FIPB defers call on HDFC Bank's plan to raise FII limit

The bank had proposed to increase its FII limit to 67.55% from about 51% at present

The Foreign Investment Promotion Board (FIPB) on Wednesday deferred a decision on HDFC Bank’s proposal to increase its foreign shareholding limit, as the commerce & industry department and the law ministry were yet to give comments on the issue. This means a decision on the issue might be taken only after a new government takes charge at the centre.

“All comments were not there. So, it was withdrawn from the list. We need more analysis,” said a finance ministry official after an hour-long FIPB meeting, where other items on the agenda were discussed. The official did not wish to be named, as the model code of conduct for general elections is in place.

HDFC Bank had sought FIPB’s approval to increase its foreign institutional investment (FII) limit to 67.55 per cent from about 51 per cent at present.

The foreign investment cap in the private banking sector is 74 per cent. But its parent, HDFC, which has a 75.7 per cent foreign investment, holds 22.64 per cent in the bank. After a change in the foreign direct investment policy a few years ago, downstream investment by any entity controlled by foreign investors is taken as foreign investment.

The finance ministry had written to the law ministry for its opinion on whether the parent’s investment in HDFC Bank will be considered foreign money. If it will be, foreign investment in the bank has already touched 73.73 per cent and no further increase can be allowed.

“The law ministry asked us to get views of the Reserve Bank of India (RBI) and the Department of Industrial Policy & Promotion (DIPP). When we get all the comments, we will refer it again to the law ministry. FIPB will consider it only after getting the law ministry’s opinion,” the official added.

RBI is learnt to have suggested that taking into account the downstream investment by the parent, the bank has already reached the maximum FDI level allowed. DIPP officials were present at Wednesday’s FIPB meeting but did not comment.

The bank, on its part, had said the new regulation should not apply on it as HDFC’s holding in HDFC Bank was already there when the law on a deemed foreign company was passed. Managing Director Aditya Puri had earlier this week said the bank had taken legal opinion from a Chief Justice and a Supreme Court judge on the issue and their view was that the law could not be applied retrospectively. FIPB’s deferral comes amid the Lok Sabha polls, when the bureaucracy is avoiding taking decisions and preferring to refer all key matters to the Election Commission. Since the next FIPB meeting is not likely before the election verdict is out on May 16, a decision might be taken by the new government.