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| Application of Press Notes 2 to 4 on banks: FinMin arms divided |
| Surajeet Das Gupta / New Delhi Apr 05, 2010, 00:36 IST |
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Ministry calls meeting this week to further discuss the contentious issue.
The Department of Economic Affairs (DEA) in the Union finance ministry wants to reject a plea by leading banks in the country, like ICICI Bank and HDFC Bank, to keep them outside the purview of Press Notes 2 to 4, on foreign direct investment (FDI) norms.
But, it has also allowed them a breather by clarifying the guidelines would apply to them only prospectively and therefore would not impact their existing foreign equity structure.
However, the finance ministry has called a meeting on Tuesday with key departments to discuss these issues further.
For, the Department of Financial Services within the ministry had supported the banks’ arguments.
Press Notes 2 and 3 were issued last year to replace the earlier method of computing foreign indirect equity. They redefined foreign ownership of companies incorporated in India. Press Note 4 was issued later to clarify some of these issues
DEA has argued that similar exemptions to that asked for by the banks mentioned would be demanded by others, such as non-bank financial companies and firms with a diversified holding structure. It has said it was in favour of subjecting banking companies to the same discipline as other companies.
Under the press notes, companies with more than 50 per cent foreign stake in their equity would be considered “foreign owned”, based on a new method of calculation which, apart from FDI, would also include money put in by foreign institutional investors, foreign currency convertible bonds, convertible preference shares, convertible currency debentures, global and American depository receipts. Put another way, it meant all foreign holdings would be included in calculating the foreign holding in a company.
Banks had opined that under the new definition, banks like ICICI Bank and HDFC Bank would become “foreign owned” and therefore there were fears that the limitations on foreign banks would be imposed on them, irrespective of the fact that the ownership (a majority of the directors are Indian residents) is in Indian hands or is very diversified.
The Department of Financial Services says the two press notes should not apply to the banking sector, as ownership and control are not real and effective in these companies for various reasons. For one, the foreign ownership is diverse and the investors cannot be expected to act in “concert”. Two, ownership of a single entity beyond five per cent and up to 10 per cent is not permissible without RBI approval. Three, the control and power over management is severely proscribed by the banking laws and RBI’s power to approve directorships in the banking company and, finally, downstream investments are restricted by the banking laws and RBI regulation.
The DEA rejected these arguments. For one, it says that RBI has powers under law to allow ownership of single entities beyond 10 per cent to 30 per cent and even beyond, based on certain “fit and proper criteria” for the entity. For instance in the case of IndusInd Bank, HDFC Bank and ING Vysya Bank, the promoter entities as on March 31, 2009, were 25.63 per cent, 19.38 per cent and 43.81 per cent, respectively.
Second, voting rights of shareholders in banking companies were capped at 10 per cent; however, this provision can also be overruled under some sections of the Banking Regulation Act.
Three, while diversity of ownership may hold true in ICICI and HDFC and that as of now, the situation can change over time.
(Disclosure: Kotak Mahindra Bank is a significant stakeholder in Business Standard)
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