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Private banks may now become fully foreign owned as FinMin, DIPP and RBI mull raising FDI limit to 100%

Economic Times:  September, 2015

New Delhi: ICICI Bank, HDFC Bank and their private sector peers could turn into fully foreign-owned entities if a proposal to raise the overseas investment limit in the sector to 100 per cent from 74 per cent is accepted. The measure is being discussed by the finance ministry, the department of industrial policy & promotion (DIPP) and the Reserve Bank of India (RBI), a senior government official said.

The move would be in keeping with the government's push to streamline foreign direct investment and open up key sectors to overseas participation. 

It's also significant in light of the RBI deeming ICICI Bank as one of India's two systemically important banks, the other one being government owned State Bank of India. 

Within the current 74 per cent limit, 49 per cent is allowed automatically and the rest through the approval route, which means permission has to be sought from the Foreign Investment Promotion Board (FIPB) beyond that threshold. 

"The MoF response is still awaited but it is likely they will agree," the official said. "Any decision will be taken after there is an agreement between all stakeholders." 

One of the options is that the additional 26 per cent increase be subjected to the approval route. Allowing an increase to the maximum will provide room for further overseas investment, given that this is already close to the 74 per cent limit in HDFC Bank, the country's biggest private bank by market capitalisation. It's at about 70 per cent in ICICI Bank. 

Message to Foreign Banks 

The proposal is also consistent with the policy of allowing foreign banks to set up wholly owned subsidiaries in India. It would then follow that private sector banks that are majority foreign owned can be 100 per cent overseas held subject to safeguards. Abolishing the limit may help persuade foreign banks to set up local units as the RBI wants. 

"This may further give India the leverage to push foreign banks to open wholly owned subsidiaries in the country," said the official cited above. So far, only four foreign banks have applied to the RBI seeking approval for wholly owned subsidiaries. The idea is that once they do this, such banks would be treated on par with local ones. 

In July, the government approved a composite cap policy for foreign investment, implying that there will be no sublimit within the overall overseas ceiling for any particular investor category. 

However, in the case of private banks, the specific subcap of 49 per cent on foreign portfolio investment remains given concerns over volatile flows into and out of sectors that are critical to the economy.

Insurance Investments 

The chances of the government agreeing to the 100 per cent plan are bright because of changes that have already been made under the Indian Insurance Companies (Foreign Investment) Rules, 2015, said another government official aware of the deliberations. This amendment relaxed rules related to investments in insurance units by non-state-run banks.

"Now that the downstream investments of private banks into their insurance ventures will not be calculated towards foreign investment, there is a strong case for allowing 100 per cent foreign investment in the banking sector," said this official. In July, FIPB had approved Kotak Mahindra Bank's proposal to raise its foreign institutional investment cap to 55 per cent from 49 per cent.