1

FOREIGN DIRECT INVESTMENT IN BANKING SECTOR IN

INDIA

1.Abstract:
Foreign Direct Investment (FDI) is considered to be the
lifeblood of economic development especially for the
developing and underdeveloped countries. Multinational
companies (MNCs) capitalise on foreign business
opportunities by engaging in FDI, which is investment in real
assets (such as land, buildings, or existing plants) in foreign
countries. MNCs engage in joint ventures with foreign firms,
acquire foreign firms, and form new foreign subsidiaries. It
plays an important role in the long-term development of a
country not only as a source of capital but also for enhancing
competitiveness of the domestic economy through transfer of
technology, strengthening infrastructure, raising productivity
and generating new employment opportunities (Deutsche
Bundesbank, 2003). MNCs are interested in boosting
revenues through FDI by attracting new sources of demand,
entering into profitable markets and exploiting monopolistic
advantages. Currently these corporations are increasingly
establishing overseas plants or acquiring existing overseas
plants to learn the technology of foreign countries.

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2.Evolution of Banking/History:

The banking history is interesting and reflects evolution in
trade and commerce. It also throws light on living style,
political and cultural aspects of civilized mankind. The
strongest faith of people has always been religion and God.
The seat of religion and place of worship were considered safe
place for money and valuables. Ancient homes didn't have the
benefit of a steel safe, therefore, most wealthy people held
accounts at their temples. Numerous people, like priests or
temple workers were both devout and honest, always
occupied the temples, adding an sense of security. There are
records from Greece, Rome, Egypt and Ancient Babylon that
suggest temples loaned money out, in addition to keeping it
safe. The fact that most temples were also the financial
centers of their cities and this is the major reason that they
were ransacked during wars. The practice of depositing
personal valuables at these places which were also functioning
as the treasuries in ancient Babylon against a receipt was
perhaps the earliest form of Banking.
Gradually as the personal possession got evaluated in term of
money, in form of coins made of precious metal like gold and
silver, these were being deposited in the temple treasuries. As
these coins were commonly accepted form of wealth,lending
activity to those who needed it and were prepared to borrow
at an interest began. The person who conducted this lending
activity was known as the Banker because of the bench he
usually set. It is also observed that the term bankrupt got
evolved then as the irate depositors broke the bench and table
of the insolvent banker.With the expansion of trade the
concept of banking gained greater ground.

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The handling of banking transcended from individual to
groups to companies. Issuing currency was one of the major
functions of the banks. The earliest from of moneycoins,
were a certificate of value stamped on a metal, usually gold,
silver, and bronze or any other metal, by an authority, usually
the king. With the increasing belief and faith in such authority
of their valuation and the necessities of wider trade a
substitute to metal was found in paper. The vagaries of
monarchial rule led to the issues of currency being vested with
the banks since they enjoyed faith, controlled credit and
trading. All forms of money were a unit of value and
promised to pay the bearer of specified value. Due to failure
on account of unwise loans, to rule and organize, a stable
banking system arose. The words earliest bank currency
notes were issued in Sweden by stock holms Banco in July
1661.
The story of Indian coinage itself is very vast and fascinating,
and also throws tremendous light on the various aspects of life
during different periods. The Rig Veda speaks only gold,
silver copper and bronze and the later Vedic texts also
mention tin, lead, iron and silver. Recently iron coins were
found in very early levels at Attranji Kheri(U.P.) and Pandu
Rajar Dhibi (Bengal). A money economy existed in India
since the days of Maurya Dynasty . In ancient India during the
Maurya dynasty (321 to 185 BC), an instrument called adesha
was in use, which was an order on a banker desiring him to
pay the money of the note to a third person, which
corresponds to the definition of a bill of exchange as we
understand it today. During the Buddhist period, there was
considerable use of these instruments. Merchants in large
towns gave letters of credit to one another. Trade guilds acted
as bankers, both receiving deposits and issuing loans. The
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larger temples served as bankers and in the south the village
communities economically advanced loans to peasants. There
were many professional bankers and moneylenders like the
sethi, the word literally means chief. It has survived in the
It has survived in the North India as seth. Small purchases
were regularly paid for in cowry shells (varataka), which
remained the chief currency of the poor in many parts of
India.
Indigenous banking grew up in the form of rural money
lending with certain individuals using their private funds for
this purpose. The scriptures singled out the vaishyas as the
principal bankers. The earliest form of Indian Bill of
Exchange was called Hundi. Exports and import were
regulated by barter system. Kautilyas Arthasastra mentions
about a currency known as panas and even fines paid to courts
were made by panas. E. B. Havell in his work: The History of
Aryas Rule in India says that Muhammad Tughlaq issued
copper coin as counters and by an imperial decree made them
pass at the value of gold and silver. The people paid their
tribute in copper instead of gold, and they bought all the
necessaries and luxuries they desired in the same coin.
However, the Sultans tokens were not accepted in counties in
which his decree did not run. Soon the whole external trade of
Hindustan come to a standstill. When as last the copper tankas
had become more worthless than clods, the Sultan in a rage
repealed his edict and proclaimed that the treasury would
exchange gold coin for his copper ones. As a result of this
thousands of men from various quarters who possessed
thousand of these copper coins bought them to the treasury
and received in exchange gold tankas. The origin of the word
"rupee" is found in the Sanskrit rpya "shaped; stamped,
impressed; coin" and also from the Sanskrit word "rupa"
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meaning silver. The standardisation of currency unit as Rupee
in largely due to Sher Shah in 1542.


2.1 The Early Phase of Banking in India- 18
th
Century to 1947.


The phase leading up to independence laid the foundations of
the Indian banking system. The beginning of commercial
banking of the joint stock variety that prevailed elsewhere in
the world could be traced back to the early 18th century. The
western variety of joint stock banking was brought to India by
the English Agency houses of Calcutta and Bombay(now
Kolkata and Mumbai). The first bank of a joint stock variety
was Bank of Bombay, established in 1720 in Bombay This
was followed by Bank of Hindustan in Calcutta, which was
established in 1770 by an agency house.5 This agency house,
and hence the bank was closed down in 1832. The General
Bank of Bengal and Bihar, which came into existence in 1773,
after a proposal by Governor (later Governor General) Warren
Hastings, proved to be a short livedexperiment . Trade was
concentrated in Calcutta after the growth of East India
Companys trading and administration. With this grew the
requirement for modern banking services, uniform currency to
finance foreign trade and remittances by British army
personnel and civil servants. The first Presidency bank was
the Bank of Bengal established in Calcutta on June 2, 1806
with a capital of Rs.50 lakh. The Government subscribed to
20 per cent of its share capital and shared the privilege of
appointing directors with voting rights. The bank had the task
of discounting the Treasury Bills to provide accommodation
to the Government. The bank was given powers to issue notes
in 1823. The Bank of Bombay was the second Presidency
bank set up in 1840 with a capital of Rs.52 lakh, and the Bank
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of Madras the third Presidency bank established in July 1843
with a capital of Rs.30 lakh. They were known as Presidency
banks as they were set up in the three Presidencies that were
the units of administrative jurisdiction in the country for the
East India Company. The Presidency banks were governed by
Royal Charters. The Presidency banks issued currency notes
until the enactment of the Paper Currency Act, 1861, when
this right to issue currency notes by the Presidency banks was
abolished and that function was entrusted to the Government.
The first formal regulation for banks was perhaps the
enactment of the Companies Act in 1850. This Act, based on
a similar Act in Great Britain in 1844, stipulated unlimited
liability for banking and insurance companies until 1860, as
elsewhere in the world. In 1860, the Indian law permitted the
principle of limited liability following such measures in
Britain. Limited liability led to an increase in the number of
banking companies during this period. With the collapse of
the Bank of Bombay, the New Bank of Bombay was
established in January 1868.The Presidency Bank Act, which
came into existence in 1876, brought the three Presidency
banks under a common statute and imposed some restrictions
on their business. It prohibited them from dealing with risky
business of foreign bills and borrowing abroad for lending
more than 6 months, among others. In terms of Act XI of
1876, the Government of India decided on strict enforcement
of the charter and the periodic inspection of the books of these
banks. The proprietary connection of the Government was,
however, terminated, though the banks continued to hold
charge of the public debt offices in the three presidency
towns, and the custody of a part of the Government balances.
The Act also stipulated the creation of Reserve Treasuries at
Calcutta, Bombay and Madras into which sums above the
specified minimum balances promised to the presidency
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banks, were to be lodged only at their head offices. The
Government could lend to the presidency banks from such
Reserve Treasuries. This Act enabled the Government to
enforce some stringent measures such as periodic inspection
of the books of these banks. The major banks were organised
as private shareholding companies with the majority
shareholders being Europeans.
The first Indian owned bank was the Allahabad Bank set up in
Allahabad in 1865, the second, Punjab National Bank was set
up in 1895 in Lahore, and the third, Bank of India was set up
in 1906 in Mumbai. All these banks were founded under
private ownership.

The Swadeshi Movement of 1906 provided a great impetus
to joint stock banks of Indian ownership and many more
Indian commercial banks such as Central Bank of India, Bank
of Baroda, Canara Bank, Indian Bank, and Bank of Mysore
were established between 1906 and 1913. By the end of
December 1913, the total number of reporting commercial
banks in the country reached 56 comprising 3 Presidency
banks, 18 Class A banks (with capital of greater than Rs.5
lakh), 23 Class B banks (with capital of Rs.1 lakh to 5 lakh)
and 12 exchange banks. Exchange banks were foreign owned
banks that engaged mainly in foreign exchange business in
terms of foreign bills of exchange and foreign remittances for
travel and trade. Class A and B were joint stock banks.
The Swadeshi Movement also provided impetus to the co-
operative credit movement and led to the establishment of a
number of agricultural credit societies and a few urban co-
operatives. The evolution of co-operative banking movement
in India could be traced to the last decade of the 19th Century.
The late Shri Vithal L Kavthekar pioneered the urban co-
operative credit movement in the year 1889 in the then
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princely State of Baroda.7 The first registered urban co-
operative credit society was the Conjeevaram Urban Co-
operative Bank, organised in Conjeevaram, in the then Madras
Presidency. The idea of setting up of such a co-operative was
inspired by the success of urban co-operative credit
institutions in Germany and Italy. The second urban co-
operative bank was the Peoples Co-operative Society in 1905
in Bangalore city in the princely State of Mysore. The joint
stock banks catered mainly to industry and commerce. Their
inability to appreciate and cater to the needs of clientele with
limited means effectively drove borrowers to moneylenders
and similar agencies for loans at exorbitant rates of interest
this situation was the prime mover for non-agricultural credit
co-operatives coming into being in India. The main objectives
of such co-operatives were to meet the banking and credit
requirements of people with smaller means to protect them
from exploitation. Thus, the emergence of urban co-operative
banks was the result of local response to an enabling
legislative environment, unlike the rural co-operative
movement that was largely State-driven (Thorat, 2006).
After the early recognition of the role of the co-operatives,
continuous official attention was paid to the provision of rural
credit. A new Act was passed in 1912 giving legal recognition
to credit societies and the like. The Maclagan Committee, set
up to review the performance of co-operatives in India and to
suggest measures to strengthen them, issued a report in 1915
advocating the establishment of provincial cooperative banks.
It observed that the 602 urban cooperative credit societies
constituted a meager 4.4 per cent of the 13,745 agricultural
credit societies. The Committee endorsed the view that the
urban cooperative societies were eminently suited to cater to
the needs of lower and middle-income strata of society and
such institutions would inculcate banking habits among
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middle classes. Apart from commercial and co-operative
banks, several other types of banks existed in India. This was
because the term bank was an omnibus term and was used
by the entities, which, strictly speaking, were not banks.
These included loan companies, indigenous bankers and
nidhis some of which were registered under the Companies
Act, 1913. Although very little information was available
about such banks, their number was believed to be very large.
Even the number of registered entities was enormous. Many
doubtful companies registered themselves as banks and
figured in the statistics of bank failures. Consequently, it was
difficult to define in strict legal terms the scope of organised
banking, particularly in the period before 1913
(Chandavarkar, 2005).

2.2 Setting up of a Central Bank
The setting up of a central bank for the country was
recommended by various committees that went into the causes
of bank failures.11 It is interesting to note that many central
banks were established specifically to take care of bank
failures.For instance, the US Federal Reserve, was established
in 1913 primarily against the background of recurrent banking
crises. It was felt that the establishment of a central bank
would bring in greater governance and integrate the loosely
connected banking structure in the country. It was also
believed that the establishment of a central bank as a separate
entity that does not conduct ordinary banking business (like
the Imperial Bank of India) was likely to have the stature to be
able to deftly handle the central banking functions without the
other joint stock banks feeling any rivalry towards it.
Accordingly, the Reserve Bank of India Act 1934 was enacted
paving the way for the setting up of the Reserve Bank of
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India. The issue of bank failures and the need for catering to
the requirements of agriculture were the two prime reasons for
the establishment of the Reserve Bank. The banking sector
came under the purview of the Reserve Bank in 1935. At the
time of setting up of the Reserve Bank, the joint stock banks
constituted the largest share of the deposits held by the
banking sector, followed by the Imperial Bank of India and
exchange banks. The Reserve Bank of India Act, 1934 gave
the Reserve Bank powers to regulate issue of bank notes, the
custody of the commercial banks cash reserves and the
discretion of granting them accommodation. The preamble to
the RBI Act set forth its functions as to regulate the issue of
bank notes and the keeping of reserves with a view to
securing monetary stability in India and generally to operate
the currency and credit system of the country to its
advantage.
The Reserve Banks main functions could be classified into
the following broad categories (a) to act as a banker to the
Government; (b) to issue notes; (c) to act as a banker to other
banks; and (d) to maintain the exchange ratio. The RBI Act
had a limited control on banks although its obligations in each
sphere were spelt out in clear terms. There was some amount
of built-in flexibility as the Reserve Bank was vested with
extra powers and maneuverability under extra-ordinary
circumstances, that could be exercised only with the prior
approval of the Governor General in Council or the Central
Board of the Bank as might be prescribed in each case.
The Reserve Bank, as the lender-of-last resort, had a crucial
role in ensuring the liquidity of the short-term assets of
commercial banks. The banking sector had adequate liquidity
in the initial years because it had a facility of selling
Government securities freely to the Reserve Bank. In 1935,
banks were required to maintain cash reserves of 5 per cent
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of their demand liabilities and 2 per cent of their time
liabilities on a daily basis. The task of managing the currency
that was assigned to the Controller of Currency came to the
Reserve Bank in March 1935 under Section 3 of the RBI Act,
1934. The provisions of the RBI Act also required the Reserve
Bank to act as a bankers bank. In accordance with the general
central banking practice, the operations of the Reserve Bank
with the money market were to be largely conducted through
the medium of member banks, viz., the scheduled banks and
the provincial co-operative banks. The scheduled banks
were banks which were included in the Second Schedule to
the RBI Act and those banks in British India that subsequently
became eligible for inclusion in this Schedule by virtue of
their paid-up capital and reserves being more than Rs.5 lakh
in the aggregate. The power to include or exclude banks in or
from the Schedule was vested with the Governor General in
Council. The preamble of the Reserve Bank of India Act that
was accepted had no reference to a gold standard currency
for British India unlike that envisaged in the initial preamble
of the 1928 Bill. This change occurred due to the fluidity of
the international monetary situation in the intervening period,
following Great Britains departure from the gold standard in
September 1931. Some promotional role was envisaged for
the Reserve Bank from the very beginning as agricultural
credit was a special responsibility of the Reserve Bank in
terms of the RBI Act. The Reserve Bank assumed a proactive
role in the sphere of agricultural credit for the economy and
took concrete action by commissioning two studies in 1936
and 1937 in this area. Almost the entire finance required by
agriculture at that time was supplied by moneylenders;
cooperatives and other agencies played a negligible part
(Mohan, 2004). During the period from 1935 to 1950, the
Reserve Bank continued to focus on agricultural credit by
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fostering the co-operative credit movement through the
provision of financial accommodation to co-operatives. As a
result of the concerted efforts and policies of the Reserve
Bank, a well-differentiated structure of credit institutions for
purveying credit to agriculture and allied activities emerged.
Within the short-term structure, primary agricultural credit
societies at the village level formed the base level, while
district central co-operative banks were placed at the
intermediate level, and the State co-operative banks at the
apex level. The long-term structure of rural co-operatives
comprised State co-operative agriculture and rural
development banks at the State level, and primary co-
operative agriculture and rural development banks at the
decentralised district or block level. These institutions focused
on providing typically medium to long-term loans for making
investments in agriculture and rural industries. The central
bank, if it is a supervisory authority must have sufficient
powers to carry out its functions, such as audit and inspection
to be able to detect and restrain unsound practices and suggest
corrective measures like revoking or denying licences.
However, the Reserve Bank in the earlier years did not have
adequate powers of control or regulation. Commercial banks
were governed by the Company Law applicable to ordinary
non-banking companies, and the permission of the Reserve
Bank was not required even for setting up of a new bank. The
period after setting up of the Reserve Bank saw increase in
the number of reporting banks. The classification of banks
was expanded to include the banks with smaller capital and
reserve base. Class A banks were divided into A1 and A2.
Further, two new categories of banks, viz,. C and D were
added to include the smaller banks.
Banks with capital and reserves of greater than Rs.5 lakh and
included in the second schedule to the RBI Act 1934 were
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classified as Class A1, while the remaining non-scheduled
banks with capital and reserves of greater than Rs.5 lakh were
classified as Class A2. The rest of the non-scheduled banks
were classified according to their size; those with capital and
reserves of greater than Rs.1 lakh and lower than Rs.5 lakh
were classified as Class B; banks with capital and reserves of
greater than Rs.50,000 and up to Rs.1 lakh were classified as
Class C; and those with capital and reserves of less than
Rs.50,000 were classified as Class D. In 1940, the number of
reporting banks was 654. The underdeveloped nature of the
economy and the lack of an appropriate regulatory framework
posed a problem of effective regulation of a large number of
small banks. The laisez faire policy that permitted free entry
and exit had the virtues of free competition. However,
benefits of such a policy are best reaped in a system that is
characterised by perfect competition unalloyed by market
failures and imperfect markets. Indian financial markets at
that stage, however, were certainly far from perfect. The
free entry ushered in a very high growth of banking
companies only to be marred by the problem of massive bank
failures. Mushrooming growth of small banks in a scenario,
where adequate regulation was not in place, led to various
governance issues. The Reserve Banks statute alone then did
not provide for any detailed regulation of the commercial
banking operations for ensuring sound banking practices. The
submission of weekly returns made by scheduled banks under
Section 42(2) of the Act was mainly intended to keep a watch
over their compliance with the requirements regarding
maintenance of cash reserves with the Reserve Bank.
Inspection of banks by the Reserve Bank was visualised for
the limited purpose of determining the eligibility of banks for
inclusion or retention in the Second Schedule to the Act.
Thus, apart from the limited scope of the Reserve Banks
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powers of supervision and control over scheduled banks, a
large number of small banking institutions, known as non-
scheduled banks, lay entirely outside the purview of its
control. When the Reserve Bank commenced operations, there
were very few and relatively minor provisions in the Indian
Companies Act, 1913, pertaining to banking companies. This
virtual absence of regulations for controlling the operations of
commercial banks proved a serious handicap in the sphere of
its regulatory functions over the banking system. There was
ambiguity regarding the functioning of the smaller banks as
there was no control on their internal governance or solvency.
Measures were taken to strengthen the regulation first by
amending the Indian Companies Act in 1936. This
amendment incorporated a separate chapter on provisions
relating to banking companies. Prior to its enactment, banks
were governed in all important matters such as incorporation,
organisation and management, among others, by the Indian
Companies Act, 1913 which applied commonly to banking as
well as non-banking companies. There were only certain
relatively innocuous provisions in the Companies Act 1913,
which made a distinction between banks and other companies.
The enactment of the Indian Companies (Amendment) Act,
1936 incorporated a separate chapter on provisions relating
to banking companies, including minimum capital and cash
reserve requirement and some operational guidelines. This
amendment clearly stated that the banking companies were
distinct from other companies. In order to gradually integrate
the non-scheduled banks with the rest of the organised
banking, the Reserve Bank continued to make efforts to keep
in close touch with the non-scheduled banks and provide
them advice and guidance. The Reserve Bank also continued
to receive the balance sheets and the cash reserve returns of
these banks from the Registrars of Joint Stock Companies.
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According to the information received from them, in British
India as on the 31
st
December 1938, about 1,421 concerns
were operating which might be considered as non-scheduled
banks. The real issue was to get them under the regulatory
purview of the Reserve Bank because a large number of these
companies claimed that they were not really banks within
the meaning of Section 277(F) of the Companies Act as that
section defined a banking company as a company which
carried on as its principal business, the acceptance of deposits
subject to withdrawal by cheque, draft, or order, and they did
not accept deposits so withdrawable.

In order to ensure a viable banking system, it was crucial that
the weak links in the banking system were taken care of. For
this, it was essential to address the root cause of bank failures,
which was then the lack of adequate regulation. Hence, the
need was felt to put in place sound regulatory norms. The fact
that most of the banks that failed were small and non-
scheduled underlined the need for monitoring the operations
of the non-scheduled banks regularly. In October 1939, a
report on the non-scheduled banks with a special reference to
their assets and liabilities was submitted to the Reserve
Banks Central Board. The report mentioned the low reserves
position of these banks and the overextension of advances
portfolios and large proportion of bad and doubtful debt. The
report stressed the need for comprehensive banking regulation
for the country. In 1939, the Reserve Bank submitted to the
Central Government its proposals for banking legislation in
India. The important features of the proposals were to define
banking in a simpler and clearer way than had been done in
the Indian Companies Act, 1936. Second, the proposals
sought to ensure that institutions calling themselves banks
started with sufficient minimum capital to enable them to
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operate on a scale large enough to make it possible for them to
earn reasonable profits. Third, the proposals visualised certain
moderate restrictions on bank investments in order to protect
the depositors. Finally, an endeavour was made to expedite
liquidation proceedings so that in the event of a bank failing,
the depositors were paid off with the minimum delay and
expense. However, the Government decided not to undertake
any comprehensive legislation during the war period when all
the energies of the Government were inevitably concentrated
on the war effort. Certain interim measures were taken to
regulate and control by legislation certain issues that required
immediate attention. After the war, the aspect of inadequate
regulation was addressed partially by the promulgation of the
RBI Companies (Inspection) Ordinance, 1946. New powers
were given to the Reserve Bank under the Banking
Companies (Restriction of Branches) Act, 1946 and the
Banking Companies (Control) Ordinance, 1948. Most of the
provisions in these enactments were subsequently embodied
in the Banking Companies Act in 1949. This Act gave the
Reserve Bank very comprehensive powers of supervision and
control over the entire banking system as detailed in the
subsequent section.


3.Post Independence Developments in Banking Sector upto
1991

When the country attained independence, Indian banking was
entirely in the private sector. In addition to the Imperial Bank,
there were five big banks, each holding public deposits
aggregating Rs.100 crore and more, viz., Central Bank of
India Ltd., Punjab National Bank Ltd., Bank of India Ltd.,
Bank of Baroda Ltd. and United Commercial Bank Ltd.
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All other commercial banks were also in the private sector and
had a regional character; most of them held deposits of less
than Rs.50 crore. Interestingly, the Reserve Bank was also not
completely State owned until it was nationalised in terms of
the Reserve Bank of India (transfer to Public Ownership) Act,
1948. Independence made a large difference to many spheres
of economic activity and banking was one of the most crucial
areas where a phenomenal transformation took place. On the
eve of independence, several difficulties plagued the banking
system as noted by the then Governor C.D. Deshmukh:
The difficulty of the task of the Reserve Bank
of India in dealing with the banking system
in the country does not lie in the multiplicity
of banking units alone. It is aggravated by
its diversity and range. There can be no
standard treatment in practice although in
theory the same law governs all.
At the time of independence, the banking structure was
dominated by the domestic scheduled commercial banks.
Non-scheduled banks, though large in number, constituted a
small share of the banking sector.

3.1 Bank Failures and Liquidation/Consolidation of
Smaller Banks
The partition of the country hurt the domestic economy, and
the banking sector was no different. Of the 84 banks operating
in the country in the organised sector before partition, two
banks were left in Pakistan. Many of the remaining banks in
two States of Punjab and West Bengal were deeply affected.
In 1947, 38 banks failed, of which, 17 were in West Bengal
alone, having total paid-up capital of Rs.18 lakh. The paidup
capital of banks that failed during 1947 amounted to a little
more than 2 per cent of the paid-up capital of the reporting
banks. The average capital of the failed banks between 1947
18

and 1955 was significantly lower than the average size of
paid-up capital of reporting banks in the industry, suggesting
that normally it was small banks that failed.


3.2 Nationalisation of Banks

In India,Banking sector has been dominated by government or
public sector banks.In 1954, the All India Rural Credit Survey
Committee submitted its report recommending creation a
strong integrated,state-sponsored,state-partnered commercial
banking institution with an effective machinery of branches
spread all over the country.The recommendation of this
committee led to establishment of first public sector bank in
the name of State Bank of India on July 1 1955 by acquiring
the substantial part of share capital by Reserve Bank of
India.Similarly during 1956-59,as aresult of reorganization of
princely states,the State Bank of India associate bank came
into fold of Public Sector Banking.
On July 19 1969,the government promulgated Banking
Companies (Acquisition and Transfer of Undertakings)
ordinance 1969 to acquire 14 bigger commercial banks with
deposits over Rs.50 Crores.The main objective behind the
nationalisation of banks ws to spread banking infrastructure in
rural india and make cheap finance available to indian
farmers.

The second phase of bank nationalisation took place in 1980
during Prime Ministerial tenure of Indira Gandhi in which 6
more banks were nationalised with deposits over Rs 200
Crores.



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List of Nationalised Banks:

1.Allahabad Bank
2. Andhra Bank
3. Bank of Baroda
4. Bank of India
5. Bank of Maharashtra
6. Canara Bank
7. Central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank
11. Indian Overseas Bank
12. Oriental Bank of Commerce
13. Punjab and Sind Bank
14. Punjab National Bank
15. State Bank of Bikaner & Jaipur
16. State Bank of Hyderabad
17. State Bank of India (SBI)
18. State Bank of Indore
19. State Bank of Mysore
20. State Bank of Patiala
21. State Bank of Saurashtra
22. State Bank of Travancore
23. Syndicate Bank
24. UCO Bank
25. Union Bank of India
26. United Bank of India
27. Vijaya Bank

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4.Banking Sector Reforms (Liberalisation)

Since nationalisation of banks in 1969, the banking sector had
been dominated by the public sector. There was financial
repression, role of technology was limited, no risk
management etc. This resulted in low profitability and poor
asset quality. The country was caught in deep economic crises.
The Government decided to introduce comprehensive
economic reforms. Banking sector reforms were part of this
package. In august 1991, the Government appointed a
committee on financial system under the chairmanship of M.
Narasimhan.



4.1 First Phase

To promote healthy development of financial sector, the
Narasimhan committee made recommendations.

I) RECOMMENDATIONS OF NARASIMHAN COMMITTEE :-
1. Establishment of 4 tier hierarchy for banking structure with
3 to 4 large banks (including SBI) at top and at bottom rural
banks engaged in agricultural activities.
2. The supervisory functions over banks and financial
institutions can be assigned to a quasi-autonomous body
sponsored by RBI.
3. Phased reduction in statutory liquidity ratio.
4. Phased achievement of 8% capital adequacy ratio.
5. Abolition of branch licensing policy.
6. Proper classification of assets and full disclosure of
accounts of banks and financial institutions.
7. Deregulation of Interest rates.
21

8. Delegation of direct lending activity of IDBI to a separate
corporate body.
9. Competition among financial institutions on participating
approach.
10. Setting up asset Reconstruction fund to take over a portion
of loan portfolio of banks whose recovery has become
difficult.

II) Banking Reform Measures Of Government :-
On the recommendations of Narasimhan Committee,
following measures were undertaken by government since
1991 :-

1. Lowering SLR And CRR
The high SLR and CRR reduced the profits of the banks. The
SLR has been reduced from 38.5% in 1991 to 25% in 1997.
This has left more funds with banks for allocation to
agriculture, industry, trade etc.
The Cash Reserve Ratio (CRR) is the cash ratio of a banks
total deposits to be maintained with RBI. The CRR has been
brought down from 15% in 1991 to 4.1% in June 2003. The
purpose is to release the funds locked up with RBI.
2. Prudential Norms :-
Prudential norms have been started by RBI in order to
impart professionalism in commercial banks. The purpose of
prudential norms include proper disclosure of income,
classification of assets and provision for Bad debts so as to
ensure hat the books of commercial banks reflect the accurate
and correct picture of financial position.Prudential norms
required banks to make 100% provision for all Non-
performing Assets (NPAs). Funding for this purpose was
placed at Rs. 10,000 crores phasedover 2 years.

22

3. Capital Adequacy Norms (CAN) :-
Capital Adequacy ratio is the ratio of minimum capital to
risk asset ratio. In April 1992 RBI fixed CAN at 8%. By
March 1996, all public sector banks had attained the ratio of
8%. It was also attained by foreign banks.
4. Deregulation Of Interest Rates :-
The Narasimhan Committee advocated that interest rates
should be allowed to be determined by market forces. Since
1992, interest rates has become much simpler and freer.
a) Scheduled Commercial banks have now the freedom to set
interest rates on their deposits subject to minimum floor rates
and maximum ceiling rates.
b) Interest rate on domestic term deposits has been
decontrolled.
c) The prime lending rate of SBI and other banks on general
advances of over Rs. 2 lakhs has been reduced.
d) Rate of Interest on bank loans above Rs. 2 lakhs has been
fully decontrolled.
e) The interest rates on deposits and advances of all Co-
operative banks have been deregulated subject to a minimum
lending rate of 13%.
5. Recovery Of Debts :-
The Government of India passed the Recovery of debts due
to Banks and Financial Institutions Act 1993 in order to
facilitate and speed up the recovery of debts due to banks and
financial institutions. Six Special Recovery Tribunals have
been set up. An Appellate Tribunal has also been set up in
Mumbai.
6. Competition From New Private Sector Banks :-
Now banking is open to private sector. New private sector
banks have already started functioning. These new private
sector banks are allowed to raise capital contribution from
23

foreign institutional investors up to 20% and from NRIs up to
40%. This has led to increased competition.
7. Phasing Out Of Directed Credit :-
The committee suggested phasing out of the directed credit
programme. It suggested that credit target for priority sector
should be reduced to 10% from 40%. It would not be easy for
government as farmers, small industrialists and transporters
have powerful lobbies.
8. Access To Capital Market :-
The Banking Companies (Acquisation and Transfer of
Undertakings) Act was amended to enable the banks to raise
capital through public issues. This is subject to provision that
the holding of Central Government would not fall below 51%
of paid-up-capital. SBI has already raised substantial amount
of funds through equity and bonds.
9. Freedom Of Operation :-
Scheduled Commercial Banks are given freedom to open
new branches and upgrade extension counters, after attaining
capital adequacy ratio and prudental accounting norms. The
banks are also permitted to close non-viable branches other
than in rural areas.
10. Local Area banks (LABs) :-
In 1996, RBI issued guidelines for setting up of Local Area
Banks and it gave Its approval for setting up of 7 LABs in
private sector. LABs will help in mobilizing rural savings and
in channeling them in to investment in local areas.







24

4.2 Second Phase

To make banking sector stronger the government appointed
Committee on banking sector Reforms under the
Chairmanship of M. Narasimhan. It submitted its report in
April 1998. The Committee placed greater importance on
structural measures and improvement in standards of
disclosure and levels of transparency. Following are the
recommendations of Narasimhan Committee :-
1) Committee suggested a strong banking system especially in
the context of capital Account Convertibility (CAC). The
committee cautioned the merger of strong banks with weak
ones as this may have negative effect on stronger banks.
2) It suggested that 2 or 3 large banks should be given
international orientation and global character.
3) There should be 8 to10 national banks and large number of
local banks.
4) It suggested new and higher norms for capital adequacy.
5) To take over the baddebts of banks committee suggested
setting up of Asset Reconstruction Fund.
6) A board for Financial Regulation and supervision (BFRS)
can be set up to supervise the activities of banks and financial
institutions.
7) There is urgent need to review and amend the provisions of
RBI Act, Banking Regulation Act, etc. to bring them in line
with current needs of industry.
8) Net Non-performing Assets for all banks was to be brought
down to 3% by 2002.
9) Rationalization of bank branches and staff was emphasized.
Licensing policy for new private banks can be continued.
10) Foreign banks may be allowed to set up subsidiaries and
joint ventures.
25

On the recommendations of committee following
reforms have been taken :-
1) New Areas :-
New areas for bank financing have been opened up, such as :-
Insurance, credit cards, asset management, leasing, gold
banking, investment banking etc.
2) New Instruments :-
For greater flexibility and better risk management new
instruments have been introduced such as :- Interest rate
swaps, cross currency forward contracts, forward rate
agreements, liquidity adjustment facility for meeting day-to-
day liquidity mismatch.
3) Risk Management :-
Banks have started specialized committees to measure and
monitor various risks. They are regularly upgrading their
skills and systems.
4) Strengthening Technology :-
For payment and settlement system technology infrastructure
has been strengthened with electronic funds transfer,
centralized fund management system, etc.
5) Increase Inflow Of Credit :-
Measures are taken to increase the flow of credit to priority
sector through focus on Micro Credit and Self Help Groups.
6) Increase in FDI Limit :-
In private banks the limit for FDI has been increased from
49% to 74%.
7) Universal banking :-
Universal banking refers to combination of commercial
banking and investment banking. For evolution of universal
banking guidelines have been given.
8) Adoption Of Global Standards :-
RBI has introduced Risk Based Supervision of banks. Best
international practices in accounting systems, corporate
26

governance, payment and settlement systems etc. are being
adopted.
9) Information Technology :-
Banks have introduced online banking, E-banking, internet
banking, telephone banking etc. Measures have been taken
facilitate delivery of banking services through electronic
channels.
10) Management Of NPAs:-
RBI and central government have taken measures for
management of non-performing assets (NPAs), such as
corporate Debt Restructuring (CDR), Debt Recovery
Tribunals (DRTs) and Lok Adalts.



5.Introduction to Froeign Direct Investment

In India, FDI is considered as a developmental tool, which can
help in achieving self-reliance in various sectors of the
economy. With the announcement of Industrial Policy in
1991, huge incentives and concessions were granted for the
flow of foreign capital to India. India is a growing country
which has large space for consumer as well as capital goods.
Indias abundant and diversified natural resources, its sound
economic policy, good market conditions and highly skilled
human resources, make it a proper destination for foreign
direct investments. As per the recent survey done by the
United National Conference on Trade and Development
(UNCTAD), India will emerge as the third largest recipient of
foreign direct investment (FDI) for the three-year period
ending 2012 (World Investment Report 2010). As per the
study, the sectors which attracted highest FDI were services,
telecommunications, construction activities, and computer
27

software and hardware. In 1991, India liberalised its highly
regulated FDI regime.
Along with the virtual abolition of the industrial licensing
system, controls over foreign trade and FDI were considerably
relaxed. The reforms did result in increased inflows of FDI
during the post reform period. The volume of FDI in India is
relatively low compared with that in most other developing
countries.

6. Foreing Direct Investment in Banking Sector

Foreign direct investment (FDI) is defined as investment
made to acquire lasting interest in enterprises operating
outside of the economy of the investor. The FDI relationship
consists of a parent enterprise and a foreign affiliate which
together form a Multinational corporation (MNC). In order to
qualify as FDI the investment must afford the parent
enterprise control over its foreign affiliate. The UN defines
control in this case as owning 10% or more of the ordinary
shares or voting power of an incorporated firm or its
equivalent for an unincorporated firm;lower ownership shares
are known as portfolio investment.

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 countrys 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
28

Reserve Bank of India (RBI), countrys central banking
authority, would be required.



6.1 Statutory Limits
1. 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.
2. 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).
3.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.
4. 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.
5. 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.
29

6. 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.
Such applications would be considered by RBI in consultation
with Insurance regulatory and Development Authority
(IRDA).
7. FDI and Portfolio Investment in nationalized banks are
subject to overall statutory limits of 20 percent.
8. The 20 percent ceiling would apply in respect of such
investments in State Bank of India and its associate banks.


6.2 Voting Rights of Foreign Investors

Table:

Private Sector
Banks
Not more than 10% of total
voting rights of all the
shareholders
Nationalized
banks
Not more than 1% of total
voting rights of all the
shareholders of nationalized
banks.
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.
30

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 shareholder

RBI Approval

1.Transfer of shares of 5 percent and more of the paid-up
capital of a private sector bank requires prior
acknowledgement of RBI.
2.For FDI of 5 percent and more of the paid-up capital, the
private sector bank has to apply in the prescribed form to RBI.
3.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.
4.The Indian banking company is only required to undertake
two-stage reporting to the ECD of RBI as follows: (1) 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. (2) 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.


31

6.3 Divestment 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.
1.Sale of shares by private arrangement requires RBIs prior
approval.
2.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)], IPOs, private placement,
ADRs or GDRs and acquisition of shares from the existing
shareholders. This will be the cap for any increase through an
investment subsidiary route as in the case of HSBC-UTI deal.
In real terms, the sectoral cap has come down from 98% to
74% as the earlier limit of 49% did not include the 49% stake
that FII investors are allowed to hold. That was allowed
32

through the portfolio route as the sector cap for FII investment
in the banking sector was 49%.The decision on foreign
investment in the banking sector, the most radical since the
one in 1991 to allow new private sector banks, is likely to
open the doors to a host of mergers and acquisitions.
The move is expected to also augment the capital needs of the
private banks.

6.4 Public Sector Banks

In the case of public sector banks, the Government had earlier
announced that it is planning to reduce its stake in such banks
to 33 per cent in a phased manner. This is mainly because the
Government does not have enough money to contribute the
additional capital that would be required over a period. Private
domestic capital may not be enough to fill the gap in capital
requirements, which means that foreign capital would have to
be accessed. Such foreign capital can be either FII or FDI
investments. The moot point is whether sufficient capital from
overseas investors would be forthcoming if there were no
change in management in the public sector banks. Induction
of FDI in public sector banks would probably have to be
accompanied by change in management style in public sector
banks. Politically such decisions are not easy to take.
Therefore, lack of capital in addition to other well known
impediments may constrain the growth of public sector
banking segment as a whole.

7.FDI Inflows in India
Recognising the importance of FDI in the accelerated
economic growth of the country,Government of India initiated
a number of economic reforms in 1991. As a result of the
various policy initiatives taken, India has been rapidly
33

changing from a restrictive regime to a liberal one, and FDI is
encouraged in almost all the economic activities under the
Automatic Route. FDI is freely allowed in all sectors
including the services sector, except a few sectors where the
existing and notified sectoral policy does not permit FDI
beyond a ceiling. To make the investment in India attractive,
investment and return on them are freely repatriable, except
where the approval is specific to specific conditions such as
lock-in period on original investment,dividend cap, foreign
exchange neutrality etc. as per the notified sectoral policy
(Govt. of India, 2003). After the economic reforms are
implemented in the post 1990s, the inflows of FDI to India
have increased tremendously since 2000. The opening up of
the Indian economy in the international trade front and more
liberal FDI policies has been one of the factors which led to
huge FDI inflows in India. However, India's FDI inflows have
fallen sharply this financial year as a stumbling global
recovery from global crisis hit investor appetite. Again,the
macroeconomic instability in terms of fiscal deficit, current
account deficit and high inflation rate also contribute to fall in
FDI inflows. As Economic Survey 2010-11 has reported,
inflation is a dominant concern and India needs policies to
help reverse a fall in FDI inflows. In India, Reserve Bank of
India (RBI) publishes foreign investment data on a monthly
basis in the RBI Bulletin, which provides component-wise
details of direct investment and portfolio investment.
Direct investment comprises of inflows through (i)
Government (SIA/FIPB) route, (ii) RBI automatic route, (iii)
NRI and (iv) Acquisition of shares. Portfolio investment
covers: (i) GDRs/ADRs (ii) FIIs and (iii) offshore funds and
others.


34

8. Impact of FDI on Indian Banking

The RBI's decision to allow foreign direct investment in
Indian banks, the lifting of sectoral caps on foreign
institutional investors and a series of other policy measures
could ultimately lead to the privatisation of public sector
banks. 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 sectoral 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 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
35

their operations, primarily by acquiring other banks. Initially,
foreign banks are likely to acquire control of private banks.
The PSBs are likely to be put on the block after their balance
sheets have been cleaned up and the workforce trimmed to
meet the demands of their foreign suitors. The private banks
are a mixed bag. Many of the older private banks cater to
niche markets. S.L. Shetty, Director, Economic and Political
Weekly Research Foundation, points that some of these banks
have played a useful role because they have adapted to local
and regional requirements. "It is likely that a few of the
international banks are knocking at the doors of these banks,"
he says. However, he reckons that takeovers may not be easy.
The promoters of especially the older private banks, who have
a long tradition of banking and linkages with local
communities, may resist takeover bids. Shetty contends that
the government's "negative attitude" to small savings and
provident funds may pave the way for foreign financial
institutions to extend their operations to include pension
funds. Prof. T.T. Ram Mohan, who specialises in banking at
the Indian Institute of Management, Ahmadabad, says that
the banking industry is likely to undergo consolidation. Some
of the private banks are already wooing foreign banks. Vysya
Bank, whose promoters have sold 20 per cent stake to Bank
Brussels Lambert (BBL), part of the Dutch ING Group, is
likely to offer a controlling stake to the foreign bank. Vysya
Bank already has a tie-up with ING to sell insurance products
in India.Since the International Finance Corporation,
promoted by the World Bank, has a 10 per cent stake in the
bank, BBL can increase its stake by only 19 per cent because
of the 49 per cent ceiling on foreign stake in Indian banks.
However, banking industry sources say that even if BBL has a
stake of 39 per cent, it can control the private bank
effectively. In fact there have been suggestions that the RBI
36

"clarification" came mainly because BBL decided to test the
regulatory regime governing FDI in banking after acquiring
20 per cent of the stake in Vysya Bank. There is speculation
that foreign banks may be interested in picking up a stake in
Centurion Bank, Bank of Punjab, IndusInd bank and the
Global Trust Bank. Since the RBI announcement, shares
of some of these banks have been volatile in anticipation of
buying interest from foreign banks. The lifting of the cap on
FIIs is likely to increase further the volatility in bank stocks.
The banking sector norms, a key feature of the financial sector
reforms since the 1990s, threaten to prise open Indian banks,
particularly the PSBs. For instance, the norms for capital
adequacy ratio (CAR) require that capital be infused in these
institutions. If banks do not have the prescribed capital base,
the only course open to them is to make an offer in the
market. However, this will lower the promoters' stake in these
banks. This mechanism has already lowered the government
stake in several public sector banks. For instance, Bank of
India's recent decision to "return" equity capital to the tune of
Rs.150 crores to the government will lower the government
stake from 75 per cent to 67 per cent. The RBI has directed 11
old private sector banks having equity base of between Rs.6
crores and Rs.49 crores to increase their capital base. These
banks are now under threat. Prof. Ram Mohan believes that
the foreign banks, which generally have an asset base of
between Rs.3,000 crores and Rs.12,000 crores, "may prefer
faster growth by acquisition rather than through organic
expansion". He calculates that such acquisitions will overnight
imply a growth rate of 50 per cent for some of the prominent
foreign banks. Besides, it provides them an established client
base and access to low-cost funds, particularly in a regime in
which deposit rates are glued to low levels, barely above the
rate of inflation. Some of the old private banks have the
37

advantage of working over a long period in geographical
niches in rural and semi-urban areas. And foreign banks, in
their pursuit of growth, would prefer taking over such banks
to the more risky option of establishing themselves in new
areas. Incidentally, this has also been the route pursued by
some of the new generation private banks like ICICI Bank and
HDFC Bank. While ICICI Bank took over Bank of Madura,
HDFC Bank bought Times Bank. The current market
capitalisation (market value of a company's stock) of the 11
private banks whose shares are listed is about Rs.1,600 crores.
The under-capitalised old private banks are clearly vulnerable.
A 49 per cent stake in each of these banks can be bought by
foreign banks at a total cost of less than Rs.800 crores. A 49
per cent stake in Dhanalakshmi Bank would cost Rs.13 crores;
in Nedungadi Bank Rs. 21 crores; in Lakshmi Vilas Bank
Rs.28 crores; in United Western Bank Rs.32 crores; in City
Union Bank Rs.27 crores; and in Federal Bank Rs.73 crores.
Although the CARs of many of these banks are higher than
the RBI-stipulated norm, Prof. Ram Mohan argues that this
alone does not offer them protection.

9.Conclusion

The anomalous situation needs to be rectified. It is capable of
being resolved by modifying this policy document presently at
a draft stage. A clarificatory amendment to the draft policy
document in favour of the domestic investment is called for.
For FDI, the draft policy document is unambiguous. But
under Clause 2 (f) of the Press Note 32 of 2004, Guidelines
for setting up a wholly-owned subsidiary of a foreign bank is
to issue separately by RBI. This introduces an element of
uncertainty in this respect also. It makes little sense to invite
comments and suggestions to the FDI related part of the draft
38

policy when it is not even a full draft. Over the last decade,
the fast pace of economic growth and progressive policy
liberalisation has made India an attractive destination for
worlds investments. United States have been at the forefront
of investments in India strengthening the partnership between
the two largest democracies in the world.

10.References

1.www.rbi.org.in

2.www.indusedu.org (International Journal of Research in
Management,Economics and Commerce)