New Delhi: The government may reverse the new foreign direct investment (FDI) guidelines for the banking industry to avoid classifying a few private sector banks as foreign-owned entities, a change that could have posed a regulatory challenge and limited the banks’ investment capabilities.
Financial institutions such as ICICI Bank Ltd, India’s largest private sector bank, and Housing Development Finance Corp. Ltd (HDFC), the largest home lender, in which foreign investment exceeds 50%, would be considered foreign-owned under the new FDI guidelines.
Overseeing changes: Kamal Nath. Harikrishna Katragadda / Mint
ICICI Bank has approached the department of industrial policy and promotion (DIPP) seeking a clarification on the issue. Overseas investment in the bank was almost 63% as of 31 March.
While foreign institutional investors have a 35.47% stake, holders of its American depository receipts control 27.12%.
The bank submitted that because its management is controlled by Indians, it should be considered an India-owned company.
An ICICI Bank spokesperson declined to comment on the issue.
“The issue will first be examined. If the need is felt, there will be inter-ministerial consultation. If there is consensus for a change in the guidelines, it will be done accordingly,” said a senior DIPP official who didn’t want to be named. The department of economic affairs, the department of financial services and the Reserve Bank of India (RBI) may be involved in the consultations, the official added.
DIPP, under commerce and industry minister Kamal Nath, issued Press Notes 2, 3 and 4 of 2009 series in February this year, introducing far-reaching changes in the way foreign investment in a domestic company is calculated.
According to PN2, both ownership as well as control have to be with Indians for a company to be deemed India-owned.
In the event that either ownership, which means a stake in excess of 50%, or management control of the company is with an overseas entity, the company will be considered foreign-owned.
The same press note also maintained that if an Indian company with less than 50% foreign investment makes a further downstream investment, such investment will not be considered FDI.
According to DIPP, the banking sector is adequately regulated by RBI and there may be a case for easing the norms for the sector, which otherwise may limit the downstream capability of such banks in sectors where FDI is capped, such as media and telecom.
RBI has also written to DIPP seeking a clarification on the issue.
However, the DIPP official said it would seek RBI’s opinion on the matter.
Clarification sought: The ICICI Bank tower in Mumbai. Under the new FDI norms, ICICI Bank would be considered a foreign entity. Prashanth Vishwanathan / Bloomberg
“RBI needs to assure that it will look into the downstream investments made by such banks. Also, we need to ensure that the voting power in such banks always remains with Indians,” the official said.
In its letter to DIPP, RBI also objected to the simple definition of “control” of a company, which is taken to mean the “right to appoint majority of the board of directors in the company,” which it feels could be played around with.
However, the DIPP official said this was the only definition available under the Companies Act.
Asked whether any changes to the FDI guidelines would need cabinet approval, the official said it would depend on the extent of the review in the already notified norms.
Sanjiv Shankaran contributed to this story.