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Government unwilling to change FDI policy on banks
6 April 2010: The Union Government is reluctant to change the new Foreign Direct Investment policy regarding the treatment of ownership and control in private banks.
The government has reportedly reiterated that the policy in this regard was working “very well”.
According to the interpretation of the FDI policy, private sector banks such as HDFC Bank and ICICI Bank can be treated as foreign entities as the majority stake in them is held by overseas investors.
The government said there have been talks on the issue between the Reserve Bank of India, the Department of Industrial Policy and Promotion (or DIPP, which frames the FDI policy) and the Union Ministry of Finance.
Press Notes 2, 3 and 4 of the DIPP says that for an entity to be treated as Indian, it should have less than 50 per cent foreign investment, including foreign currency convertible bonds, American and Global Depository Receipts as well as convertible preference shares and from Non-Resident Indians.
But the problem regarding these private banks is that though the control in them is in Indian hands, foreign ownership in them is over 50 per cent, making them ineligible for being treated as domestic entities.
The affected private banks include HDFC Bank, ICICI Bank, Development Credit Bank, Federal Bank, Yes Bank, ING Vysya and IndusInd Bank. This interpretation has prompted some of these banks to take up the issue with the Government and RBI.
They are also worried that this rule could adversely impact the new investments in their subsidiaries in sectors like insurance, where there is an FDI limit of 26 per cent.
This is because these rules could treat the entire capital infusion by the parent companies as inflows from foreign entities without considering the Indian shareholders' holdings, thereby causing it to breach the FDI cap.
Source: Hindu Business Line