HDFC Bank may not get govt nod to raise FII limit

The bank has reached its 74% FII holding cap if parent HDFC's shareholding is considered

The Foreign Investment Promotion Board (FIPB), which is to meet on Wednesday to consider HDFC Bank's proposal for an increase in limit for foreign institutional investor (FII) stake, is unlikely to approve such a move. This is because the bank, according to the Reserve Bank of India (RBI), has reached its 74 per cent FII holding cap if parent HDFC's shareholding is considered.

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, the country's second-largest private-sector lender.

Asked by the finance ministry for its views, RBI is learnt to have opined that parent HDFC's 22.64 per cent stake in HDFC Bank should be considered foreign investment, not domestic.

"The composite cap on foreign investment in a bank is 74 per cent. The foreign holding in HDFC Bank, including that of its parent, is 73.73 per cent," a finance ministry official, who did not wish to be named, told Business Standard.

However, the bank on Monday stressed that its proposal was legally tenable. Managing Director Aditya Puri said HDFC Bank had got legal opinion from a Chief Justice and a Supreme Court judge 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 being.

"HDFC should not be taken as a foreign entity because it was already there. Normally, you do not have retrospective application of a law. When that law came in, HDFC already had the holding. Now you have changed the law; that will have to be for future," Puri said on the sidelines of an event, adding the bank was hopeful of an increase in the cap to 67 per cent.

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 through the automatic route. Increasing foreign shareholding beyond 49 per cent, up to 74 per cent, needs the approval of both the RBI and FIPB.

 

FIPB will take a final view on the issue at its meeting on Wednesday. According to the official quoted earlier, since the RBI saw HDFC's stake as foreign investment, the finance ministry's view was unlikely to be different.

Earlier, the finance ministry had sought the views of the law ministry, which had in turn asked the issue to be referred to the RBI and the Department of Industrial Policy & Promotion (DIPP).

If DIPP, which is yet to send its comments to the finance ministry, holds a different view at the FIPB meeting on Wednesday, a decision on the issue might be deferred.