Fungibility for FDI, FII stake in private banks to help spur capital flows

This is positive for Axis Bank, Yes Bank and Kotak Mahindra Bank

The move to allow full fungibility in foreign direct investment (FDI) and foreign institutional investment (FII) in Indian private banks will give these lenders good flexibility to raise capital. It will also spur capital flows into the banking sector, which will in turn help lenders meet the Basel-III norms.

Going forward, the total foreign holding in private banks will have a composite cap of 74 per cent, removing the sub-limits for FDI and FII.

According to Chanda Kochhar, managing director and chief executive of ICICI Bank, the decision to remove the sub-limit restrictions within the overall limit of 74 per cent for private banks would offer “greater flexibility to banks and investors”.

Among private sector banks, HDFC Bank (74 per cent limit is reached) and Kotak Mahindra Bank (49 per cent FII limit is reached) are under FII restriction list. Kotak Mahindra Bank will benefit as foreign holding can go up to 74 per cent, said Parag Jariwala, vice-president - institutional research, banking and financial services at Religare Capital Markets.

There is no immediate benefit for other private sector banks as they are outside FII restriction as of now. But, this is positive for private sector banks like YES and Axis bank - out of MSCI index as FII holding is near the maximum permitted so limited room for FIIs to buy.

A top executive with a private bank said these are essentially administrative reforms, which will make the process of raising capital simpler. “Earlier, if a bank had to raise capital, it had to prepare for both qualified institutional placement (QIP) and American depository receipt / global depository receipt. Now, it doesn’t have to do that. It can simply raise capital via QIP. So there will be more freedom to raise capital the way one wants, without worrying about sub-limits.”

Harish H V, partner, Grant Thornton India, also said the move would provide flexibility to banks. “It can attract more capital into the banking sector to support credit growth as well as meet the stringent capital adequacy norms under Basel-III.”

While the government was in favour of raising the overall cap on foreign investment to 100 per cent, the Reserve Bank of India had voiced reservations about this. The central bank’s concern is that such a move might blur the distinction between foreign banks operating in India and Indian banks with 100 per cent foreign investment.