New Delhi: The department of industrial policy and promotion, or DIPP, has begun the process of consultations with the Reserve Bank of India (RBI) and the finance ministry to ease the revised foreign investment guidelines for the banking sector so that some domestic banks do not have to be classified as foreign-owned entities.
“We have written to the various stakeholders seeking their comment on the issue. We are waiting for their reply,” said a senior commerce and industry ministry official, who didn’t want to be identified.
The official ruled out a complete overhaul of the guidelines announced in February. Any changes are likely only after a new government takes charge at the Centre following the general election that concluded on Wednesday, the official added.
Regulatory challenge? RBI has pointed out that the guidelines will create a new category of ‘foreign-owned and Indian-controlled banks’. Harikrishna Katragadda / Mint
“We will send our reply after examining it (the message from DIPP),” said a finance ministry official who didn’t want to be identified.
Press Notes 2, 3 and 4 of 2009 series issued in February by DIPP caused confusion over their implications for sectors where foreign investment is prohibited or limited. The finance ministry and RBI have opposed the move and written letters to the department expressing reservations. ICICI Bank Ltd, India’s largest private sector bank, has also approached DIPP seeking a clarification on the issue.
Under the new foreign investment guidelines, seven banks—ICICI Bank, HDFC Bank Ltd, Yes Bank Ltd, IndusInd Bank Ltd, Federal Bank Ltd, ING Vysya Bank Ltd and Development Credit Bank Ltd—could be categorized as foreign-owned because foreign investment in the institutions exceeds 50%.
DIPP, which functions under the ministry of commerce and industry, has since come around to the view that because the banking sector is adequately regulated by RBI, there may be a case for easing the norms for banks. The guidelines may limit the capability of such banks to invest in sectors where foreign direct investment is capped—such as media and telecom.
According to Press Note 2, both ownership as well as control have to be with Indians for an entity to be deemed India-owned. In the event that either ownership, which means a stake in excess of 50%, or management control is with an overseas entity, it will be considered foreign-owned.
RBI has pointed out that the guidelines will create a new category of “foreign-owned and Indian-controlled banks”, which could pose a regulatory challenge. So far there have been only Indian banks and foreign banks, and separate rules on priority sector lending and market access are applied for the two categories.
Although DIPP has kept the insurance sector out of the ambit of the new guidelines, RBI has maintained that this is against the intent of the new foreign direct investment norms which is to bring uniformity and consistency in calculating the foreign holding in Indian companies across sectors. RBI has 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 the central bank feels could be circumvented.