fdi in banking
TRANSCRIPT
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ST. ANDREW’S COLLEGE
OF ARTS, SCIENCE AND COMMERCE
BANDRA (W), MUMBAI – 400050.
A STUDY ON FDI IN BANKING SECTOR
Sub!""#$ %&' "# C&u'#
ECONOMICS OF GLOBAL TRADE AND FINANCE
IN
MASTER OF COMMERCE *ROGRAMME –*ART I
SEMESTER I
OF T+E
UNIERSITY OF MUMBAI
BY
RA-I DOS+I
ROLL NO /00
UNDER T+E GUIDANCE OF D'. K1!'1 M&$2
305 – 30
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DECLARATION
I hereby declare that this project report entitled 6A STUDY ON FDI INBANKING SECTOR7 which is being submitted in partial fulfillment of therequirement of the course on Economics of Global Trade and Finance leading tothe award of the “Master of ommerce !egree" by the #ni$ersity of Mumbai isthe result of the research carried out by me under the guidance and super$isionof !r% &ashmira Mody%
I further declared that I ha$e not pre$iously submitted this project report to any
other institution'uni$ersity for any other degree' diploma or for any other
person%
D1"#
*819#( Mumbai S!:;1"u'# &% S"u$#;"
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CERTIFICATE
It is certified that this project “A STUDY ON FDI IN BANKING SECTOR7 has
been prepared and submitted by )aj$i !oshi *)oll +umber , -./.0 under myguidance during the academic year 1.2341.2/%
D1"# S!:;1"u'#
(D'. K1!'1 M&$2)
(A&9!1"# *'&%#&')
*819# Mumbai
S!:;1"u'# &% "# S!:;1"u'# &% "# S!:;1"u'# &% "#
I;"#';18 E
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ACKNOWLEDGEMENT
I would li5e to e6press my sincere gratitude towards my teacher and guide !r% &ashmira
Mody% I would also li5e to than5 our Principal !r% Marie Fernandes for pro$iding us with the
moti$ation and facilities to help me in completing this project% I would also li5e to than5 mu
family and peers for their 5ind co4operation and encouragement which help me in completion
of this project% I would li5e to e6press my special gratitude and than5s towards these people%
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E?ECUTIE SUMMARY
Foreign direct in$estment *F!I0 has played an important role in the process of
globalisation during the past two decades% The rapid e6pansion in F!I bymultinational enterprises since the mid4eighties may be attributed to significant
changes in technologies7 greater liberalisation of trade and in$estment regimes7
and deregulation and pri$atisation of mar5ets in de$eloping countries li5e India%
The present study aims at pro$iding detailed information about F!I inflows in
India during the subsequent years% The analysis is fully based on secondary data
collected through different website and journals%
The project aims at pro$iding information of present F!I policy7 year wise F!I
inflows7 ad$antages and disad$antages of F!I7 )8I policy7 foreign portfolio
in$estment7 impact and importance of F!I in ban5ing sector7 etc%
9nd thus different suggestion and recommendation are gi$en to impro$e the
present condition of F!I in India%
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SR.
NO.
TO*ICS *AGE
NO.
C+A*TER @ INTRODUCTION
2%2 I+T):!#TI:+ ;
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C+A*TER > – FDI IN BANKING
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C+A*TER
INTRODUCTION
9 foreign direct in$estment *F!I0 is a controlling ownership in a business
enterprise in one country by an entity based in another country%
Foreign direct in$estment is distinguished from portfolio foreign in$estment7 a
passi$e in$estment in the securities of another country such as public stoc5s and
bonds7 by the element of control%" 9ccording to the Financial Times7 =tandard
definitions of control use the internationally agreed 2. percent threshold of
$oting shares7 but this is a grey area as often a smaller bloc5 of shares will gi$e
control in widely held companies% Moreo$er7 control of technology7
management7 e$en crucial inputs can confer de facto control%
The origin of the in$estment does not impact the definition as an F!I( the
in$estment may be made either inorganically by buying a company in the
target country or organically by e6panding operations of an e6isting business
in that country%
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https://en.wikipedia.org/wiki/Portfolio_investmenthttps://en.wikipedia.org/wiki/Stockhttps://en.wikipedia.org/wiki/Bond_(finance)https://en.wikipedia.org/wiki/Portfolio_investmenthttps://en.wikipedia.org/wiki/Stockhttps://en.wikipedia.org/wiki/Bond_(finance)
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DEFINITION
8roadly7 foreign direct in$estment includes mergers and acquisitions7 building
new facilities7 rein$esting profits earned from o$erseas operations and intra
company loans% In a narrow sense7 foreign direct in$estment refers just to
building new facilities% The numerical F!I figures based on $aried definitions
are not easily comparable% 9s a part of the national accounts of a country7 and in
regard to the G!P equation CHIHGH*4M0Jonsumption H gross In$estment
H Go$ernment spending H*e6ports 4 imports0K7 where I is domestic in$estment
plus foreign in$estment7 F!I is defined as the net inflows of in$estment *inflow
minus outflow0 to acquire a lasting management interest *2. percent or more of
$oting stoc50 in an enterprise operating in an economy other than that of the
in$estor% F!I is the sum of equity capital7 other long4term capital7 and short4term capital as shown the balance of payments% F!I usually in$ol$es
participation in management7 joint4$enture7 transfer of technology and e6pertise%
=toc5 of F!I is the net *i%e%7 inward F!I minus outward F!I0 cumulati$e F!I
for any gi$en period% !irect in$estment e6cludes in$estment through purchase
of shares% F!I is one e6ample of international factor mo$ements 9 foreign
direct in$estment *F!I0 is a controlling ownership in a 8#=I+E== enterprise in
one country by an entity based in another country% Foreign direct in$estment is
distinguished from portfolio foreign in$estment7 a passi$e in$estment in the
securities of another country such as public stoc5s and bonds7 by the element of
control% 9ccording to the Financial Times7 =tandard definitions of control use
the internationally agreed 2. percent threshold of $oting shares7 but this is a
grey area as often a smaller bloc5 of shares will gi$e control in widely held
companies% Moreo$er7 control of technology7 management7 e$en crucial inputs
can confer de facto control%"
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https://en.wikipedia.org/wiki/Equity_capitalhttps://en.wikipedia.org/wiki/Balance_of_paymentshttps://en.wikipedia.org/wiki/Joint-venturehttps://en.wikipedia.org/wiki/Transfer_of_technologyhttps://en.wikipedia.org/wiki/Foreign_portfolio_investmenthttps://en.wikipedia.org/wiki/Foreign_portfolio_investmenthttps://en.wikipedia.org/wiki/International_factor_movementshttps://en.wikipedia.org/wiki/Equity_capitalhttps://en.wikipedia.org/wiki/Balance_of_paymentshttps://en.wikipedia.org/wiki/Joint-venturehttps://en.wikipedia.org/wiki/Transfer_of_technologyhttps://en.wikipedia.org/wiki/Foreign_portfolio_investmenthttps://en.wikipedia.org/wiki/Foreign_portfolio_investmenthttps://en.wikipedia.org/wiki/International_factor_movements
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C+A*TER 3
STATEMENT OF T+E *ROBLEM
In todayLs economy F!I plays an important role in each sector% 8eing a
de$eloping country7 F!I is a topic of great discussion in India7 considering that
foreign income has the will to change the face of the Indian economy% 9s easy
as it may sound to a layman that incoming cash flow is good for the economy7
F!I comes with a lot of complications% hile there are few who support F!I7
there are also many who oppose the idea% The ban5ing industry is a bac5bone on
which any country can grow% It is through which the entire economy and the
cash flow of the country runs% Therefore it is necessary to understand the change
in the industry which is going to be brought about by the increase in F!I in the
particular industry% The study will also illustrate how F!I changes an industryand highlights the benefits which will be recei$ed by the people%
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OB-ECTIE OF T+E STUDY
To find out the Impact of F!I on Indian ban5ing ser$ices%
To analyNe the Impact of F!I on Indian ban5ing Technology
To understand the Impact of F!I on Indian ban5ing Infrastructure%
To chec5 out customer satisfaction towards F!I
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RESEARC+ MET+OLOGY
=econdary data has been done by using tools such as internet7 research papers
and news articles%
AREA OF RESEARC+
Indian ban5ing sector has been considered while researching%
LIMITATIONS OF RESEARC+
!ue to certain time and resource barriers7 a part of study is focused on
secondary research%
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C+A*TER >
TY*ES OF FDI
BY DIRECTION
:utward F!I 4 9n outward4bound F!I is bac5ed by the go$ernment against all
types of associated ris5s% This form of F!I is subject to ta6 incenti$es as well as
disincenti$es of $arious forms% )is5 co$erage pro$ided to the domestic
industries and subsidies granted to the local firms stand in the way of outward
F!Is7 which are also 5nown as Odirect in$estments abroad%O
Inward F!Is 4 !ifferent economic factors encourage inward F!Is% These
include interest loans7 ta6 brea5s7 subsidies7 and the remo$al of restrictions and
limitations% Factors detrimental to the growth of F!Is include necessities of
differential performance and limitations related with ownership patterns%
BoriNontal F!Is 4 In$estment in the same industry abroad as a firm operates in
at home%
@ertical F!Is
• 8ac5ward @ertical F!I( here an industry abroad pro$ides inputs for a firmOs
domestic production process%
• Forward @ertical F!I( here an industry abroad sells the outputs of a firmOs
domestic production%
BY TARGET
Greenfield In$estment( 4 !irect in$estment in new facilities or the e6pansion of
e6isting facilities% Greenfield in$estments are the primary target of a host
nationLs promotional efforts because they create new production capacity and
jobs7 transfer technology and 5now4how7 and can lead to lin5ages to the global
mar5etplace% The :rganiNation for International In$estment cites the benefits of
Greenfield in$estment *or in sourcing0 for regional and national economies to
include increased employment *often at higher wages than domestic firms0
in$estments in research and de$elopment and additional capital in$estments%
!isad$antage of Greenfield in$estments include the loss of mar5et share for
competing domestic firms%
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Mergers 9nd 9cquisitions(4 Transfers of e6isting assets from local firms to
foreign firm ta5es place the primary type of F!I% ross4border mergers occur
when the assets and operation of firms from different countries are combined to
establish a new legal entity% ross4border acquisitions occur when the control of
assets and operations is transferred from a local to a foreign company7 with thelocal company becoming an affiliate of the foreign company%
BY MOTIE
F!I can also be categoriNed based on the moti$e behind the in$estment from the
perspecti$e of the in$esting firm(
)esource4=ee5ingIn$estments which see5 to acquire factors of production those are more efficient
than those obtainable in the home economy of the firm% In some cases7 these
resources may not be a$ailable in the home economy at all% For e6ample see5ing
natural resources in the Middle East and 9frica7 or cheap labour in =outheast
9sia and Eastern Europe%
Mar5et4=ee5ing
In$estments which aim at either penetrating new mar5ets or maintaininge6isting ones% F!I of this 5ind may also be employed as defensi$e strategy it is
argued that businesses are more li5ely to be pushed towards this type of
in$estment out of fear of losing a mar5et rather than disco$ering a new one%
Efficiency4=ee5ing
In$estments which firms hope will increase their efficiency by e6ploiting the
benefits of economies of scale and scope7 and also those of common ownership%
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IM*ORTANCE AND BARRIERS TO FDI
The rapid growth of world population since 2-3. has occurred mostly in
de$eloping countries% This growth has been matched by more rapid increases in
gross domestic product7 and thus income per capita has increased in most
countries around the world since 2-3.%
9n increase in F!I may be associated with impro$ed economic growth due to
the influ6 of capital and increased ta6 re$enues for the host country% Bost
countries often try to channel F!I in$estment into new infrastructure and other
projects to boost de$elopment% Greater competition from new companies can
lead to producti$ity gains and greater efficiency in the host country and it has
been suggested that the application of a foreign entityLs policies to a domestic
subsidiary may impro$e corporate go$ernance standards% Furthermore7 foreignin$estment can result in the transfer of soft s5ills through training and job
creation7 the a$ailability of more ad$anced technology for the domestic mar5et
and access to research and de$elopment resources% The local population may
benefit from the employment opportunities created by new businesses%In many
instances7 the in$esting company is simply transferring its older production
capacity and machines7 which might still be appealing to the host country
because of technological lags or under4de$elopment7 in order to a$oid
competition against its own products by the host country'company%
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INDIAN FDI SCENARIO
To facilitate ease of doing business for foreign in$estors and their domestic
recipients7 the #nion 8udget 1.2/42; has proposed liberaliNation of foreign
direct in$estment *F!I0 norms in a host of sectors%
These include insurance7 pension7 9sset )econstruction ompanies *9)07
stoc5 e6changes7 mar5eting of food products7 listed entral Public =ector
Enterprises *P=E0 e6cept ban5s and areas go$erned by financial sector
regulators7 falling beyond the 2< specified +8F acti$ities%
This the second time such Q big bangL F!I reforms are being announced by the
go$ernment under Prime Minister +arendra Modi% In +o$ember last year7 just
after the 8?P4led +ational !emocratic 9lliance *+!90 suffered a huge defeat inthe 8ihar 9ssembly Elections7 the entre had similarly eased norms across 23
sectors7 including defence7 pri$ate sector ban5ing7 construction7 single brand
retail7 broadcasting and ci$il a$iation to boost in$estment sentiment and attract
more foreign capital into the country% Following these reforms and the Ma5e in
India initiati$e7 F!I during 9pril4!ecember 1.23 in FCL2/ was up D. per cent
year4on4year to R1-%3 billion%
=ignificantly7 in a mo$e that is in line with the union go$ernmentLs policy of
Qcooperati$e and competiti$e federalismL as well as to ensure effecti$e
implementation of 8ilateral In$estment Treaties *8IT0 signed by India with
other countries7 the go$ernment proposed in the FCL2; 8udget to introduce a
entre4=tate In$estment 9greement%
=tates opting to in5 these pacts with the entre will be seen as more attracti$e
destinations by foreign in$estors7 according to the anne6ure to the finance
ministerLs 8udget speech%
The finance ministry had in !ecember last year brought out IndiaLs Model 8IT
Te6t that will be used as a basic template during treaty negotiations with other
countries% ith se$eral instances of in$estors suing go$ernments under different
8ITs and claiming huge compensation for their Qlosses7L these initiati$es are
aimed at protecting the go$ernmentLs interests and securing their policy space%
India has 8ITs with
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e6tant guidelines on Indian management and control to be $erified by the
sectoral regulators%
In the FCL23 8udget7 the go$ernment had increased the composite cap
*including F!I and foreign institutional in$estment0 in the insurance sector *and
automatically in the pension sector as well0 to D- per cent from the 1/ per cent
but with full Indian management and control and through the go$ernment
appro$al *through Foreign In$estment Promotion 8oard or FIP80 route%
In$estors had delayed new in$estments in the sectors citing ambiguity regarding
the rider specifying that management and control should be in Indian hands%
To help ban5s and financial institutions *FI0 address the problem of huge bad
loans7 the FCL2; 8udget has proposed 2.. per cent F!I in 9)s through
automatic route% 9)s play a crucial role in resolution of non4performing assets by acquiring them from ban5s and FIs% The FCL2; 8udget also proposed that
foreign portfolio in$estors will be allowed up to 2.. per cent of each tranche in
securities receipts issued by 9)s subject to sectoral caps%
The go$ernment has also proposed to allow 2.. per cent F!I through FIP8
route in mar5eting of food products produced and manufactured in India%
hile trade bodies including onfederation of 9ll India Traders ha$e opposed
the mo$e saying it amounts to partially opening up foreign in$estment in multi4
brand retail trade and allowing multi4nationals in the sector through the
bac5door7 Finance Minister 9run ?aitley justified the decision saying( “9 lot of
fruits and $egetables grown by our farmers either do not fetch the right prices or
fail to reach the mar5ets% Food processing industry and trade should be more
efficient% This mo$e will benefit farmers7 gi$e impetus to food processing
industry and create $ast employment opportunities%"
The FCL2; 8udget has also proposed to hi5e the in$estment limit for foreign
entities in Indian stoc5 e6changes from fi$e per cent to 23 per cent on par withdomestic institutions% This mo$e is aimed at enhancing global competiti$eness
of Indian stoc5 e6changes and accelerating adoption of best4in4class technology
and global mar5et practices7 the go$ernment said%
9lso7 the e6isting 1D per cent limit for in$estment by foreign portfolio in$estors
*FPI0 in P=Es other than ban5s7 listed in stoc5 e6changes7 will be increased to
D- per cent% The mo$e is to ob$iate the need for prior appro$al of go$ernment
for increasing the FPI in$estment7 the go$ernment said%
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http://www.thehindu.com/business/budget/the-impact-of-the-budget-across-sectors/article8295738.ecehttp://www.thehindu.com/business/budget/the-impact-of-the-budget-across-sectors/article8295738.ecehttp://www.thehindu.com/business/budget/the-impact-of-the-budget-across-sectors/article8295738.ecehttp://www.thehindu.com/business/budget/the-impact-of-the-budget-across-sectors/article8295738.ecehttp://www.thehindu.com/business/budget/the-impact-of-the-budget-across-sectors/article8295738.ece
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GOERNMENT A**ROALS FOR FOREIGN COM*ANIES
DOING BUSINESS IN INDIA
Go$ernment 9ppro$als for Foreign ompanies !oing 8usiness in India or
In$estment )outes for In$esting in India7 Entry =trategies for Foreign In$estors
IndiaOs foreign trade policy has been formulated with a $iew to in$ite and
encourage F!I in India% The )eser$e 8an5 of India has prescribed the
administrati$e and compliance aspects of F!I% 9 foreign company planning to
set up business operations in India has the following options(
Au"&1"!9 1=='&18 b2 RBI
The )eser$e 8an5 of India accords automatic appro$al within a period of two
wee5s *subject to compliance of norms0 to all proposals and permits foreign
equity up to 1DS 3.S 32S ;DS and 2..S is allowed depending on the
category of industries and the sectoral caps applicable% The lists are
comprehensi$e and co$er most industries of interest to foreign companies%
In$estments in high4priority industries or for trading companies primarily
engaged in e6porting are gi$en almost automatic appro$al by the )8I%
T# FI*B R&u"# – *'&9#!;: &% ;&;@1u"&1"!9 1=='&18 91#
FIP8 stands for Foreign In$estment Promotion 8oard which appro$es all other cases where the parameters of automatic appro$al are not met% +ormal
processing time is D to / wee5s% Its approach is liberal for all sectors and all
types of proposals7 and rejections are few% It is not necessary for foreign
in$estors to ha$e a local partner7 e$en when the foreign in$estor wishes to hold
less than the entire equity of the company% The portion of the equity not
proposed to be held by the foreign in$estor can be offered to the public%
IM*ACT OF FDI ON INDIAN BANKING SECTOR
Today Indian 8an5s are as technology sa$$y as their counter parts in de$eloped
countries%
The competiti$e and reform force ha$e led to the emergence of internet7 e4
ban5ing7 9TM7 credit card and mobile ban5ing too7 to let ban5s attract and retain
customers%
In recent times economy is been pushing to increase the role of multi4national
ban5s in the ban5ing sector%
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WORLD BANKING SECTOR
9 1.2. meta4analysis of the effects of foreign direct in$estment on local firms
in de$eloping and transition countries suggests that foreign in$estment robustly
increases local producti$ity growth% The ommitment to !e$elopment Inde6
ran5s the de$elopment4friendliness of rich country in$estment policies%
C+INA
F!I in hina7 also 5nown as )F!I *renminbi foreign direct in$estment07 has
increased considerably in the last decade7 reaching R2-%2 billion in the first si6
months of 1.217 ma5ing hina the largest recipient of foreign direct in$estment
and topping the #nited =tates which had R2;%D billion of F!I%In 1.2A the F!I
flow into hina was R1D%2 billion7 resulting in a AD%;S mar5et share of F!I intothe 9sia4Pacific region% 8y contrast7 F!I out of hina in 1.2A was Rist of the ten largest foreign companies
in$esting in India *from 9pril 1...4 ?anuary 1.220 are as follows 44
2 TMI Mauritius >td% 4)s ;1-D crore'R2/.. million
30 P a g e
https://en.wikipedia.org/wiki/Meta-analysishttps://en.wikipedia.org/wiki/Meta-analysishttps://en.wikipedia.org/wiki/Commitment_to_Development_Indexhttps://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008https://en.wikipedia.org/wiki/Foreign_Exchange_Management_Acthttps://en.wikipedia.org/wiki/Foreign_Exchange_Management_Acthttps://en.wikipedia.org/wiki/Manmohan_Singhhttps://en.wikipedia.org/wiki/Aviationhttps://en.wikipedia.org/wiki/Insurancehttps://en.wikipedia.org/wiki/UNCTADhttps://en.wikipedia.org/wiki/Meta-analysishttps://en.wikipedia.org/wiki/Commitment_to_Development_Indexhttps://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008https://en.wikipedia.org/wiki/Foreign_Exchange_Management_Acthttps://en.wikipedia.org/wiki/Foreign_Exchange_Management_Acthttps://en.wikipedia.org/wiki/Manmohan_Singhhttps://en.wikipedia.org/wiki/Aviationhttps://en.wikipedia.org/wiki/Insurancehttps://en.wikipedia.org/wiki/UNCTAD
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1 airn #& Bolding 4 )s///A crores'R2D-1 million
A :racle Global *Mauritius0 >td% 4 )s Dtd% , )s A1/< crore'Rtd% , )s A11< crore
; MP 9sia >td% , )s 1/Aynch*Mauritius0 >td% , )s 11A.%.1 crore ' RDtd%0
In 1.23 India emerged as top F!I destination surpassing hina and the #=% In
first half of the 1.23 India attracted F!I of RA2 billion compared to R1< billion
and R1; billion of hina and the #= respecti$ely%
UNITED STATES
8roadly spea5ing7 the #nited =tates has a fundamentally open economy and
low barriers to F!I%
#%=% F!I totalled R2-D 8illion in 1.2.% u6embourg7 the +etherlands7 and anada%J9 major source of
in$estment is the real estate7 the foreign in$estment in this area totalled R-1%1
billion in 1.2A7 under $arious forms of purchase structures *considering the #%=%
ta6ation and residency laws0%
9 1..< study by the Federal )eser$e 8an5 of =an Francisco indicated that
foreigners hold greater shares of their in$estment portfolios in the #nited =tates
if their own countries ha$e less de$eloped financial mar5ets7 an effect whose
magnitude decreases with income per capita% ountries with fewer capital
3 P a g e
https://en.wikipedia.org/wiki/Open_economyhttps://en.wikipedia.org/wiki/Foreign_investment_in_the_United_States_real_estatehttps://en.wikipedia.org/wiki/Foreign_investment_in_the_United_States_real_estatehttps://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_San_Franciscohttps://en.wikipedia.org/wiki/Open_economyhttps://en.wikipedia.org/wiki/Foreign_investment_in_the_United_States_real_estatehttps://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_San_Francisco
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controls and greater trade with the #nited =tates also in$est more in #%=% equity
and bond mar5ets%
hite Bouse data reported in 1.22 found that a total of 3%; million wor5ers
were employed at facilities highly dependent on foreign direct in$estors% Thus7
about 2AS of the 9merican manufacturing wor5force depended on suchin$estments% The a$erage pay of said jobs was found as around R;.7... per
wor5er7 o$er A.S higher than the a$erage pay across the entire #%=% wor5force%
President 8arac5 :bama said in 1.217 In a global economy7 the #nited =tates
faces increasing competition for the jobs and industries of the future% Ta5ing
steps to ensure that we remain the destination of choice for in$estors around the
world will help us win that competition and bring prosperity to our people%
In =eptember 1.2A7 the #nited =tates Bouse of )epresentati$es $oted to pass
the Global In$estment in 9merican ?obs 9ct of 1.2A *B%)% 1.31 22Athongress07 a bill which would direct the #nited =tates !epartment of
ommerce to conduct a re$iew of the global competiti$eness of the #nited
=tates in attracting foreign direct in$estment%=upporters of the bill argued that
increased foreign direct in$estment would help job creation in the #nited =tates%
CANADA
Foreign direct in$estment by country and by industry are trac5ed by =tatistics
anada% Foreign direct in$estment accounted for 9!R/AD billion in 1.217
eclipsing the #nited =tates in this economic measure% Global F!I inflows and
outflows are tabulated by =tatistics anada%
UNITED KINGDOM
The #& has a $ery free mar5et economy and is open to foreign in$estment%
Prime Minister !a$id ameron has sought in$estment from emerging mar5ets
and from the Far East in particular and some of 8ritainOs largest infrastructure
including energy and s5yscrapers such as The =hard ha$e been built with
foreign in$estment%
RUSSIAN FEDERATION
• History of Foreign Investment Law
In 2--27 for the first time7 )ussia regulated the form7 range and fa$orable policy
of F!I in )ussia%
In 2--D7 a consulting council of F!I was an established in )ussia7 which was
responsible for setting ta6 rate and policies for e6change rate7 impro$ing
in$estment en$ironment7 mediating relationship between central and localgo$ernment7 researching and impro$ing images of F!I wor57 and increasing the
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https://en.wikipedia.org/wiki/White_Househttps://en.wikipedia.org/wiki/White_Househttps://en.wikipedia.org/wiki/Barack_Obamahttps://en.wikipedia.org/wiki/United_States_House_of_Representativeshttps://en.wikipedia.org/wiki/Global_Investment_in_American_Jobs_Act_of_2013_(H.R._2052;_113th_Congress)https://en.wikipedia.org/wiki/Global_Investment_in_American_Jobs_Act_of_2013_(H.R._2052;_113th_Congress)https://en.wikipedia.org/wiki/United_States_Department_of_Commercehttps://en.wikipedia.org/wiki/United_States_Department_of_Commercehttps://en.wikipedia.org/wiki/Statistics_Canadahttps://en.wikipedia.org/wiki/Statistics_Canadahttps://en.wikipedia.org/wiki/David_Cameronhttps://en.wikipedia.org/wiki/The_Shardhttps://en.wikipedia.org/wiki/White_Househttps://en.wikipedia.org/wiki/Barack_Obamahttps://en.wikipedia.org/wiki/United_States_House_of_Representativeshttps://en.wikipedia.org/wiki/Global_Investment_in_American_Jobs_Act_of_2013_(H.R._2052;_113th_Congress)https://en.wikipedia.org/wiki/Global_Investment_in_American_Jobs_Act_of_2013_(H.R._2052;_113th_Congress)https://en.wikipedia.org/wiki/United_States_Department_of_Commercehttps://en.wikipedia.org/wiki/United_States_Department_of_Commercehttps://en.wikipedia.org/wiki/Statistics_Canadahttps://en.wikipedia.org/wiki/Statistics_Canadahttps://en.wikipedia.org/wiki/David_Cameronhttps://en.wikipedia.org/wiki/The_Shard
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right and responsibility of Ministry of Economic in appealing F!I and enforcing
all 5inds of policies%
In 2--;7 )ussia starts to enact policies for appealing F!I on particular
industries7 for e6ample7 fossil fuel7 gas7 woods7 transportation7 food
reprocessing7 etc%
In 2---7 )ussia announced a law named F!I of )ussian Federation7 which
aimed at pro$iding a basic guarantee for foreign in$estors on in$esting7 running
business7 earnings%
In 1..
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M1!; !"# &% !;%8& !;#"#;" !; Ru!1; F#$#'1"!&;
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T+E *RESENT BANKING SCENARIO IN INDIA
In recent times economy is been pushing to increase the role of multi4national
ban5s in the ban5ing and insurance sector7 despite7 the concern e6pressed by the
left communist parties are opposing the finance minister mo$e to raise o$erseas
in$estment limits in the insurance business% The go$ernment wants to fulfil a
pledge to allow companies li5e +ew Cor5 >ife Insurance7 Met >ife Insurance to
raise in$estment in local companies to D- per cent from 1/ per cent%
8ut it is opposed on the front that it will lead to state run insurers losing
business and wor5ers their job% >eft do not want foreign in$estors to ha$e
greater $oting rights in pri$ate ban5s and oppose the pri$atiNation of state run
pension fund%
There are se$eral reasons why such mo$e is fraught with dangers% hen
domestic or foreign in$estors acquire a large shareholding in any ban5 and
e6ercise proportionate $oting rights7 it creates potential problems not only of
e6cursi$e concentration in the ban5ing sector but also can e6pose the economy
to more intensi$e financial crises at the slightest hint of panic%
:pposition is not considering the need of present situation% F!I in ban5ing
sector can sol$e $arious problems of the o$erall ban5ing sector% =uch as ,
i0 Inno$ati$e Financial Products
ii0 Technical !e$elopments in the Foreign Mar5ets
iii0 Problem of Inefficient Management
i$0 +on4performing 9ssets
$0 Financial Instability
$i0 Poor apitaliNation
$ii0 hanging Financial Mar5et onditions
If we consider the root cause of these problems7 the reason is low4capital base
and all the problems is the outcome of the transactions carried o$er in a ban5
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without a substantial capital base% In a nutshell7 we can say that7 as the F!I is a
non4debt inflow7 which will directly sol$e the problem of capital base%
FDI IN INDIAN BANKING
In the pri$ate ban5ing sector of India7 F!I is allowed up to a ma6imum limit of
;D S of the paid4up capital of the ban5% :n the other hand7 Foreign !irect
In$estment and Portfolio In$estment in the public or nationaliNed ban5s in India
are subjected to a limit of 1. S in totality% This ceiling is also applicable to the
in$estments in the =tate 8an5 of India and its associate ban5s% F!I limits in the
ban5ing sector of India were increased with the aim to bring in more F!I
inflows in the country along with the incorporation of ad$anced Technology and
Management practices% The objecti$e was to ma5e the Indian ban5ing sector more competiti$e% The )eser$e 8an5 of India go$erns the in$estment matters in
the ban5ing sector%
The global ban5ing industry weathered turbulent times in 1..; and 1..
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The new F!I norms will not apply to P=# ban5s7 where the F!I ceiling is still
capped at 1.S% Foreign in$estment in pri$ate ban5s with a joint $enture or
subsidiary in the insurance sector will be monitored by )8I and the I)!9 to
ensure that the 1/ per cent equity cap applicable for the insurance sector is not
breached%
9ll entities ma5ing F!I in pri$ate sector ban5s will be mandatorily required to
ha$e credit rating% The increase in foreign in$estment limit in the ban5ing sector
to ;DS includes portfolio in$estment Jie7 foreign institutional in$estors *FIIs0
and non4resident Indians *+)Is0K7 IP:s7 pri$ate placement7 9!)s or G!)s and
acquisition of shares from the e6isting shareholders% This will be the cap for any
increase through an in$estment subsidiary route as in the case of B=84#TI
deal%
In real terms7 the sectorial cap has come down from -
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T+E IMF STUDY RE*ORT
The IMFOs study is in supporti$e to the abo$e4discussed features of F!I% This
study tal5s about the optimism o$er India emanates from a contribution of
following factors%
U India contributed nearly one fifth of 9sian domestic demand growth o$er
1...4.3% >oo5ing forward7 India slated to be the second largest demand dri$er
in the region7 after hina%
U India accounts for almost one quarter of the global portfolio flows to
emerging mar5et economies7 nearly R 21 bn in 1..3%
U India is the worldOs leading recipient of remittances7 accounting for about 1.S
of the global flows%
E$en though abo$e discussed factors are fair enough for the de$elopment of economy% 8ut it is a noted fact that7 economy dri$ers are reluctant towards more
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liberaliNation for F!I in the ban5ing sector% 9s the ceiling rates are not
increased7 F!I in Financial =ector is not getting a wholesome en$ironment% 8ut
the foreign in$estment is finding its own way to come in the economy% May be
the way of FII% It is e$ident from the diagram%
+ow a days7 foreign commercial and in$estment ban5s ha$e quietly begun
pic5ing up public sector ban5Os bond issues% 8an5ers said that the funds were
coming into these bonds some of the foreign ban5s were also using the ban5sO
bonds as an arbitrage opportunity in $iew of the increasing liquidity%
=o7 therefore from last 1 years FIIs ha$e e6ceeded the F!I and in portfolio
in$estment into India since 1..A4.D reflects both domestic and global factors%
ompared with FII always F!I has a greater and long4term effect on the Indianmar5et due to the whimsical nature of FII% *9s it is considered as hot money0
The present scenario loo5s more closely at the paradigm of e6ponential growth
and laments that IndiaOs role as an engine for global growth has been limited by
the still relati$ely closed nature of its economy%
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FDI IN INDIA A BOON OR A BAIN
Foreign !irect In$estment as seen as an important source of non4debt inflows7
and is increasing being sought as a $ehicle for technology flows and as a means
of attaining competiti$e efficiency by creating a meaningful networ5 of global
interconnections%
F!I plays a $ital role in the economy because it does not only pro$ide
opportunities to host countries to enhance their economic de$elopment but also
opens new $istas to home countries to optimiNe their earnings by employing
their ideal resources%
India has sought to increase inflows of F!I with a much liberal policy since2--2 after decadeOs cautious attitude% The 2--.Os ha$e witnessed a sustained rise
in annual inflows to India% 8asically7 opening of the economy after 2--2 does
not li$e much choice but to attract the foreign in$estment7 as an engine of
dynamic growth especially in $iew of fast paced mo$ement of the world
forward >iberalisation7 Pri$atisation and Globalisation%
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BENEFITS OF FDI
. E9&;&!9 D##8&=#;" S"!u81"!&;.
Foreign direct in$estment can stimulate the target countryLs economic
de$elopment7 creating a more conduci$e en$ironment for you as the in$estor
and benefits for the local industry%
3. E12 I;"#';1"!&;18 T'1$#.
ommonly7 a country has its own import tariff7 and this is one of the reasons
why trading with it is quite difficult% 9lso7 there are industries that usually
require their presence in the international mar5ets to ensure their sales and goals
will be completely met% ith F!I7 all these will be made easier%
>. E=8&2#;" 1;$ E9&;&!9 B&&".
Foreign direct in$estment creates new jobs7 as in$estors build new companies in
the target country7 create new opportunities% This leads to an increase in income
and more buying power to the people7 which in turn leads to an economic boost%
4. D##8&=#;" &% +u1; C1=!"18 R#&u'9#.
:ne big ad$antage brought about by F!I is the de$elopment of human capital
resources7 which is also often understated as it is not immediately apparent%Buman capital is the competence and 5nowledge of those able to perform labor7
more 5nown to us as the wor5force% The attributes gained by training and
sharing e6perience would increase the education and o$erall human capital of a
country% Its resource is not a tangible asset that is owned by companies7 but
instead something that is on loan% ith this in mind7 a country with F!I can
benefit greatly by de$eloping its human resources while maintaining ownership%
5. T1< I;9#;"!#.
Parent enterprises would also pro$ide foreign direct in$estment to get additional
e6pertise7 technology and products% 9s the foreign in$estor7 you can recei$e ta6
incenti$es that will be highly useful in your selected field of business%
. R#&u'9# T'1;%#'.
Foreign direct in$estment will allow resource transfer and other e6changes of
5nowledge7 where $arious countries are gi$en access to new technologies and
s5ills%
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. R#$u9#$ D!=1'!"2 B#"##; R##;u# 1;$ C&".
Foreign direct in$estment can reduce the disparity between re$enues and costs%
ith such7 countries will be able to ma5e sure that production costs will be the
same and can be sold easily%
. I;9'#1#$ *'&$u9"!!"2.
The facilities and equipment pro$ided by foreign in$estors can increase a
wor5forceLs producti$ity in the target country%
/. I;9'##;" !; I;9&#.
9nother big ad$antage of foreign direct in$estment is the increase of the target
countryLs income% ith more jobs and higher wages7 the national income
normally increases% 9s a result7 economic growth is spurred% Ta5e note thatlarger corporations would usually offer higher salary le$els than what you
would normally find in the target country7 which can lead to increment in
income%
0. T#9;&8&:2 T'1;%#'
9s due to the globaliNation local ban5s are competing in the global mar5et7
where inno$ati$e financial products of multinational ban5s is the 5ey limiting
factor in the de$elopment of local ban5% They are trying to 5eep pace with thetechnological de$elopment in the ban5s% +owadays ban5s ha$e been prominent
and prudent in the rapid e6pansion of consumer lending in domestic as well as
in foreign mar5ets% It needs appropriate tools to assess *how such credit is
managed0 credit management of the ban5s and authorities in charge of financial
stability%
. B#""#' R! M1;1:##;"
9s the ban5s are e6panding their area of operation7 there is a need to change
their strategies e6ert competiti$e pressures and demonstration effect on local
institutions7 often including them to reassess business practices7 including local
lending practices as the whole ban5ing sector is crying for a strategic policy for
ris5 management% Through F!I7 the host countries will 5now efficient
management technique% The best e6ample is 8asel II% Most of the ban5s are
opting 8asel II for ma5ing their financial system safer%
3. F!;1;9!18 S"1b!8!"2 1;$ B#""#' C1=!"18!1"!&;
Bost countries may benefit immediately% From foreign entry7 if the foreign ban5 re4capitaliNe a struggling local institution% In the process also pro$ides needed
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balance of payment finance% In general more efficient allocation of credit in the
financial sector7 better capitaliNation and wider di$ersification of foreign ban5s
along with the access of local operations to parent funding7 may reduce the
sensiti$ity of the host country ban5ing system and lead towards financial
stability%
LIMITATION OF FDI
. +!;$'1;9# "& D&#"!9 I;#"#;".
9s it focuses its resources elsewhere other than the in$estorLs home country7
foreign direct in$estment can sometimes hinder domestic in$estment%
3. R! %'& *&8!"!918 C1;:#.8ecause political issues in other countries can instantly change7 foreign direct
in$estment is $ery ris5y% Plus7 most of the ris5 factors that you are going to
e6perience are e6tremely high%
>. N#:1"!# I;%8u#;9# &; E
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in some foreign mar5ets7 which means that it is impossible to pursue an in$iting
opportunity%
. M&$#';@D12 E9&;&!9 C&8&;!18!.
Many third4world countries7 or at least those with history of colonialism7 worry
that foreign direct in$estment would result in some 5ind of modern day
economic colonialism7 which e6poses host countries and lea$e them $ulnerable
to foreign companiesL e6ploitations%
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FUTURE SCO*E
T#9;&8&:2 T'1;%#'
9s due to the globaliNation local ban5s are competing in the global mar5et7
where inno$ati$e financial products of multinational ban5s is the 5ey limiting
factor in the de$elopment of local ban5% They are trying to 5eep pace with the
technological de$elopment in the ban5s% +ow a days ban5s ha$e been
prominent and prudent in the rapid e6pansion of consumer lending in domestic
as well as in foreign mar5ets% It needs appropriate tools to assess *how such
credit is managed0 credit management of the ban5s and authorities in charge of
financial stability% It may need additional information and techniques to monitor
for financial $ulnerabilities% F!IOs tech transfers7 information sharing7 training programs and other forms of technical assistance may help meet this need%
B#""#' R! M1;1:##;"
9s the ban5s are e6panding their area of operation7 there is a need to change
their strategies e6ert competiti$e pressures and demonstration effect on local
institutions7 often including them to reassess business practices7 including local
lending practices as the whole ban5ing sector is crying for a strategic policy for
ris5 management%
Through F!I7 the host countries will 5now efficient management technique% The
best e6ample is 8asel II% Most of the ban5s are opting 8asel II for ma5ing their
financial system more safer%
F!;1;9!18 S"1b!8!"2 1;$ B#""#' C1=!"18!1"!&;
Bost countries may benefit immediately% From foreign entry7 if the foreign ban5 re4capitaliNe a struggling local institution% In the process also pro$ides needed
balance of payment finance% In general more efficient allocation of credit in the
financial sector7 better capitaliNation and wider di$ersification of foreign ban5s
along with the access of local operations to parent funding7 may reduce the
sensiti$ity of the host country ban5ing system and lead towards financial
stability%
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=ource ( Economic )e$iew7 )8I 9nnual )eport 1..34./%
=o due to the aforesaid benefits economy has consistent flow of F!I o$er the
past few years% In addition to that7 the go$t% has also ta5en step to enhance the
F!I *eg% Telecom7 ci$il a$iation0 F!I up to 2..S through the )eser$e 8an5Os
automatic route was permitted for a no% of new sectors in 1..34./ such as
Greenfield airport projects7 e6port trading% 9ll these measures ha$e been
contributing towards increasing direct in$estment%
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=ource ( Economic )e$iew7 )8I 9nnual )eport 1..34./%
This o$erall F!I is e$ident from the abo$e graph%
F!I V FII ha$e risen sharply during the 2--.s reflecting the policies to attract
non4debt creating flows%
umulati$e foreign in$estment flows ha$e amounted to #= V 2./ billion since
2--.4-2 and almost e$enly balanced between direct in$est flows *#= V D- bn0
and portfolio flows *#= V 3; bn0% =ince 2--A4-D7 F!I flows ha$e e6ceeded
portfolio flows in the 3 years while portfolio flows ha$e e6ceeded F!I in the
remaining < years% 9s a proportion to F!I flows to emerging mar5et and
de$eloping countries7 F!I flows to India ha$e shown a consistent rise from
2%/S in 2--< to A%;S in 1..3O2%
IndiaOs F!I growth of abo$e A.S during past 1 years is encouraging% 9lthough
the F!I inflows into India are small as compared to other emerging mar5ets7
their siNe is growing on the bac5 of growing interest by many of the worldOs
leading multinationals% India has impro$ed its ran5 from fifteenth *in 1..10 to
become the second most li5ely F!I destination after hina in 1..3%
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C+A*TER 4
FINDINGS AND SUGGESTIONS
hen the Modi go$ernment came into power in May 1.2D7 it found itself
inheriting a host of legacy issues resulting from the after4effects of global
recession and #P9 IILs financial misad$entures% There was a deep
macroeconomic instability brought about by the high fiscal and current account
deficits7 raging inflation7 tapering of G!P growth rates and the unra$elling of
the infrastructure sector% The state electricity discoms were in financial turmoil%
The ban5ing sector was also battling a systemic problem of highly stressed
assets%
+ow7 as 1.2/ begins7 the macroeconomic indicators ha$e seen a turn for the
better% Inflation7 the current account deficit and fiscal deficit ha$e been brought
under control% The fiscal deficit which stood at 3%
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rein$igorating the economy% This allocation has to be frontloaded as soon as
possible to a$oid further festering of the +P9 crisis% For instance7 an e6tra )s%
D.7... crore o$er and abo$e the Indradhanush allocation can be pro$ided in the
upcoming budget for FC 2; itself% In this case7 outside in$estors will be more
than happy to pitch in with the rest of amount as this mo$e would significantlyimpro$e the $iability of P=8s% 9s long as the ban5s are in distress7 it would be
difficult for in$estors to lend support to ban5s other than marquee ones li5e
=tate 8an5 of India and 8an5 of 8aroda%
It can be argued that increasing allocation towards recapitalisation will create
further pressure on fiscal deficit targets% 8ut unless the ban5ing sector is
unshac5led from the burden of its bad loans7 it will not be able to contribute as
much to growth in G!P% The mid4year economic re$iew states that pri$ate
in$estments and e6ports are lagging behind in dri$ing the economic growth
engine% +ot much can be done about e6ports as it is a function of global demand
but pri$ate in$estments can be 5ic5started if ban5s ha$e an increased capacity to
lend to the corporate sector% 9n increase in pri$ate in$estments will be able to
more than offset the pressures created on the fiscal side as it will pro$ide a boost
to G!P growth%
*!#9##18 1=='&19 &;’" #8=
9 slow and steady approach towards cleaning up the ban5ing mess will pro$e to
be counter4producti$e in the long run e$en on the fiscal front% If pri$ate
in$estments are stalled7 the lionLs share of the responsibility of infrastructure
building will fall on the shoulders of the go$ernment% This will entail further
borrowing7 which will not help the cause of fiscal consolidation% :n the other
hand7 if growth in credit off4ta5e restarts7 then pri$ate in$estments will share the
burden of in$esting in infrastructure sectors li5e power7 roads7 ports and non4
renewable energy sources% )ight now7 since the hands of the domestic corporate
sector are tied7 the go$ernment is relying hea$ily on F!I to fill the gaps in
infrastructure funding% 8ut a more holistic and sustainable approach would be to
in$ol$e pri$ate in$estments to also contribute towards financially $iable
infrastructure projects%
The funding tap for these projects has been left dry for too long% Bence it
becomes all the more essential for ban5s to start with a clean slate% 8ailouts are
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ne$er a pleasant outcome% 8ut once it becomes necessary7 it needs to be
underta5en quic5ly and unflinchingly% If the problem is left untreated for too
long it spreads rapidly across the system7 li5e an untreated cancer%
The high +P9s are a gra$e cause for concern and there is good reason to belie$ethat e$en the current le$el of high +P9s may be understated% The 5itchen sin5
cleaning efforts by 8an5 of 8aroda in the pre$ious quarter is a case in point% In
such a scenario7 ban5s will be in no mood to lend e6tensi$ely due to the scarcity
of capital% :nly a comprehensi$e bailout pac5age will enable the ban5s to
re5indle the lending spirit%
>imited access to capital will definitely stifle these initiati$es% Therefore it is
necessary for foreign in$estment to fill the gaps and there needs to be structural
reforms set in place to ensure no more bailout is necessary for the Indian ban5s%
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CONCLUSION
The )8IOs decision to allow foreign direct in$estment in Indian ban5s7 the lifting
of sectorial caps on foreign institutional in$estors and a series of other policy
measures could ultimately lead to the pri$atisation of public sector ban5s% The
series of policy announcements in recent wee5s promises to unleash a sha5eout
in the Indian ban5ing industry% 9 major policy change7 effected through an
innocuous clarification issued by the )eser$e 8an5 of India *)8I0 a few
wee5s ago7 set the stage for the increased presence of foreign entities in the
industry% The )8IOs mo$e to allow foreign direct in$estment *F!I0 in Indian
ban5s has been followed by the announcement in the #nion 8udget lifting
sectorial caps on foreign institutional in$estors *FII0%
There are also reports that the )8IOs forthcoming credit policy may feature more
sops for pri$ate and foreign ban5s% These changes are li5ely to hasten the
process of consolidation of the ban5ing industry% 9lthough there is some doubt
o$er whether the mo$es will ha$e any immediate impact7 there is consensus that
the changes are merely a prelude to the wholesale pri$atisation of the public
sector ban5s *P=8s0% I!8I7 the promoter of I!8I 8an57 has already announced
its intention to relinquish control of the ban5% Foreign ban5s ha$e also mounted
pressure on the Finance Ministry7 see5ing the remo$al of legislati$e hurdles that
set limits to pri$ate and foreign holdings in P=8s% In the short term7 the action is
li5ely to be focused on the Indian pri$ate ban5s% :f the 2.. ban5s in India7 1;
are P=8s *including eight in the =tate 8an5 of India group0% There are A2 pri$ate
sector ban5s7 of which eight are of recent $intage *for e6ample7 III 8an5 and
B!F 8an50 and there are D1 foreign ban5s with branches in India% The )8IOs
decision is seen as enabling foreign ban5s to e6tend their operations7 primarily
by acquiring other ban5s%
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REFERENCES
• http(''shodhganga%inflibnet%ac%in'handle'2./.A'13.-3
Ard March7 1.2/ ,