FIPB may approve HDFC Bank's current holding structure

But bank might not be allowed to bring fresh foreign investment in immediate future

The Foreign Investment Promotion Board (FIPB), likely to consider HDFC Bank's proposal for a higher foreign investment limit on October 21, might give a retroactive approval to raising foreign holding in the past. But the bank might not be allowed to bring fresh foreign investment in the immediate future.

For now, the decision would mean status quo on HDFC Bank's current foreign holding of 73.55 per cent, including parent HDFC's 22.5 per cent stake. If FIPB decides to refer the case to the Reserve Bank, the bank might also be asked to pay some fine for violating foreign investment norms.

"They had already breached the cap of up to 49 per cent under the automatic route. Approval by FIPB now will regularise it," a finance ministry official, who did not wish to be named, told Business Standard.

The silver lining, however, is that the finance ministry is also considering a change in the current policy to treat downstream investment by foreign-owned non-banking financial companies like HDFC (which has more than 78 per cent foreign holding) as domestic.

"Such a move will have a wider repercussion. But it may take some time, as it will have to be discussed with other ministries as well," the official added.

Earlier, FIPB had deferred a decision on HDFC Bank's proposal to increase its foreign shareholding limit to 67.55 per cent from the present 51 per cent (excluding promoter holding of 22.5 per cent). The Reserve Bank and the Department of Industrial Policy & Promotion were of the view that HDFC Bank, after taking that into account parent HDFC's holding, was already close to the 74 per cent cap for foreign investment in private sector lenders.

FIPB is learnt to have agreed to reconsider the proposal, while retaining the foreign investment at the current level, after the bank reportedly gave its concurrence for it without prejudice to its promoter being considered a foreign investor.

"The bank did not give a fresh proposal but the additional information that FIPB had sought was furnished. It is hopeful that the application would be cleared in the next meeting," said a source.

An emailed query sent to HDFC Bank had not elicited a response till the time of going to press.

After a change in FDI policy (through press notes) in 2009, downstream investment by any entity controlled by foreign investors is taken as foreign investment.

"Any foreign investment already made in accordance with the guidelines in existence prior to February 13, 2009 (date of issue of Press Note 2 of 2009) would not require any modification to conform to these guidelines. All other investments, past and future, would come under the ambit of these new guidelines," the policy said.

HDFC Bank had argued the law could not be applied retrospectively. It stressed it had got legal opinion and the general view was that HDFC's holding in HDFC Bank should be exempt from new regulations, as the holding already existed when the law came into force.

The ministry official, however, said the bank increased its holding, though marginally, after the change in policy without taking FIPB approval.

In December 2013, RBI had barred foreign investors from buying additional shares in the company, after their shareholding hit the upper limit of 49 per cent allowed under the automatic route.