2. What is a 'Foreign Direct
Investment - FDI'
Foreign direct investment (FDI) is an
investment made by a company or
individual in one country in business
interests in another country, in the form of
either establishing business operations or
acquiring business assets in the other
country, such as ownership or controlling
interest in a foreign company. Foreign
direct investments are distinguished from
portfolio investments in which an investor
merely purchases equities of foreign-based
3. Why is FDI needed?
FDI plays a major role in developing
countries like India. They act as a long
term source of capital as well as a source
of advanced and developed technologies.
The investors also bring along best global
practices of management. As large amount
of capital comes in through these
investments more and more industries are
set up. This helps in increasing
employment. FDI also helps in promoting
4. Advantages Of
FDI Access to markets: FDI can be an effective way for
you to enter into a foreign market. Some countries
may extremely limit foreign company access to their
domestic markets. Acquiring or starting a business in
the market is a means for you to gain access.
Access to resources: FDI is also an effective way
for you to acquire important natural resources, such
as precious metals and fossil fuels. Oil companies,
for example, often make tremendous FDIs to
develop oil fields.
Reduces cost of production: FDI is a means for
you to reduce your cost of production if the labor
market is cheaper and the regulations are less
restrictive in the target foreign market.
5. Disadvantages of Foreign
1. Hindrance to Domestic Investment.
As it focuses its resources elsewhere other than the investor’s
home country, foreign direct investment can sometimes hinder
2. Risk from Political Changes.
Because political issues in other countries can instantly change,
foreign direct investment is very risky. Plus, most of the risk factors
that you are going to experience are extremely high.
3. Negative Influence on Exchange Rates.
Foreign direct investments can occasionally affect exchange rates
to the advantage of one country and the detriment of another.
4. Higher Costs.
If you invest in some foreign countries, you might notice that it is
more expensive than when you export goods. So, it is very
imperative to prepare sufficient money to set up your operations.
6. FDI In Banking Sector In India
Until 1993, most Indian banks were 100 percent
owned by the central government and private
investment was allowed only in a handful of
private banks formed around the 1940s. Further,
foreign banks and financial institutions were
allowed only 20 percent ownership stakes in
Indian banks. In 1993-94, nine new banks were
formed in the private sector and one co-operative
bank was converted to a private bank. Banks were
permitted to issue Certificates of Deposits (CDs)
and offer foreign currency deposits to Non-resident
Indians (NRIs) with exchange rate risk borne by
7. Ceiling On FDI In Indian
In the private banking sector of India, FDI is
allowed up to a maximum limit of 74 % of the paid-
up capital of the bank. On the other hand, Foreign
Direct Investment and Portfolio Investment in the
public or nationalized banks in India are subjected
to a limit of 20 % in totality. This ceiling is also
applicable to the investments in the State Bank of
India and its associate banks. FDI limits in the
banking sector of India were increased with the
aim to bring in more FDI inflows in the country
along with the incorporation of advanced
technology and management practices. The
objective was to make the Indian banking sector
8. STATUTORY LIMITS OF FDI
Foreign direct investment (FDI) up to 49 percent is
permitted in Indian private sector banks under
"automatic route" which includes Initial Public Issue
(IPO), Private Placements, ADR/GDRs; and
Acquisition of shares from existing shareholders.
Automatic route is not applicable to transfer
of existing shares in a banking company from
residents to non-residents.
The "fair price" for transfer of existing shares is
determined by RBI, broadly on the basis of
Securities Exchange Board of India (SEBI)
guidelines for listed shares and erstwhile CCI
guidelines for unlisted shares.
9. Foreign banks having branch-presence in India are
eligible for FDI in private sector banks subject to the
overall cap of 49% with RBI approval.
Issue of fresh shares under automatic route is not
available to those foreign investors who have a
financial or technical collaboration in the same or
Under the Insurance Act, the maximum foreign
investment in an insurance company has been fixed
at 26 percent. Application for foreign investment in
banks which have joint venture/subsidiary in
insurance sector should be made to RBI.
FDI and Portfolio Investment in nationalised banks
are subject to overall statutory limits of 20 percent.
Foreign direct investment (FDI) is an investment made by a
company or individual in one country in business interests in
another country, in the form of either establishing business
operations or acquiring business assets in the other country, such
as ownership or controlling interest in a foreign company
FDI plays a major role in developing countries like India. They act
as a long term source of capital as well as a source of advanced
and developed technologies.
Advantages Of FDI
1. Access to markets
2. Access to resources
3. Reduces cost of production
Disadvantages Of FDI
1. Hindrance to Domestic Investment
2. Risk from Political Changes
3. Negative Influence on Exchange Rates
4. Higher Costs