FinMin, RBI agree to retain 74% foreign holding in banks

The Union Ministry of Finance and the Reserve Bank of India have agreed to retain the 74 per cent cap on foreign holding in banks.

In the RBI paper on setting up new banks in August this year, one of the proposals was to reduce the cap on aggregate foreign holding to 50 per cent from 74 to avoid a likely concentration of foreign ownership.

However, the Department of Economic Affairs (DEA) feels such a cap would be a retrograde step and inconsistent with the overall policy of foreign holding in Indian entities. “It would be inconsistent with the overall tenor of liberalisation, which is to move in a liberal and minimal interventionist direction,” said DEA.

The issue was discussed at a meeting of a group constituted by the finance ministry recently. The RBI representative at the meeting agreed with the view.

DEA has suggested an alternative: Maintain the existing cap (74 per cent) with a separate special “carve out” for critical operations like corporate debt restructuring and treasury operations. This would ensure a level-playing field for foreign banks operating in India.

The RBI representative agreed with the DEA view and said it was in keeping with the earlier decision taken by the group of officers.

The Department of Financial Services, which is formulating its final views on the RBI discussion paper, would consider the options proposed by DEA and banking regulator. The details of the operations about "carve out" will be finalised in consultation with the RBI.

Giving the rationale for capping foreign stake at 50 per cent in new banks, the proposal in the RBI’s discussion paper had said the objective was to create strong domestic banking entities and a diversified sector.

The players would include public sector banks, domestic private banks and foreign-owned banks.

The RBI, in its guidelines on entry of new banks in 2001, had permitted non-resident Indians to participate in the primary equity of a new bank to the maximum extent of 40 per cent. However, the equity participation was restricted to 20 per cent within the above ceiling of 40 per cent, in the case of a foreign banking company or finance company (including multilateral institutions) acting as the technical collaborator or the co-promoter.

Later, in March 2004, the government through press note 2 said the aggregate foreign investment from all sources (foreign direct investment, foreign institutional investment and non-resident Indian investments) in private sector banks should not exceed 74 per cent of the paid-up capital of the bank, under the automatic route.

Further, the FDI policy prescribes that at all times, at least 26 per cent of the paid-up capital of a private sector bank will have to be held by residents, except for wholly-owned subsidiaries of a foreign bank.