FOREIGN DIRECT INVESTMENT IN BANKING SECTOR

Made By:- Rithik SainiRoll No.:-15411094

M.B.A.(FYIC) 3RD SEMESTER

What is a 'Foreign Direct Investment - FDI' Foreign direct investment (FDI) is an

investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company. Foreign direct investments are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.

Why is FDI needed? 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.

Advantages Of FDI Access to markets: FDI can be an effective way for you

to enter into a foreign market. Some countries may extremely limit foreign company access to their domestic markets. Acquiring or starting a business in the market is a means for you to gain access.

Access to resources: FDI is also an effective way for you to acquire important natural resources, such as precious metals and fossil fuels. Oil companies, for example, often make tremendous FDIs to develop oil fields.

Reduces cost of production: FDI is a means for you to reduce your cost of production if the labor market is cheaper and the regulations are less restrictive in the target foreign market.

 Disadvantages of Foreign Direct Investment

1. Hindrance to Domestic Investment. As it focuses its resources elsewhere other than the investor’s home country, foreign direct investment can sometimes hinder domestic investment.

2. Risk from Political Changes. Because political issues in other countries can instantly change, foreign direct investment is very risky. Plus, most of the risk factors that you are going to experience are extremely high.

3. Negative Influence on Exchange Rates. Foreign direct investments can occasionally affect exchange rates to the advantage of one country and the detriment of another.

4. Higher Costs. If you invest in some foreign countries, you might notice that it is more expensive than when you export goods. So, it is very imperative to prepare sufficient money to set up your operations.

FDI In Banking Sector In India Until 1993, most Indian banks were 100 percent

owned by the central government and private investment was allowed only in a handful of private banks formed around the 1940s. Further, foreign banks and financial institutions were allowed only 20 percent ownership stakes in Indian banks. In 1993-94, nine new banks were formed in the private sector and one co-operative bank was converted to a private bank. Banks were permitted to issue Certificates of Deposits (CDs) and offer foreign currency deposits to Non-resident Indians (NRIs) with exchange rate risk borne by the banks.

Ceiling On FDI In Indian Banks In the private banking sector of India, FDI is

allowed up to a maximum limit of 74 % of the paid-up capital of the bank. On the other hand, Foreign Direct Investment and Portfolio Investment in the public or nationalized banks in India are subjected to a limit of 20 % in totality. This ceiling is also applicable to the investments in the State Bank of India and its associate banks. FDI limits in the banking sector of India were increased with the aim to bring in more FDI inflows in the country along with the incorporation of advanced technology and management practices. The objective was to make the Indian banking sector more competitive.

STATUTORY LIMITS OF FDI IN INDIA Foreign direct investment (FDI)  up to 49 percent 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.

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.

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.

Under the Insurance Act, the maximum foreign investment in an insurance company has been fixed at 26 percent. Application for foreign investment in banks  which have joint venture/subsidiary in insurance sector should be made to RBI.

FDI and Portfolio Investment  in nationalised banks are subject to overall statutory limits of 20 percent.

SUMMARY Foreign direct investment (FDI) is an investment made by a

company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company

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.

Advantages Of FDI 1. Access to markets 2. Access to resources 3. Reduces cost of production Disadvantages Of FDI 1. Hindrance to Domestic Investment 2. Risk from Political Changes 3. Negative Influence on Exchange Rates 4. Higher Costs