Some of India’s top Pvt Banks could soon lose their ‘Indian’ status

The foreign direct investment (FDI) in private sector banks might go up by 100%. The matter is now being discussed by the Ministry of Finance, the department of industrial policy & promotion (DIPP) and the Reserve Bank of India (RBI).

As published in an Economic Times report, ICICI Bank, HDFC Bank and other private sector banks might become fully foreign-owned entities, with an aim to raise investments from overseas.

The move will come in connection to the government’s aim of fetching more and more foreign direct investment and open up key sectors for overseas participation.

ICICI Bank, as believed by the Reserve Bank of India, is one among the two of India’s most systemically important banks. The other one being government-owned State Bank of India.

Currently, the FDI limit is 74% out of which, 49% is allowed automatically and the rest needs to be approved by the Foreign Investment Promotion Board (FIPB).

According to the officials, who requested anonymity, "The MoF response is still awaited but it is likely they will agree. Any decision will be taken after there is an agreement between all stakeholders."

What the industry experts are talking of is the solution that the additional 26% 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% limit in HDFC Bank, the country's biggest private bank by market capitalisation. While in ICICI Bank, it’s about 70%.

Establishing foreign banks to set up wholly-owned subsidiaries in India could also be considered. It would then follow that private sector banks that are majority foreign owned can be 100% 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. 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 sub-limit within the overall overseas ceiling for any particular investor category.

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