Banks for fund
transactions. The market regulator has included both these payments systems to
the existing list of methods that a company can use for payment of dividends or
other cash benefits to their shareholders and investors.
▪ The Reserve Bank of India (RBI) has taken several steps to enable mobile
payments, which forms an important part of mobile banking. The National
Payments Corporation of India has developed the Unified Payments Interface
(UPI), an instant real-time payment system that works by instantly transferring
funds between two bank accounts on a mobile platform.
RESEARCH THE BANKING SECTOR-
▪ Supply-Liquidity is controlled by the Reserve Bank of India (RBI).
▪ Demand-Rising incomes are expected to enhance the need for banking services
in rural areas and therefore drive the growth of the sector.
▪ Barriers to entry-High, due to licensing requirement, investment in technology
and branch network, capital and regulatory requirements. The role of trust also
acts as a major barrier to entry for new banks looking to compete with major
banks, as consumer are more likely to allow one bank to hold all their accounts
and service their financial needs.
▪ Bargaining power of suppliers-Low, as banks are subject to rules and
regulations of the RBI. Customers have also hedged inflation by investing in
riskier avenues besides banks.
▪ Bargaining power of customers-High, for good creditworthy borrowers due
to the availability of large number of banks and low switching costs.
▪ Competition-High. With entry of foreign banks, competition in the Indian
banking sector has intensified. Banks are increasingly looking at consolidation
to derive greater benefits such as enhanced synergy, cost take-outs from
economies of scale, and diversification of risks. The RBI has also approved for
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small finance banks and payment banks which will further increase competition
in the industry
▪ Threat of Substitutes-Loans, insurances, mutual funds, and fixed income
securities are some of the many banking services that are also offered by
NBFCs. Technological developments and the threat of payment method
substitutes may also lead to substitution of some of the services provided by the
banks.
• As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently
capitalised and well-regulated. The financial and economic conditions in the
country are far superior to any other country in the world. Credit, market and
liquidity risk studies suggest that Indian banks are generally resilient and have
withstood the global downturn well.
• Indian banking industry has recently witnessed the roll out of innovative
banking models like payments and small finance banks. RBI’s new measures
may go a long way in helping the restructuring of the domestic banking industry.
• The digital payments system in India has evolved the most among 25 countries
with India’s Immediate Payment Service (IMPS) being the only system at level
five in the Faster Payments Innovation Index (FPII).
MARKET SIZE:
• The Indian banking system consists of 12 public sector banks, 22 private sector
banks, 46 foreign banks, 56 regional rural banks, 1485 urban cooperative banks
and 96,000 rural cooperative banks in addition to cooperative credit institutions.
As of September 2020, the total number of ATMs in India increased to 210,049
and is further expected to increase to 407,000 by 2021.
• Asset of public sector banks stood at Rs. 107.83 lakh crore (US$ 1.52 trillion)
in FY20.
• During FY16-FY20, bank credit grew at a CAGR of 3.57%. As of FY20, total
credit extended surged to US$ 1,698.97 billion.
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• During FY16-FY20, deposits grew at a CAGR of 13.93% and reached US$ 1.93
trillion by FY20. Credit to non-food industries stood at Rs. 103.46 trillion (US$
1.40 trillion) as of November 20, 2020.
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
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If we consider the root cause of these problems, the reason is low-capital base and all
the problems is the outcome of the transactions carried over in a bank without a
substantial capital base.
Current Status of FDI In India

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
Problem Faced By Indian Banking Sector
• Inefficiency in management.
• Instability in financial matters.
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• 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.
Role played by the banking sector in Indian GDP-

Contribution of the banking sector to GDP is about 7.7% of GDP. Banking sector
intermediation as measured by total loans a % of GDP is 30%. Mobilization of deposits
from individuals and lending to individuals & small business.
Role of Banks in economic development

Banks play a very useful and crucial role in the economic life of every nation. They
have control over a large part of the supply of money in circulation, and they can
influence the nature and character of production in any country. In order to study the
economic significance of banks, we have to review the general and important functions
of banks.
1) Removing the deficiency of capital formation

In any economy, economic development is not possible unless there is an adequate
degree of capital accumulation (or) formation. Deficiency of capital formation is the
result of low saving made by the community. The serious capital deficiency in
developing economies is reflected in small amount of capital equipment per worker and
the limited knowledge, training and scientific advance. At this juncture, banks play a
useful role. Banks stimulate saving and investment to remove this deficiency. A sound
banking system mobilizes small savings of the community and makes them available
for investment in productive enterprises. The important implications of this activity
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include Banks mobilise deposits by offering attractive rates of interest and thus convert
savings into active capital. Otherwise, that amount would have remained idle.
Banks distribute these savings through loans among productive enterprises which are
helpful in nation building.
It facilitates the optimum utilization of the financial resources of the community.
2) Provision of finance and credit

Banks are very important sources of finance and credit for industry and trade. It is
observed that credit is the lubricant of all commerce and trade. Hence, banks become
nerve centers of all trade activities and therefore commerce and trade could function in
the presence of sound banking system.
The banks cover foreign trade transactions also. Big banks also undertake foreign
exchange business. They help in concluding deferred payments, arrangements between
the domestic industrial undertakings and foreign firms to enable the former import
machinery and other essential equipment.
3) Extension of the size of the market

Commercial bankers help commerce and industry in yet another way. With the sound
banking system, it is possible for commerce and industry for extending their field of
operation. Commercial banks act as an intermediary between buyers and the sellers.
Goods are supplied on bank guarantees, making it viable for industry and commerce to
cultivate and locate markets for their products. The risks are undertaken by the bank.
When the risks have been set free by the banks, the industry can look forward to derive
economies of the large size of the market.
4) Act as an engine of balanced regional development

Commercial banks help in proper allocation of funds among different regions of the
economy. The banks operate primarily for profits. When the banks lend their funds for
more productive uses, their profits will be maximized. Introduction of branch banking
makes it possible to choose between different regions. A region with growth potential
attracts more bank funds. But in recent years, the approach of banks towards regional
growth has been undergoing a change. Banks help create infrastructure essential for
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economic development. Thus banks are engines of balanced regional development in
the country.
FOREIGN DIRECT INVESTMENT-

• Foreign direct investment (FDI) is an investment made by a company or an
individual in one country into business interests located in another country. FDI
is an important driver of economic growth.
• Foreign direct investments are commonly made in open economies that offer a
skilled workforce and above-average growth prospects for the investor, as
opposed to tightly regulated economies. Foreign direct investment frequently
involves more than just a capital investment. It may include provisions of
management or technology as well. The key feature of foreign direct investment
is that it establishes either effective control of or at least substantial influence
over the decision-making of a foreign business.
• The Bureau of Economic Analysis (BEA), which tracks expenditures by foreign
direct investors into U.S. businesses, reported total FDI into U.S. businesses of
$4.46 trillion at the end of 2019. Manufacturing represented the top industry,
with just over 40% of FDI for 2019.
• FDI can help foster and maintain economic growth, both for the recipient
country and for the country making the investment. For example, a developing
country might benefit from incoming FDI as a way of financing the construction
of new infrastructure or providing employment for its local workforce. On the
other hand, multinational companies can benefit from FDI as a way to expand
their footprint into international markets. One of the main disadvantages of FDI,
however, are that it tends to rely on the involvement or oversight of multiple
governments, leading to higher levels of political risk.
• The services sector in India received the highest share in FDIs amounting to
over 554 billion Indian rupees in fiscal year 2020. This sector included finance,
banking, insurance and other non-financial sectors like research and
development, testing, analysis and outsourcing. The computer hardware and
software sector came second amounting to almost 324 billion Indian rupees that
year.
Services sector in limelight
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• All in all, the business services sector in the country seemed to be faring very
well in terms of attention from foreign investors. One possible reason for this
could be because almost 56 percent of the registered foreign companies in India
were under this sector. Out of this, most companies were registered in the state
of Maharashtra, followed by the capital city of Delhi indicating a good business
trajectory.
FDIs to aid an ailing economy
• Foreign investments play a critical role in developing countries since they help
bring in resources, latest technologies and best practices that help push
economic growth on to a higher curve. In August 2019, India opened its doors
further to FDIs by loosening its grip on the sourcing requirements for various
sectors. The government also allowed 100 percent FDI in sectors like
commercial coal mining and contract manufacturing, hoping to diversify its
supply chains. These were just some of the measures being taken by the
government in order to give a stimulus to the ailing economy.
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.
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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
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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.
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• Investment financial subsidies.
• Soft loan or loan guarantees.
• Free land or land subsidies.
• Relocation & expatriation subsidies.
• Job training & employment subsidies.
• Infrastructure subsidies.
• R&D support.
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History Of FDI In India
India intent to open its markets to foreign investment can be traced back to the
economic reforms adopted during two prime periods- pre- independence and post-
independence.
Pre- independence, India was the supplier of foodstuff and raw materials to the
industrialised economies of the world and was the exporter of finished products- the
economy lacked the skill and means to convert raw materials to finished products.
International trade grew with the establishment of the WTO. India is now a part of the
global economy. Every sector of the Indian economy is now linked with the world
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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:
18
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.
19
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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.
20
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
21
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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
22
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
23
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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.
Total amount of FDI that is received by India

• Total FDI inflows in the country in the last 20 years (April 2000 - September
2020) are $729.8 bn while the total FDI inflows received in the last 5 years
(April 2014- September 2019) was $319 bn which amounts to nearly 50% of
total FDI inflow in last 20 years.
• This is largely attributed to ease in FDI norms across sectors of the economy.
India, today is a part of top 100 club on Ease of Doing Business (EoDB). FDI
inflows in India stood at $45.15 bn in 2014-15 and have consistently increased
since then. Moreover, total FDI inflow grew by 55%, i.e. from $231.37 bn in
2008-14 to $358.29 bn in 2014-20 and FDI equity inflow also increased by
57% from $160.46 billion during 2008-14 to $252.42 bn (2014-20).
• FDI inflows in India during April to December were $67.54 bn. It is the
highest ever for the first ninth months of a financial year and 22% higher as
compared to the first ninth months of 2019-20 ($55.14 bn).
• Total FDI inflows in the country in the last 20 years (April 2000 - September
2020) are $729.8 bn while the total FDI inflows received in the last 5 years
(April 2014- September 2019) was $319 bn which amounts to nearly 50% of
total FDI inflow in last 20 years.
• During FY 2020-21, total FDI inflow of $58.37 bn, 22% higher as compared
to the first 8 months of 2019-20. FDI equity inflows received during April -
November 2020 is $43.85 bn which is 37% more compared to April -
November 2020 ($32.11 bn).
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.
24
➢ 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
25
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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.
FDI received by the Indian banking sector-
Indian Operations By Foreign Banks Can Be Executed By

Any One Of The Following Three Channels:
Ø Branches in India.
Ø Wholly owned subsidies.
Ø Other subsidies.
In case of wholly owned subsidies (WOS), the guidelines for FDI in the banking sector
specified that the WOS must involve a capital of minimum 300 crores and should
ensure proper corporate governance.
26
• Currently, 20 percent of FDI is allowed in PSU banks under the government

approval route. Private banks have a higher FDI cap at 74 percent, provided
there is no change of control and management. RBI regulations do not permit
a single entity to invest more than 10 percent in a bank. Foreign investment
includes FDI and overseas portfolio investment through various routes. The
modes of entry available to foreign banks are branch office, company and
representative office.
• 1997 permitted foreign investment of up to 20% in the banking sector while

Non-Resident Indians (NRIs) could hold up to 40%. This remained unchanged
till 2000. The Government of India tweaked the FDI policy for Indian banking
sector further vide Press Note 2 of 2000 by bringing the investment caps for
NRIs and foreign investors to same level. However, only up to 20%
investment was permitted by foreign banking companies or finance companies
27
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including multilateral financial institutions. Multilateral institutions were
allowed to invest within the overall FDI cap of 40% in case of shortfall in
foreign direct investment contribution by NRIs.
• The next major change happened through Press Note 4 of 2001. FDI up to
49% from all sources was permitted in the banking sector under automatic
route subject to conformity with guidelines issued by the Reserve Bank of
India (RBI) from time to time.
• 2004 saw another major change to the FDI limits for banks, with private and
public banks distinguished. Private Banks were open to FDI limits of up to
74%. Further various conditions were attached to such investments (explained
later in this note).
• FDI policy of 2010 allowed for investment of up to 20% in public sector

banks. This was subject to the Banking Companies (Acquisition & Transfer of
Undertakings) Act, 1980. This limit of 20% was further made applicable to
State Bank of India and its associate banks.
• As per the latest FDI circular issued by the Government of India, effective
from June 7, 2016, the FDI limits in both private and public sector banks has
remained unchanged at 74% and 20% respectively. For private banks, 49%
investment is allowed through the automatic route while anything beyond that
requires Government approval.
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
28
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
29
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• 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
30
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.
31
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VOTING RIGHTS OF FOREIGN INVESTORS
Private Sector Banks Not more than 10 % of the total voting rights of all
the shareholders
Nationalized Banks Not more than 1 % of the total voting rights of all
the shareholders of the nationalized bank.
32
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.
33
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RBI Approval
➢ Transfer of shares of 5% and more of the paid-up capital of a private sector

bank requires prior acknowledgement of RBI.
➢ For FDI of 5% and more of the paid-up capital, the private sector bank has to
apply in the prescribed form to RBI.
➢ Under the provision of Foreign Exchange Management Act (FEMA), 1999,
any fresh issue of shares of a bank, either through the automatic route or with
the specific approval of FIPB, does not require further approval of Exchange
Control department (ECD) RBI from the exchange control angle.
➢ The Indian banking company is only required to undertake two-stage reporting

to the ECD of RBI as follows:
• The Indian company has to submit a report within 30 days of the date
of receipt of amount of consideration indicating the name and address
of foreign investors, date of receipt of funds and their rupee
equivalent, name of bank through whom funds were received and
details of govt. approval, if any.
• 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.
34
➢ 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.
OBJECTIVES OF THE STUDY
1. To identify the trend of foreign direct investment in the Indian banking

sector
2. To analyse the impact of the FDI on the Indian Banking sector
3. To study and analyse the impact of foreign direct investment in Indian
Banking sector.
35
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Chapter 2
Literature Review
1. Role of FDI in the Indian economy-

Debatable views of spillovers in technology, knowledge, productivity and
creation of competitive business scenario coupled with a growth in capital
inflow triggered by FDIs has been well documented in the literature. Some
critics however view that FDIs could bring about deterioration in the balance of
payments in developing countries like India (Kaur, Yadav &Gautam, 2013) The
causality between FDI inflow and economic growth also spurs in considerable
contradictory opinions in literature. In this section, the contradictory viewpoints
about this linkage and try to identify other parameter which determines FDI
influx in developing countries. The relationship between the inflow of FDI and
economic growth in developing countries like India is documented in literature
with contrasting viewpoints. The beneficial effects of FDI on the economic
growth mainly arising due the spillover effects has been empirically analysed
by Borensztein, De Gregorio and Lee (1998)2 ; Zhang (2001)3 ; Sun and Parikh
(2001)4 ; Liu et al. (1997)5 ; Tsai (1991)6 ; Hansen and Rand (2005)7 ; Yao
(2006)8 ; and Chang (2007)9 . Another group of researchers had tried to
establish the linkage between FDI and economic growth. Although there are
very limited evidences in literature addressing the issue to that context, it has
been an area of interest to the researchers recently. However, the studies have
reported contrasting results about the nexus between FDI and Economic growth
(Choi and Baek, 201710; Chakraborty and Basu, 200211; Agrawal and Khan,
201112; and Dash and Parida, 201313; Sahoo and Mathiyazhagan, 200314;
Pradhan, 2002)15. According to Pradhan (2002)15 FDI does not have
significant positive growth impacts and thus they have concluded that the
contribution of FDI to economic growth was minimal. On the other hand,
Chakraborty and Nunnenkamp (2008)16 find that the influx of FDI contributes
to economic growth for the Indian economy. Dash and Parida (2013)13 reported
about passing a beneficial effect of FDI on growth, after controlling for trade.
The results were however not contrasting only to the context of India. The
36
available literature also documents for cross country studies and documents for
this contrasting results. Johnson (2006) examined the impact of FDI on growth
for a panel of 90 countries and found the result to be positive and significant.
While Motalleb (2007)17 assessed the impact of FDI on growth for 60 low- and
middle-income countries and concluded that large GDP and GDP growth rate
are instrumental in attracting FDI Some researchers view FDI as an instrument
for promoting the economic growth of host countries. Balasubramanyam et al.
(1996)18 shows that FDI leads to growth in those countries which followed
export promotion policies over import substitution policies. Apart from these
parameters of balance of payments, trade and growth, few other factors also
contributed to the inflow of FDI. These factors include human capital, GDP per
capita, government consumption, foreign exchange and trade distortions
(Siddiqui and Ahmed, 201719, Borenzstein et al., 1998)20. Other factors like
stable macroeconomic policies, institutional quality, lowering inflation rate, tax
rates, and government consumption are required to attract FDI and lead to
growth (Siddiqui and Ahmed, 2017)19. Dhakal et al. (2007)21 indicate that in
India causality is bidirectional and flows from growth to FDI and from FDI to
growth. Trade openness and development of the financial sector are also desired
for attracting higher FDI in India. Mathiyazhagan (2005)22 examines the
relationship between FDI, output, export and labour productivity for the Indian
economy during the time period from 1990-1991 to 2000-2001 based on the
model given by Sahoo et al. (2002)23 and Sahoo and Mathiyazhagan (2003)24.
It is found that FDI has led to a rise in output, labour productivity and export in
a few sectors which is not highly significant. It has also been suggested in the
study to open up export-oriented sectors in order to achieve higher growth of
the economy through these sectors. Education level of the labour force also
plays significant role in determining the FDI influx to a country (Siddiqui and
Ahmed, 2017)19. Based on this literature review, it is prudent to say that the
causality of the FDI and economic growth needs to be established. Further, it is
also necessary to identify the other parameters via empirical methods which
have an impact on the FDI influx in India.
37
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2. Role of FDI in the Indian banking sector-

Singh Arjun and Singh Narender (2011), says that Foreign Direct Investment is
a tool for economic growth by its power of local capital, power of generating
productivity and employment. FDI also plays a very important role in the
polishing and upgrade of skills, technology and capabilities of management in
various sectors of the economy. They also analysis that since 1991 FDI inflows
in service sectors of India and relating the growth of the service sector FDI in
creation of employment in conditions of skilled and unskilled Bhattacharyya
Jita, Bhattacharyya Mousumi (2012), “Impact of FDI and Merchandise and
Services Trade of the Economic growth in India: an Empirical study”, this study
exposed that there was a long term bonding between FDI, banking, services
business and economic growth of India. Bi-directional causality is experiential
between merchandise trade and economic growth, services trade and economic
growth. Laghane.K.B (2007), LPG (liberalization, privatization, and
globalization) sponsored FDI model’s impact positively on the effectiveness on
the overseas banks and Indian banks. In his study He found that FDI must be
seen as to reducing poverty, unemployment and increase primary education and
priority sector of banking. Due to LPG, Indian banks stand their business at
global and many foreign banks setting up market in India. Singh J. (2010),
“Economic Reforms and Foreign Direct Investment in India: Policy, Trends and
Patterns”, in the context of increasing competition among nations and sub
national entities to attract Foreign Direct Investment (FDI), the present paper
tries to find out the rising trends and patterns of FDI inflows into India in
attraction to various policy measures announced by the Indian government since
mid-1980 and after. The experiential analysis tends to suggest that the FDI
inflows, in general, show an increasing trend during the post-reform period.
Furthermore, country-wise comparison of FDI inflow also indicates that FDI
inflow into India has increased considerably in comparison to other developing
economies in the recent years. Thus, the study indicates that the FDI inflows
into India responded positively to the liberalization measures introduced in the
early 1990s. According to GYANPRATHA – ACCMAN (Journal of
Management, Volume 5 Issue 1, 2013) FDI for 2009- 10 at US$ 25.88 billion
was lower by five per cent from US$ 27.33 billion in the previous fiscal. Foreign
38
direct investment in August dipped by about 60 per cent to approx. US$ 34

billion, the lowest in 2010 fiscal, industry department data released showed. In
the first two months of 2010-11 fiscal. FDI inflow into India was at an all-time
high of $7.78 billion up 77%from $4.4 billion during the corresponding period
in the previous year. In 2013, the government relaxed FDI norms in several
sectors, including telecom, defence, PSU oil refineries, power exchanges and
stock exchanges, among others. In retail, UK-based Tesco submitted its
application to initially invest US$ 110 million to start a supermarket chain in
collaboration with Tata Group’s Trent. In civil aviation, Malaysiabased Air Asia
and Singapore Airlines teamed up with Tata Group to launch two new airline
services. Also, Abu Dhabi-based Etihad picked up a 24 per cent stake in Jet
Airways that was worth over Rs 2, 000 crore (US$ 319.39 million).
3. Change in the FDI flow before, during and after COVID

19-
Covid-19 has battered the global economy causing the worst recession since
The Great Depression of the 1930s. By the end of 2020, the worlds GDP maybe
about 7.5% lower than it would have been without the pandemic. Globally more
than 15% of the young people who were in work before the Covid-19 have lost
their jobs. Widespread lockdowns have caused changes that were already
affecting the world economy in technology, finance and trade. With great deal
of uncertainty in the transactional space, investors are now more cautious before
making any making any significant transactions. Global FDI flows fell by more
than 49% in the first half of 2020 and even under the most optimistic scenario
after the economic support policy measures by the governments, the numbers
don’t seem to be getting better. The developing countries are hit even worse
because the sectors attracting the largest shares of FDI such as primary and
manufacturing sectors are hit the worst. FDI being a critical driver of the
economic growth could play an important role in supporting the economies
during and after the crisis.
As Covid-19 wreaks havoc across the world, and shocks financial markets the
world over, the government has taken actions to protect Indian firms in the form
of a revised FDI policy: New rules for entities from countries sharing land
39
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border with India, any investment from such an entity will require Govt. of
India’s nod. Govt. has also added a clause to prevent routing of funds via other
nations. Govt. nod also required for transfer of ownership benefiting
aforementioned entities. The reasons for the revised FDI policy are mainly: •
Revision in view of the economic impact of Covid-19 pandemic. • Move to curb
‘Opportunistic takeovers/Acquisitions’ of Indian Firms. • Firms whose market
value has taken a hit are vulnerable. • Although India has named all its neighbors
in the new rules, the main target is believed to be China. Chinese investors have
pumped $4 BN into Indian startups and raised stakes in some major Indian
companies including HDFC. Due to the robust business environment and
favorable policy regime, India’s government has ensured that foreign capital
keeps flowing in the country. Some of the major companies which saw
investments during this time include Byju’s, Reliance, Cashaa, Unacademy,
Phoenix Mills etc. These investments were driven by some of the biggest
companies in the world like Google, Foxconn, Amazon, Facebook, Silver Lake,
SoftBank Group and many more.
Comparative Foreign Investment in Indian Banking

Sector Literature Review-
A broad stream of research has evolved on the determinants of foreign direct
investment. Some scholars draw on Dunning’s eclectic theory to identify policy
and non-policy variables that influence FDI (Loree and Guisinger, 1995) while
others focus on the effects of political stability on inward FDI (Butler and
Joaquin, 1998; Henisz, 2000).
Recent studies have focused on the effect of institutions (governance) on
economic growth/investment flows (Nissanke and Stein, 2003). Keefer and
Knack (1997)employed various governance indicators, such as rule of law, and
corruption to show that the governance environment has an influence on
economic growth. Globerman and Shapiro (2002, 2003) show that countries
with a more impartial and transparent legal system and better protection of
property rights tend to attract more US FDI. Chan-Lee and Ahn (2001) conclude
that better enforcement of law is more important than the origins of legal
system. Findings by Chinn and Ito (2006) suggest that financial openness is
important to equity market development only when legal systems and
40
institutions have attained a threshold level of development. A study by Li and

Filer (2007) observed that, in countries with a poor governance environment,
investors prefer direct investment to indirect (portfolio) investment because the
former can be better protected by private means. Acemoglu and Johnson (2005)
do not establish a link between contract institutions (legal formalism, procedural
complexity) and investment rates. After they control for the effects of property
rights institutions such as property rights, constraints on the executive,
contracting institutions seemed to have no impact on investment. They show
that economies can function in the face of weak contracting institutions without
disastrous consequences. These problems are alleviated by private contracts or
other reputation-based mechanisms.
A substantial body of research shows that the quality of institutions does matter
(Benassy-Quere et al., 2007; Everhart et al., 2003; Habib and Zurawicki, 2002;
Kinoshita and Campos, 2003; Knack, 2001; Wesberry, 1998). For instance, the
amount of bureaucracy and corruption in the country as well as the quality of
information,banking and legal institutions are important determinants of inward
FDI. These findings are articulated in the work of Quazi (2007) which found
that countries can attract more FDI by improving their domestic investment
climate through, among other policies, tax and tariff reform, reducing
government ownership of business, and liberalizing the banking and financial
sectors.
While several studies examine the relationship between institutions and
economic growth/FDI (Globerman and Shapiro, 2002, 2003; Li and Filer,
2007), the subject of transparency has received little attention in the academic
literature. A few empirical studies on the subject show that low public
transparency is likely to have a negative effect on inward FDI flows (Zhao et
al., 2003; Drabek and Payne, 2001). Regulatory transparency also affects
foreign service providers (such as banks and insurance companies) that are
already established in the domestic market. Breslin (2000) notes that foreign
investors consider leaving the market when they encounter low regulatory
transparency. Low transparency provides insiders with privileged access to
information thus distorting market outcomes. The equal availability and access
to information is an important tool to foster fair and equitable competition. In
41
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the context of FDI, low transparency burdens foreign investors with high
transaction costs to overcome market failure.
Corporate transparency has been largely examined in the context of portfolio
flows. Chipalkatti et al. (2007) show that higher levels of corporate transparency
in emerging economies are associated with higher levels of portfolio flows. A
World Bank (1989) study emphasizes the importance of financial information
in capital markets, i.e. developing an effective accounting and auditing
profession is essential for building efficient financial markets. Mishkin (1997)
highlights the role of accounting standards and other financial regulations in
encouraging information production and ameliorating the asymmetric
information problem.
Transparency has often been associated with the activity of governments and
their institutions. Public sector transparency is often correlated to the degree of
corruption and bribery, property rights, bureaucratic efficiency and enforcement
of the rule of law. Similarly, the level of private sector transparency depends on
the presence of various governance indicators: existence of an efficient judicial
system for protecting property rights and enforcing contracts and presence of
privately owned /managed enterprises.
In countries dominated by state-owned enterprises, politicians may seek to
restrict the flow of information to prevent the public scrutiny of their business
dealings with cronies (Bushman et al., 2004). Investment decisions are
generally made with respect to the overall state of transparency in a country than
to its individual components.
42
Chapter 3
Hypothesis/ Research Model
Given the state of the literature, the following hypotheses are developed:
H1. The lower the level of public sector transparency in a developing country, the lower
the inflow FDI.
H2. The lower the level of private sector transparency in a developing country, the
lower the inflow FDI.
Public officials need to provide a structure of institutional incentives specific to a

particular firm in order to influence the ways in which that firm deploys its resources
and capabilities (Dunning, 2006). Public transparency makes practical sense to foreign
investors if officials in host countries have the competence and sophistication to
determine the impact of a given set of incentives on investment projects. It will not have
the desired effect if information reflects an erratic decision pattern, lack of expertise
and experience (Zurawicki, 2003). In many developing countries, public information
(even when available) is not sufficiently reliable to base investment decisions. This is
partly due to the presence of a corrupt or less skilled bureaucracy in many of these
countries. This is compounded by rules that often provide for more discretionary power
to decision-makers thus facilitating arbitrariness and providing opportunities for
corruption.
In view of these circumstances, it is plausible to contend that foreign investors would
rely more on private (corporate) information than public information to make decisions
pertaining to Greenfield investments or cross-border mergers/acquisitions in
developing countries. Thus:
H3. Private sector transparency has a greater impact on inward FDI than public sector
transparency in developing countries.
43
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RESEARCH METHODOLOGY:
The present study is of analytical in nature and makes use of secondary data. The
relevant secondary data are collected from various publications of Government of India,
Ministry of Finance, Department of Economic Affairs, Economic Division, India,
Reserve bank of India reports and World Investment Report Published by UNCTAD
etc. The data collected relate to FDI in banking sector in India are analysed through
simple tabular and graphical statistical methods. By surveying the available theoretical
and empirical evidences in the Indian context from various research studies, the study
examines the role of new phase of FDI policy by RBI in Indian banking.
44
Chapter 4
Methodology
The data collected relate to FDI in banking sector in India are analysed through simple
tabular and graphical statistical methods. By surveying the available theoretical and
empirical evidences in the Indian context from various research studies, the study
examines the role of new phase of FDI policy by RBI in Indian banking.
Conceptual Clarification: Opportunities for FDI into Indian

Banking Sector
Government of India (GOI) launched economic reforms to resolve the deficit problem
in 1991 and suggested to deregulate financial sector specified by Narasimham
Committee.
Though foreign bank entry in India had been made in 1853 by Hong Kong and Shanghai
(HSBC) bank, the real foreign investment was gained after liberalization in 1991-92.
Indian banking sector was liberalized by Government of India with the objective to
enhance efficiency, productivity and profitability through competition. RBI does not
maintain any data to measure FDI in Indian banking sector. Thus, foreign banks are
mainly considered as FDI into Indian banking system (Kim & Pant, 2009). As a founder
member of World Trade Organization (WTO), India is abided by WTO’s guideline to
allow opening up of 12 branches of foreign banks in a single year.
In 2005, RBI announced its “Roadmap for the presence of foreign banks” in India. In
the first phase, foreign banks were allowed to establish their own subsidiary or
transform the existing branches into a Wholly Owned Subsidiary (WOS). In this phase
RBI also allowed to open up more than 12 branches in a single year by considering the
principle of reciprocity. After reviewing the first phase by April 2009, RBI was
supposed to initiate second Phase which was delayed due to global financial crisis in
2008. The committee on financial sector chaired by Dr. Raghuram Rajan also supported
further opening up of foreign bank’s entry into India to improve the banking sector.
Besides, India has being engaged with bilateral trade agreements with Singapore and
Korea. The Agreement with Singaporean banks, Comprehensive Economic
Cooperation Agreement (CECA) granted them permission to open 15 branches in India
within four years from the 2006. While the agreement with Korean banks,
45
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Comprehensive Economic Partnership Agreement (CEPA) permitted them to open 10
branches within four years from 2010.
Direct investment into Indian banking Sector follows four distinct channels. In order to
invest in Indian banking sector, Foreign Direct Investors would open their branches or
wholly owned subsidiary (WOS), but not both. According to consolidated FDI Policy
by DIPP-2014, Foreign Direct Investors can invest into Indian private banks up to 74%.
This74 percentage limit will include investment under the Portfolio Investment Scheme
(PIS) by FIIs, NRIs and shares acquired prior to September 16, 2003 by erstwhile
OCBs, and continue to include IPOs, Private placements, GDR/ADRs and acquisition
of shares from existing shareholders. Out of 74 percent limit, 49 percent would be
invested through automatic route. But in order to invest beyond 49 percent and up to
74 percent, Government route is a must.
Trends of FDI in Indian Banking Sector

Trends of FDI in Indian banking sector would be represented as the number of foreign
banks entered into Indian markets, the increasing number of branches and asset share
in the total banking system. The rising trend is high stock of foreign investors in private
and public sector banks in India. Most of FDI into Indian banking Sector exist in the
form of branches or acquiring a stake in Indian banks. Though RBI has allowed foreign
banks to establish WOS, not a single WOS has been established so far.
Year 2001 2005 2010 2015 2020

No. of 42 31 32 41 42
Foreign
Banks
46
No. of foreign banks

45
40
35
30
25
20
15
10
0
1985 1990 1995 2001 2005 2010 2015 2020
No. of foreign banks
The table shows that the number of foreign banks led from 1985 to 2020 from 20 to 43,
which may represent the determination of foreign banks to enter into India. In 1991,
when Indian economy was liberalized, the rules for foreign bank entry were also
liberalized further which generated the opportunity for foreign banks to enter. Most of
the times, developing countries open their market through economic reforms due to
financial crisis or current account deficit, which creates scope for foreign investment
(Mohan, 2013). Banking crisis creates opportunities for a foreign bank to acquire
domestic banks as its asset value declines for example, Thailand in 1997 crisis (Clark,
2008). It is learnt from the chart that foreign banks entered in India in a large number
in1997 during Asian financial crisis. After reaching to the peak in 1999, the number
declined sharply and it surged again from 2009at the time of Global financial crisis.
Thus, the good number of foreign banks entry during Asian financial crisis and Global
financial crisis in India is to be observed.
Foreign banks have shown interest to establish as branches rather than in any other
forms. It is also noted that before 2006, ATMs of foreign banks were also considered
branches. Hence, foreign banks had a little opportunity to open up more branches. But,
as soon as India has allowed 12 branches per year to foreign banks and ATMs were
excluded to be considered as branches, foreign banks branches were rapidly enhanced
throughout the country. There were 145 offices in 1990 and the number of foreign
banks' offices increased by 100 ending up with 272 offices in 2007 (Kim & Pant, 2010).
47
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foreign banks branches raised 29 percent in 2013 considering 2006 as the base year and
it is raised by 130 percent by considering 1985 as a base year. It has also interesting to
note that till 2006; ATMs of foreign banks were considered branches by GOI.
48
Number of foreign banks’ branches in India -

Year 1991- 1995- 2000- 2006- 2011- 2012-
92 96 01 07 12 13
No. of foreign 148 177 248 276 323 334

branches
Foreign banks’ asset

As far as the asset share is concerned, foreign banks could not achieve any big share
due to the dominance of Indian public sector banks. In the year 2006-07 foreign banks
gained the highest asset share of 8.58% and in the year 1990-91 the lowest asset share
was 6.2% after liberalization. The average asset share of foreign banks from 1990 to
2013 is 7.4%. It is observed from Figure 3 that the asset share in the beginning of the
years of liberalization i.e., 1991 & 1992 and at recent years i.e., 2012 & 2013 are almost
equal. Mild fluctuation in the asset share by foreign banks is observed between 1991
and 2013. The empirical study by Classens et. al. (2001) has concluded that it is not the
asset share that matters but the foreign bank entry which alerts the domestic banks.
Foreign Investment in Private Banks and Public Sector

Banks in India
Foreign investment is allowed 74 percent in Indian private banks. Till March 2013,
most of the private banks in India were flooded with foreign capital.
Conditions for investment in Private Banks

The 2004 policy note introduced the conditions for investment in Private Banks. These
conditions have since been unchanged and are summarised hereunder.
The permissible limits under portfolio investment schemes through stock exchanges for
FIIs/FPIs and NRIs are as follows:
1. In the case of FIIs/FPIs, as hitherto, individual FII/FPI holding is
restricted to below 10% of the total paid-up capital, aggregate limit for
all FIIs/FPIs cannot exceed 24% of the total paid-up capital, which can
49
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be raised up to sectoral limit of 74% of the total paid-up capital by the
concerned bank through a resolution by its Board of Directors followed
by a special resolution to that effect by its General Body.
2. In the case of NRIs, as hitherto, individual holding is restricted to 5% of
the total paid-up capital both on repatriation and non-repatriation basis
and aggregate limit can't exceed 10% of the total paid-up capital both on
repatriation and non- repatriation basis. However, NRI holding can be
allowed up to 24% of the total paid-up capital both on repatriation and
non-repatriation basis provided the banking company passes a special
resolution to that effect in the General Body.
3. Applications for FDI in private banks having joint venture/subsidiary in
insurance sector may be addressed to RBI for consideration in
consultation with the Insurance Regulatory and Development Authority
of India (IRDAI) to ensure that the 49% limit of foreign shareholding
applicable for the insurance sector is not being breached.
4. Transfer of shares under FDI from residents to non-residents will
continue to require approval of RBI and Government. Similarly, the
policies and procedures prescribed from time to time by RBI and other
institutions such as SEBI, Ministry of Corporate Affairs and IRDAI on
these matters will continue to apply.
5. RBI guidelines relating to acquisition by purchase or otherwise of shares
of a private bank, if such acquisition results in any person owning or
controlling 5% or more of the paid-up capital of the private bank will
apply to non-resident investors as well.
50
A foreign bank could set-up a subsidiary bank by following these

conditions:
1. Foreign banks can set-up either branches or subsidiaries but not both.
2. Foreign banks regulated by banking supervisory authority in the home country
and meeting RBI’s licensing criteria can hold 100% paid up capital to enable
them to set up a wholly-owned subsidiary in India.
3. A foreign bank may operate in India through only one of the three channels i.e.,
branches; a wholly-owned subsidiary and a subsidiary with aggregate FDI up to
a maximum of 74% in a private bank.
4. A foreign bank will be permitted to establish a wholly-owned subsidiary either
through conversion of existing branches into a subsidiary or through a
fresh banking license. A foreign bank will be permitted to establish a subsidiary
through acquisition of shares of an existing private sector bank provided at least
26% of the paid capital of the private sector bank is held by residents at all times.
5. A subsidiary of a foreign bank will be subject to the licensing requirements and
conditions broadly consistent with those for new private sector banks.
Guidelines for setting up a wholly-owned subsidiary of a foreign bank will be
issued separately by RBI. All applications by a foreign bank for setting up a
subsidiary or for conversion of their existing branches to subsidiary in India will
have to be made to the RBI.
4. At present there is a limit of 10% on voting rights in respect of banking
companies, and this should be noted by potential investor. Any change in the
ceiling can be brought about only after final policy decisions and appropriate
Parliamentary approvals.
Private Sector Banking:
1.1 Non-Banking Financial Companies (NBFC)
100% FDI is allowed from all sources on the automatic route subject to guidelines
issued from RBI from time to time.
a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall

be as per levels indicated below:
51
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• Merchant banking
• Underwriting
• Portfolio Management Services
• Investment Advisory Services
• Financial Consultancy
• Stock Broking
• Asset Management
• Venture Capital
• Custodial Services
• Factoring
• Credit Reference Agencies
• Credit rating Agencies
• Leasing & Finance
• Housing Finance
• Foreign Exchange Brokering
• Credit card business
• Money changing Business
• Micro Credit
• Rural Credit
b. Minimum Capitalization Norms for fund based NBFCs:
i) For FDI up to 51% - US$ 0.5 million to be brought upfront
ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront
iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $
7.5 million to be brought upfront and the balance in 24 months
c. Minimum capitalization norms for non-fund based activities:
Minimum capitalization norm of US $ 0.5 million is applicable in respect of all

permitted non-fund based NBFCs with foreign investment.
52
d. Foreign investors can set up 100% operating subsidiaries without the condition
to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in
US$ 50 million as at b) (iii) above (without any restriction on number of operating
subsidiaries without bringing in additional capital)
e. Joint Venture operating NBFC's that have 75% or less than 75% foreign
investment will also be allowed to set up subsidiaries for undertaking other NBFC
activities, subject to the subsidiaries also complying with the applicable minimum
capital inflow i.e. (b)(i) and (b)(ii) above.
f. FDI in the NBFC sector is put on automatic route subject to compliance with
guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this
regard.
53
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It is visible from the figure 4 that ING-Vysya, ICICI and Indus Ind banks availed higher
foreign capital than the rest of private banks in India. According to the recent news,
FIPB has declined the HDFC bank’s request to raise foreign capital as it would have
crossed the limit of 74 percent cumulative foreign capital.
Private lenders including Axis Bank, YES Bank, Kotak Mahindra Bank and even
Federal Bank stand to benefit from the government’s move to remove the distinction
between foreign portfolio investment (FPI) and foreign direct investment (FDI),Bureau
in Mumbai. The Bank Nifty rose 616.65 points after finance minister Arun
Jaitley announced to club foreign investments like FPI and FDI under a composite cap.
Currently, the limit for FPI in banks is 49% while the FDI cap is 74%;.now FIIs will
have headroom to buy into some private sector bank stocks.
The FII holding in Axis Bank is currently around 48%, almost near the cap of 49%
under the present rules. In YES Bank it is at 46% while in ICICI Bank it is 41.74%.
“The move is positive for private banks and it will increase the FII investment limit
(including FDI) in private banks to 74% from the current 49%,” Kotak Securities wrote
in a note. A Credit Suisse report notes that even small banks such as Karur Vysya Bank,
54
Karnataka Bank and South Indian Bank will see an expansion of their current headroom
to attract more FII stake. However, in the case of large lenders such as HDFC Bank and
ICICI Bank, the incremental room to raise FII holdings is minimal. Taking into account
the American depository receipts and global depository receipts issued by both lenders,
the incremental room for HDFC Bank is a mere 1.7% while that of ICICI Bank is 3.2%.
55
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FOREIGN DIRECT INVESTMENT IN PUBLIC SECTOR BANKS
In PSBs the limit is 20% for foreign investment. It is obvious from figure-5 that Bank
of Baroda, Punjab National Bank and Dena Bank have acquired higher foreign capital.
There are banks like Union Bank of India, State Bank of Patiala, State Bank of Mysore
and State Bank of Hyderabad having no foreign investment.
56
Chapter 5
Findings
Impact of foreign banks on Domestic Indian Banks
Foreign banks improve profitability and asset quality, although they dampen spreads
Foreign banks bring modern technology and new financial services to home country as
a spill over effect. In India, foreign banks introduced the sophisticated technology and
products. The first ATM was introduced by HSBC in 1987, while Citibank and
Standard Chartered Bank introduced credit card and credit card with photo respectively
for the first time in India (Kim &Pant, 2010). As these sophisticated products help
banks to reduce their labour and administrative cost, the contribution of foreign banks
in the direction of improving efficiency of domestic banks do exist.
Few studies also claimed that foreign banks adopt “follow your customer” theory. They
find their own country mates and grant high credits to them and encourage them in their
businesses. But, on the other hand they neglect the need for local entrepreneurs. Foreign
banks “Cherry Pick” customers in the home country and grant loan to only few potential
corporate. The critics also confine that domestic banks may follow high credit
allocation and finds themselves in trouble by raising their Non-Performing Assets
(NPA).
Foreign banks which commenced banking business in India from August 2010 onwards
were required to furnish an undertaking that they would convert their branches into
wholly owned subsidiaries if so, required by RBI. RBI has incentivized foreign banks
by providing national treatment to WOS of foreign banks. WOS can be opened up in
any city from tier-1 to tier-6, removing the previous restriction of only in tier-1 and tier-
2 cities.
Thus, WOSs of the foreign banks, even though locally incorporated, being foreign
owned and controlled companies, will be treated as “foreign banks” which also can be
listed on Indian stock market for disinvestment up to 26 percent. The main purpose of
incentivized foreign banks with national treatment to WOS is financial stability. In
order to reduce down size risk, prior approval is needed when the capital and reserves
of the foreign banks (i.e., WOSs and foreign bank branches) in India exceed 20% of the
capital and reserves of the banking system. Moreover, as per the WTO commitments
licenses for new foreign banks may be denied when the maximum share of assets in
57
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India both on and off-balance sheet of foreign banks’ branches to total assets both on
and off-balance sheet of the banking system exceeds by 15 %.
FDI is considered the lifeblood of economic development for developing countries like
India. As the economic liberalization leads to entry for foreign international banks
which enhance efficiency, productivity and profitability in banking sector; the scope
for further liberalization of banking sector in India was expected. In this line, RBI has
initiated second phase of Liberalization for Indian banking sector with its new FDI
policy in 2014.It is quite clear from the present reforms in the FDI policy on Indian
banking sector that foreign banks have wide scope in India. Foreign banks have entered
into India taking the advantage of the opportunity given by GOI. The important
observation of the study was that good number of foreign banks entered during Asian
financial crisis and Global financial crisis in India. Although foreign banks entry in
India has increased, the RBIs’ favoured WOS a mode of presence has not seen yet.
Further it is understood that Indian banking system seeks more competition, which can
be achieved through foreign banks entry.
Banking crisis creates opportunities for a foreign bank to acquire domestic banks
as its asset value declines.
Indian Federal Government has opened up the banking sector for foreign investors
raising the ceiling of foreign direct investment in the Indian private sector banks to 49
percent. However, the ceiling of FDI in the country's public sector banks remains
unchanged at 20 percent. Foreign banks having branches in India are also entitled to
acquire stakes up to 49% through "automatic routes". It is to be noted that under
"automatic route" fresh shares would not be issued to foreign investors who already
have financial or technical collaboration in banking or allied sector. They would require
FIPB approval. However, some statutory approvals of the Reserve Bank of India (RBI),
country's central banking authority, would be required. There are 29 Indian private
sector banks. RBI has also specified the voting rights of foreign investors. The scope
for disinvestment is also there.
Seeking to further relaxation investment norms Government is considering increasing
the FDI limit in private banks to 100 per cent from the existing 74 per cent. If 100 per
cent FDI is allowed in banking sector it will help the existing private sector banks and
small finance banks to tap overseas markets to enhance their capital base.
58
RBI has recently given in-principal approval to 11 entities to set up payments banks
and 10 for small banks.
Recently, the Government has introduced the concept of composite caps but given the
sensitivities in the sector. But foreign institutional investors cannot exceed the cap or
limit prescribed for portfolio investments in private sector banks.
STRENGTHS of INDIA FOR FDI
■ India is recognised as 2nd fastest growing economy in world after china.

■ 100% FDI allowed in many sectors after 2005 amendments in foreign investment
policy.
■ India is considered 111th globally in terms of siting a business and 165th in terms
of fiscal concerns (world bank-2007).
■ India is 10th Largest in world by nominal GDP.
■ India is 4th largest in world in terms of Purchasing power parity.
■ Strong GDP output of from service and industrial sector.
■ More than 8% growth which is considered to double the GDP in 10 yrs of time
■ Stable government to keep foreign policies intact.
■ Rapid growth in banking and insurance sector with entry of foreign banks in market.
■ Huge land area for industrial development.
■ Availability of huge labour work force.
■ Rapid growth in infrastructure.
■ Air & Sea connectivity to all parts of world.
■ World class Seaports & Airports.
■ Availability of Skilled managerial & technical expertise in all sectors.
■ Availability of Natural resources i.e. raw material in bulk quantity.
■ Production cost is lower in comparison to other countries.
■ High Domestic consumption demand.
■ Low cost of construction along speedy construction.
■ Modern telecom network
WEAKNESS of INDIA FOR FDI
59
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■ The image of India as a country where everything is cheap or nearly free is no more
in existence.
■ Lack of Working Capital with private individual.
■ Red tapism, Bureaucracy & Corruption.
■ Lack of sector specific business setting up / establishment private consultants.
■ Depending on 75% of oil consumption on external sources, this is major contributor
in trade deficit.
■ Tough labour protection laws.
■ Low production of electricity comparing to rising demands.
■ Delayed justice
■ Complex taxation system.
■ Complex structure to start up an industry by a foreigner.
■ No powers to branch and liaison office.
■ Higher land prices which consumes more share of investment.
■ High Domestic consumption demand increasing Foreign trade deficit.
60
Chapter 6
Limitations
Following are the limitations of the report which is based on
secondary data -:
• Limited Access to Information
study may involve some organizations and people in the research, get problems
with access to these organizations. Due to this, need to redesign and rewrite
study, explain the cause of limited access to readers.
• Conflicts on Biased Views and Personal Issues
Some researchers can have biased views because of their cultural background
or personal views. Needless to say, it can affect the research. Apart from this,
researchers with biased views can choose only those results and data that
support their main arguments.
• Data or statistical limitations-In some cases, it’s impossible to collect
enough data or enrolment is very difficult, and all that under-powers research
results, produce more issues in interpreting your findings.
• Might be not specific to your needs
Secondary data is not specific to the researcher’s needs due to the fact that it
was collected in the past for another reason. That is why the secondary data
might be unreliable for your current needs. Secondary data sources can give you
a huge amount of information, but quantity does not always mean
appropriateness.
• You have no control over data quality
The secondary data might lack quality. The source of the information may be
questionable, especially when you gather the data via the Internet. As you
relying on secondary data for your data-driven
• Biasness
As the secondary data is collected by someone else than you, typically the data
is biased in favor of the person who gathered it. This might not cover your
requirements as a researcher or marketer.
• Not timely
61
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Secondary data is collected in the past which means it might be out-of-date.
This issue can be crucial in many different situations.
• You are not the owner of the information
Generally, secondary data is not collected specifically for your company.
Instead, it is available to many companies and people either for free or for a
little fee. So, this is not exactly a “competitive advantage” for you. Your current
and potential competitors also have access to the data.
62
Chapter 7
Conclusions and Recommendations
Benefits of FDI in the Banking Sector
• FDI in the banking sector benefits the host country's economy through funds
transfer of capital. This also leads to efficiency in resource utilization along
with access to the local market by the parent organization which ultimately
leads to better capitalization and diversification.
• FDI also leads to better customer services. Competition in the banking sector
benefits the borrowers the most as there are a wide variety of schemes which
can be availed. The focus on customer satisfaction is a paradigm shift in the
creation of better and beneficial services to the customers.
• A healthy and robust banking sector is important for the economic growth and
development of any country. The strength of the financial institutions is a
major parameter for judging economic growth in the world. More banks leads
to more investments within the country in important sectors like infrastructure
development, mining, real estate and construction, etc.
• Another benefit of foreign investment in the banking sector is the transfer of
technology and best management practices. Advanced technology with regard
to credit management, market dynamics, lending and transfer, etc. have all
been absorbed by Indian banks as well in the quest to keep up with the major
foreign players.
• New Trends in FDI in Banking sector has its impact on Private sector Banks
and Public Sector banks in India. India is now emerging and upcoming market
for money investment in many modes. Hence FDI facilitate money circulation
and increase in employment generation to local people. FDI in banking as
relates to FDI in retail sector gives great rise in providing infrastructure and
basic amenities to India. Current trends in FDI in Public sector as well as private
sector leads to industrial growth. It results in high regulation of import and
export policies in India.
• The Global Banking industry weathered turbulent times in 2007 and 2008. The
impact of the economic slowdown on the banking sector in India has so far been
moderate. The Indian financial system has very little exposure to foreign assets
63
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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.
• The third quarter of 2008 saw the beginning of negative net capital inflows into
the country. Notwithstanding this bleak scenario, the investment pattern with
regard to foreign direct investment (FDI) and inflows from non-resident Indians
remains resilient and FDI inflows into the country grew by an impressive 145%
between fiscal 2006 and 2007 and by a respectable 46.6% between fiscal 2007
and 2008. However, owing to the economic downturn, the growth in FDI
inflows in fiscal 2009 slowed to 18.6% from the previous fiscal.
• Despite the surge in investments, the stringent regulatory framework governing
FDI has proved to be a significant hindrance. However, FDI norms have been
relaxed to a considerable extent with respect to certain sectors. Private banks,
for instance.
• Foreign investment, in addition to technological innovation and expertise,
brings with it a plethora of risks.
• An unwarranted increase in the size of foreign holding in the banking and
insurance sector will inevitably exposes the country to risks not commensurate
with those that an emerging market economy such as ours is equipped to grapple
with.
• At the same time, it is important to recognize that FDI in banking can address
several issues pertaining to the sector such as encouraging development of
innovative financial products, improving the efficiency of the banking sector,
better capitalization of banks and better ability to adapt to changing financial
market conditions.
64
• The decision of the Government to remove sub-limits for foreign investments

in Indian companies, domestic banks, especially those in the private sector,
could benefit from enhanced capital-raising options from overseas investors.
• Currently, the different types of foreign investments include foreign direct
investment (FDI), foreign institutional investors (FIIs), foreign portfolio
investors (FPIs), non-resident Indians (NRIs), qualified foreign investors
(QFIs), and depository receipts (DRs). Each class of these investors is allocated
a sub-limit for investment in the capital of an Indian company. Within the
banking sector, foreign investment up to 74 per cent (including
• investment by FIIs/FPIs) is allowed in private sector banks. This limit stands at
20 per cent (FDI and portfolio investment) in the case of public sector banks.
• The intermingling of sub-limits will help attract foreign investments into Indian
banks, especially those in the private sector, where the 74 per cent sectoral cap
on foreign investment has not yet been reached. “This provision may not be of
much help to banks which have already hit the sectoral cap,” he said. Public
sector banks could benefit from this move only if the sectoral cap for foreign
investment is raised above 20 per cent.
65
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Bibliography
Garg, Richa. (2013). Role of Foreign Direct Investment in Indian Banking.
International Journal of Research in Finance & Marketing, 3 (2), 63-68, ISSN 2231-
5985, accessed from http://euroasiapub.org/wp-content/uploads /2016 /09/7-132.pdf on
15.07.2016.
Ghosh, Chinmoy & Phani, B.V. (2004). The Effect of Liberalization of Foreign
Direct Investment (FDI) Limits on Domestic Stocks: Evidence from the Indian Banking
Sector, 1-33, accessed from: http://ssrn.com/abstract=546422 on 2.10.2016.
Ilgun, Erkan & Coskun, Ali. (2009). Foreign Direct Investments in Bosnia and
Herzegovina: Banking Sector Example. Alatoo Academic Studies, 4(2), 49-67,
accessed from
http://www.academia.Edu/2992826/foreign/direct/investtments/in/bosnia/and/ Herze
g-ovina/banking/sector/example on 3.01.2017.
Tsaurai, K. (2014). Banking sector development and foreign direct investment. A
Case of Botswana, accessed from https://www.researchgate.net/publication/289656705
Banking sector development and foreign direct investment A case of Botswana on
15.09.2016.
Kumari, Anil & Gupta, Surender Kumar. (2012). Impact of FDI on Indian Banking
Sector.
International Journal of Research in Management, Economics and Commerce, 2 (1),
58-72 accessed from https://www.scribd.com/document/270068131/fdi-on-banking -
sector-effects-pdf on 15.09.2016.
Laifi, Jihene. (2007). The determinants of foreign direct investment in banking
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Saint Etienne (France), 1-18, accessed from
https://www.gate.cnrs.fr/uneca07/communi-cations%20pdf/Laifi-Jihene-Rabat -
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direct-inves - tment-fdi/112172 as on 16.05.2018.
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Patil, J. (2014). Performance evaluation of Indian FDI and non-FDI banks: A

comparative analysis. Thesis Submitted in the Department of economics, Osmania
University, Hyderabad.
Patil-Dake J. (2017). Productivity Performance of Indian Banks with FDI Contents.
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Kamaiah B., Shylajan C., Seshaiah S., Aruna M., Mukherjee S. (eds) Current Issues in
Economics and Finance. Springer, Singapore.
Reddy, M. M. (2016). Impact of FDI on Performance of Select Private Sector Banks
in India.
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Sharma, N. K. S. & Krishna, B. S. (2013). Role of FDI in Banking in generating
wealth to Indian Economy. International Journal of Advancements in Research &
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Annexure
The present study is of analytical in nature and makes use of secondary data. The
relevant secondary data are collected from various publications of Government of India,
Ministry of Finance, Department of Economic Affairs, Economic Division, India,
Reserve bank of India reports and World Investment Report Published by UNCTAD
etc.
• www.rbi.org.in
• www.banknetindia.com
• Currentaffairs-businessnews.com
• www.hindustantimes.com
68
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Comparative Analysis of Foreign Direct Investment in Indian Banking Sector

Grand Project Report

COMPARATIVE ANALYSIS OF FOREIGN

Shanti Business School

Under guidance of : Dr. SHREYA BISWAS

I, MUSKAN LAKHWANI, the author of the Grand Project (GP) titled

Signature of the Student: _________________

Guide (Name) : DR. SHREYA BISWAS

I MUSKAN LAKHWANI, would like to take this opportunity to express my deepest

In the rapidly changing economic environment, Foreign Direct Investment (FDI) is

Comparative Analysis of Foreign Direct Investment in the Indian

Chapters Page No.

Acronym Full Form

HOW TO INVEST IN INDIA

I. Foreign Direct Investment (FDI)

Forms in which business can be conducted by a foreign company in India

A foreign company planning to set up business operations in India may:

● Incorporate a company under the Companies Act, 1956, as a Joint Venture or a

Procedure for receiving Foreign Direct Investment in an Indian company

ii. Government Route

BANKING INDUSTRY GLOBALLY-

TRENDS IN BANKING INDUSTRY GLOBALLY-

INDIAN BANKING INDUSTRY IN INDIA

Current Banking Scenario In India

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

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

Innovative Financial Products

Current Status of FDI In India

➢ Foreign Investment Promotion Board (popularly known as FIPB): The Board is

➢ Secretariat for Industrial Assistance (SIA): It acts as a gateway to industrial

➢ Foreign Investment Implementation Authority (FIIA) : The authority works for

Problem Faced By Indian Banking Sector

• Instability in financial matters.

• Technical developments happening across various foreign markets.

• Non-performing areas or properties.

• Poor marketing strategies.

• Changing financial market conditions.

Role played by the banking sector in Indian GDP-

Role of Banks in economic development

1) Removing the deficiency of capital formation

2) Provision of finance and credit

3) Extension of the size of the market

4) Act as an engine of balanced regional development

FOREIGN DIRECT INVESTMENT-

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

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

• Greenfield Investment: - Direct investment in new facilities or the expansion

• Mergers and Acquisitions: - Transfers of existing assets from local firms to

Methods Of Foreign Direct Investments

•By incorporating a wholly owned subsidiary or company.

Foreign direct investment incentives may take the following forms:

• Special economic zones.

• Investment financial subsidies.

• Soft loan or loan guarantees.

• Free land or land subsidies.

• Relocation & expatriation subsidies.

• Job training & employment subsidies.