HDFC Bank gets FIPB approval to raise foreign investment to 74%

New Delhi/Mumbai: The foreign investment promotion board (FIPB) on Friday cleared HDFC Bank's revised proposal to increase foreign investment in the bank to 74%, but the decision is unlikely to benefit the bank's shareholders immediately.

The approval ends the uncertainty over foreign investments in India's most valuable bank and clears the decks for its proposed capital raising.

The bank may, however, have to pay a penalty for breaching the permitted foreign investment limit, which would be decided by the RBI. The FIPB has counted parent HDFC's 22.5% stake in the bank as foreign investment, which means the total foreign holding in the bank is already close to the 74% limit in the sector. Effectively, the FIPB has only regularised the existing foreign investment in the bank and there's no room for further foreign investment.

"FIPB today considered and approved HDFC Bank's proposal to raise foreign investment ceiling to 74%," said a government official, adding that the board's view is that HDFC Bank's parent HDFC Ltd's 22% holding in the bank is foreign direct investment (FDI). This means total foreign holding in the bank, which includes FII, FDI, NRI, ADR and GDR, is already over 73%.

"The FIPB decision will hardly have any impact on the stock as the bank has little headroom left to raise funds from foreign investors," said Daljeet Kohli, head of research, IndiaNivesh Securities. "FII limit in HDFC Bank will open up only if HDFC stake is considered domestic." HDFC Bank has shareholders' approval for raising Rs 10,000 crore capital till July 2015.

"Overall, the FIPB decision is in the right direction. Though FIIs cannot increase their holding in HDFC Bank immediately, it is very positive in the long term and if RBI considers HDFC as an Indian entity, the stock will lead to a sharp re-rating," said Sudip Bandyopadhyay, MD & CEO, Destimoney Securities.

Shares of HDFC Bank rose 1.43% to Rs 923.30 at the Bombay Stock Exchange on Friday. The HDFC Bank stock has risen 42% since the RBI ban on further increase in FII holding on December 19 last year. The FIPB also cleared 14 other proposals, including that of pharmaceutical company Sanofi, and that of Punj Lloyd's to enter the defence space.

In December last, the RBI had closed further foreign purchase of HDFC Bank's shares saying overall foreign shareholding limit of 49% had been reached.

Foreign investment of up to 49% is allowed in private banks through the automatic route, but any subsequent increase has to be approved by the FIPB. HDFC Bank had subsequently moved a proposal to raise foreign investment limit to 67.55% from 49% but the proposal had hit a wall after the RBI, the department of industrial policy and promotion and the department of economic affairs in the finance ministry felt that the foreign holding in the bank was already over the limit sought by the bank.

This was because of the 2009 FDI policy guideline for calculation of foreign investment that said investment by a company majority foreign-owned or foreign-controlled in another Indian company will be considered foreign investment. Since HDFC has more than 50% foreign investment, which made it a foreign-owned company, all its investments were counted as foreign investment.

This meant that HDFC's 22.5% stake in HDFC Bank was considered as foreign investment, and counting it, the total foreign investment in the bank was already near 74%, the maximum allowed. This meant two things - one, there was no room for further increase in the limit. Two, HDFC Bank was already in violation of the limit.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.