FIPB clears Kotak bank proposal to increase foreign investment limit

The Foreign Investment Promotion Board (FIPB) on Friday cleared Kotak Mahindra Bank's proposal to raise foreign investment limit in the lender to 55 per cent.

After deferring a decision on the proposal in the past, the FIPB, headed by Finance Secretary Rajiv Mehrishi, cleared the application after the Department of Financial Services gave its opinion on the matter, sources said.

Kotak Bank had approached FIPB after the Reserve Bank of India barred overseas investments in it as foreign shareholding hit the permissible threshold following the merger with ING Vysya Bank. Investments from foreign institutional investors (FIIs), foreign portfolio investors (FPIs) and foreign banks had reached 48.55 per cent in the merged entity.

With this move, promoters like HDFC and Kotak Bank, who have insurance ventures, won't have to worry even if FII holdings exceed 51 per cent.

If the February circular on insurance was followed, several Indian insurers where parents have high FII holding would have been considered foreign insurers. FIPB has already said all insurers in India would need to have Indian management and control, though they have not clarified what that would mean.

According to foreign direct investment (FDI) rules, there is a cap of 49 per cent on foreign equity investment for all Indian insurance companies; they cannot allow the aggregate holdings by way of total foreign investment in their equity shares by foreign investors, including portfolio investors, to exceed 49 per cent of their paid-up equity capital. They also have to ensure that ownership and control shall remain at all times in the hands of resident Indian entities as referred to in these rules.

According to these rules, FDI proposals up to 26 per cent of the total paid-up equity of the Indian insurance firm was allowed via the automatic route, while FDI proposals which took the total foreign investment above 26 per cent and up to the cap of 49 per cent required FIPB approval. Due to the confusion regarding FIIs in the parent companies, several insurers were waiting for FIPB to give its definition of what these norms would mean. Almost all life and general insurers have stated an intent from foreign partner to raise stake in the joint venture, but were in a wait-and-watch mode.

Kotak Mahindra and associates are significant shareholders in Business Standard Private Limited