Clarification on FDI in banks by year-end

Clarification on FDI in banks by year-end

New Delhi: In what should come as a relief to private sector banks such as ICICI Bank and HDFC Bank, the government, finance secretary Ashok Chawla said, has decided to resolve by the end of December the issue of these banks being classified as foreign banks as a result of the new foreign direct investment (FDI) policy.

This is the first time the government is setting a deadline for this issue.

“Efforts are on and all I can say at this stage is we will have a pragmatic and workable solution by 31 December. We need to have it since it (the issue) has been there for a long time," Chawla said, without getting into details. The new FDI policy was announced in February.

Mint learns that the government is contemplating either to keep the banking sector out of the ambit of FDI guidelines or to make special exceptional provision for Indian banks that are impacted by the new guidelines. The new FDI guidelines have already kept the insurance sector outside its purview.

A senior official at the department of industrial policy and promotion, or Dipp, in the commerce ministry had earlier told Mint that the cabinet will need to approve any exemption for banks from the new FDI policy guidelines.

“Since the banking sector is heavily regulated by the Reserve Bank of India (RBI), it merits that this sector is kept out of the new FDI regulations. Carving out a special provision for a few banks may not be a good idea. There has to be clear guidelines for the sector and norms should be laid down upfront," said Akash Gupt, executive director at audit and consulting firm PricewaterhouseCoopers.

In a series of three press notes earlier this year, Dipp, which is responsible for formulating foreign investment policy, had introduced far-reaching changes in the way the quantum of foreign investment in a domestic company is calculated.

The calculations are significant because India imposes caps on FDI in several sectors such as banking, media and telecom.

The second of the three press notes says that a company will be deemed Indian-owned only if Indians own more than half its equity capital and control its management.

If either or both of these requirements are not met, the company will be considered foreign-owned and all downstream investments by such a company will be considered foreign investment.

RBI has pointed out that the new norms will create a new set of banks which are “owned by foreigners but controlled by Indians", thus creating a regulatory challenge for the central bank.

RBI also named seven private sector banks, including ICICI Bank and HDFC Bank, the two biggest, which would be classified as foreign-owned. 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. Reclassifying some Indian banks as foreign-owned would have impacted the current and future investment of such banks in FDI regulated sectors.

ICICI Bank had also approached DIPP seeking a clarification on the issue. The bank had pointed out that because its management is controlled by Indians, it should be considered an Indian-owned company.

On 27 October, in reply to a question at a Mumbai press conference after the second quarter monetary policy review, RBI governor D. Subbarao said: “The issue has not been completely and finally resolved."

Earlier this month, finance minister Pranab Mukherjee said the government would issue clarifications, if they are required, on the guidelines, and added that consultations were under way.

On the sidelines of a conference of state industry ministers on 17 November, Dipp secretary Ajay Shankar had said that the matter was being discussed with the finance ministry.