FIPB to decide on raising foreign investment in HDFC Bank

The Foreign Investment Promotion Board (FIPB) will take a call on increasing foreign investment in HDFC Bank.

The proposal to increase foreign investment in the bank was opposed by the Department of Industrial Policy and Promotion (DIPP) and the Reserve Bank of India (RBI) under the current foreign direct investment (FDI) policy.

"It (ambiguities in HDFC Bank's proposal) will be cleared in the FIPB," Finance Secretary Arvind Mayaram said.

Mayaram, also the economic affairs secretary, heads FIPB, which also comprises the DIPP in the commerce and industry ministry and all other nodal departments, depending on a proposal.

Mayaram said individual departments have their views on the proposal.

HDFC Bank has proposed to increase foreign investment to 67.55 per cent from 49 per cent.

However, the catch is foreign investment in HDFC Bank is already close to the statutory cap of 75 per cent, according to a different calculation. Foreign institutional investors (FIIs) hold a 75.7 per cent stake in Housing Finance Development Company (HDFC), the parent company that owns 22.64 per cent in HDFC Bank.

According to the FDI policy that came into effect from February 13, 2009, if foreign entities own and control a company, its downstream investment would be taken as foreign investment. Besides, FDI, foreign institutional investors, non-resident Indians holding, American depository receipts (ADR), global depository receipts (GDR), convertible preference shares and foreign currency convertible bonds are treated as foreign investment under the new FDI policy.

At the end of March 2014, foreign institutional investment (FII) in the bank was 34.08 per cent, according to BSE data. Further, foreign investors hold another 16.97 per cent shares through ADRs and GDRs.

If parent HDFC's 22.64 per cent stake is also added, foreign investment in HDFC Bank would be close to 74 per cent.

In fact, both RBI and DIPP have opined that parent HDFC's 22.64 per cent stake in HDFC Bank should be considered foreign investment and not domestic, sources said.

The law ministry had suggested RBI, DIPP and the finance ministry take a view on the proposal of the country's second largest private bank.

However, the bank is of the view that its proposal was legally tenable as HDFC's holding in HDFC Bank should be exempt from new regulations, as the stake already existed when the new FDI policy came into being.