CMS Business School

(Jain Deemed-to-be University)

Batch 2018-20 Semester II

Assignment Topic: Case Study on Introduction to Indian

Economy

Subject: Indian Economy and Policy

Assignment No: 01

Submitted to Dr. Shakeela Banu C

Student Name Register/Roll number Section

AKHIL KUMAR 18MBAR0280 CM1
Summary
India received highest foreign direct investment (FDI) in the world during the
first half of 2015, even more than countries like China and the US. India has
liberalized all its sectors and invited FDI in most of the sectors, with a sectoral
cap. Internationalization of banks is perhaps the best example of India’s
globalization. There are 44 foreign banks with 300 branches operating in India
having a cap of 74 per cent and 20 per cent foreign investment in private and
public sector banks, respectively.

India opened its banking sector to FDI following the recommendation of

Narasimham Committee in 1991; however, it had phased out bank FDI over a
period and Phase I began in 2005 followed by Phase II in 2013. In the first
phase, the investment cap in private sector was raised to 74 per cent from the
earlier 49 per cent. In the second phase, the Reserve Bank of India (RBI)
incentivized foreign banks to enter India by providing them national treatment.
In a recent reform in November 2013, RBI has allowed foreign banks to open
wholly owned subsidiary (WOS) and permitted them to expand in any Tier I to
Tier VI cities in India without seeking RBI’s prior approval. Taking advantage of
this reform, Development Bank of Singapore announced that it will establish
150 WOSSs in India. City Bank and Standard Chartered Bank also might follow
suit. The announcement of permitting foreign banks to establish WOS was
made in the year 2005, but no foreign bank has opened any WOS in India till
date.

Foreign banks can be present in India through any of the four modes: (i) it can
open a branch, (ii) it can open a WOS, where a foreign bank can invest 100 per
cent and have full control over it, (iii) it can have a representative office, and
(iv) it can have a stake in any Indian domestic bank, subject to the cap of 74 per
cent in private sector banks and 20 per cent in public sector banks. There is
also a limit of 5 per cent of paid-up capital in an Indian bank for an individual
foreign investor. RBI has limited the voting rights to 10 per cent for foreign
investors in Indian banks. The existing foreign banks can convert their branches
to WOS also, but a foreign bank can be present in India only in a single mode,
either as a branch or as a subsidiary. By March 2014, there were 44 foreign
banks with more than 300 branches from 25 countries.
Problems Identified
1. Bank FDI does not follow the trend of general FDI in India.
2. Cap on foreign investment in Indian banking sector and restricted entry
of foreign banks could be hindrances for further entry.
3. 100% FDI is allowed in banking , what could be the potential
consequences

Solutions
1. Because, in country in India people liked to keep money in savings due
to which foreign banks needed to pay interest to match up the
competition with the Indian Banks.
2. Hindrances can be reduced by increasing bank sectoral cap for
investment and allow setting up of more branches of foreign banks in
India
3. 100% FDI would be beneficial because Indian banking sector is in need
of capital and Indian banks also should get a proper valuation. So if
foreign investors are allowed, then there will be good competition.

Questions and Answers

1. Why countries seek more FDI? What kind of trends is observed in recent
time?

FDI has become an important source of private external finance for developing
countries. It is different from other major types of external private capital
flows in that it is motivated largely by the investors' long-term prospects for
making profits in production activities that they directly control.

Recent Trends in FDI:

 According to the commerce and industry ministry foreign direct

investment inflows hit an all-time high of $60.1 billion in 2016-17.
 The global investment landscape has changed considerably in 2016 as
FDI gravitated to locations experiencing the strongest economic growth,
while locations in recession or facing high levels of uncertainty saw
major declines.
  In 2016, greenfield FDI continued to rise worldwide, with capital
investment increasing, alongside an increase in job creation.
 Globally, the real estate sector has claimed the top spot for capital
investment, with $157.5 billion of announced FDI recorded in 2016, In
value terms, coal and natural gas witnessed an inflow of $121 billion,
followed by alternate and renewable energy at $77 billion.

2. Differenciate between greenfield FDI and brownfield FDI in Indian Banking

Sector?

A green field investment is a type of foreign direct investment (FDI) where a

parent company builds its operations in a foreign country from the ground up.
In addition to the construction of new production facilities, these projects can
also include the building of new distribution hubs, offices and living quarters.

Brownfield FDI is investment made by a foreign company in existing production

arrangements.

Brown field FDI is different from Greenfield FDI. Greenfield FDI makes
additional production capacity, whereas Brownfield FDI is purchase of existing
production capacities. The latter is just a transfer of ownership of existing firm
from a domestic entrepreneur to a foreign one.

The Disadvantage of Brownfield FDI as a source of investment is that it doesn’t

create expansion of production capacities or employment generation etc.

3. Whether bank FDI follows overall FDI? Explain?

Recent reforms allowed foreign banks to open wholly owned subsidiary (WOS)
and permitted them to expand in any tier I to tier VI cities in india without
seeking RBI’s prior approval. According to the consolidated foreign investment
policy of 2015 , foreign banks can be present in india through nay 4 modes:

 It can open a branch

 It can open a WOS, where a foreign bank can invest 100 percent and
have full control
 It can have a representative office
 It can have a stake in any indian domestic bank, subject to 74 percent in
private sector and 20 percent in public sector.
The existing foreign banks can convert their branches to WOS, but a foreign
bank can be present in india either as a branch or a subsidiary. FDI does follow
the general FDI in india.

4. According to you, should RBI and government liberalize further for FDI in
India’s? Why do you think so?

Yes, I do think government should allow 100% FDI in the banking sector.
Because if foreign banks invest in India, they will not only help in terms of
monetary benefits but, bringing up the new technologies for the country to
regulate their functions as per their convenient. India will also able to adopt
new technologies in their banking sector, by learning some from outsiders. So,
this is the reason why government should liberalize FDI in banking sector, It
will also lead to increased competition in the developing countries. The entry
of a new firm and the opening up of new business enterprises in a nontradable
sector will lead to an increase in the output of the industry and hence resulting
in a reduction of the domestic price and a net improvement in welfare

Conclusion
Banking is very sensitive area. So we need to have a balance between the two
i.e foreign investment and having some Indian character of very critical
financial sector identities like banks. However, lack of competition in the Indian
banking sector & high savings economy Indians has not attracted bank FDI or
foreign banks. It is also believed that2008-2010 was a global period of financial
crises affected to all countries. This could be reason of reduced investment
during those years. As the interest rate differential represents the profit
opportunity in the Indian banking sector. Relatively, high interest rates in India
would lead to earning high profits from Indian banking sectors. Thus, we
expect positive relationship between interest rate differential. High net
domestic savings represents huge market opportunity, which could attract
foreign banks to set up their operations in India.