RBI may save HDFC Bank, ICICI from new FDI rule

The central bank may classify them as foreign-owned Indian banks.

The Reserve Bank of India (RBI) may come to the rescue of banks, such as ICICI and HDFC Bank, which are majority owned by foreign funds or entities.

RBI is likely to soon issue a notification classifying them as “foreign-owned Indian banks”, even as the Department of Industrial Policy and Promotion (DIPP) is firm that any company with more than 51 per cent foreign equity should be considered as a foreign company. This definition was included in foreign direct investment (FDI) guidelines issued in February 2009.

While the DIPP has said that such banks — ICICI Bank, HDFC Bank, ING Vysya Bank, IndusInd Bank and Yes Bank — are “foreign banks”, the banking industry says despite the equity structure, majority voting rights are with Indians.

The issue was raised by ICICI and HDFC Bank, which came under the scanner, as foreign stakes in these two are about 77 per cent and 64 per cent, respectively.The two filed complaints with the finance ministry and RBI against the new definition and sought clarifications.

“RBI can issue a notification and provide relaxation by stating that these banks are foreign-owned Indian banks, but there will be no changes in FDI norms. Also, no exceptions will be made. RBI as well as finance and commerce ministries are on board on this. However, in case some banks face an issue, RBI can provide relaxations, as they continue to be governed by its licensing rules,” a senior government official told Business Standard.

Last month, Commerce and Industry Minister Anand Sharma said the new rules were “doing very well” and had been introduced after extensive inter-ministerial consultations, besides talks with all stakeholders. He said some banks were having problems with the new rules and discussions had taken place among finance ministry, commerce ministry and RBI officials.

At present, 74 per cent FDI is permitted in private banks.

According to the rules issued under Press Notes 2, 3 and 4, companies with more than 51 per cent foreign investments will be classified as foreign owned. Also, investments by their subsidiaries will be considered as foreign investments. The press notes were brought under the consolidated FDI policy released on March 31.

The banks also fear if their investments in subsidiaries, particularly insurance, are classified as foreign investments, they may face problems since the FDI cap in the sector is 26 per cent.

The new rules also say that investments by foreign institutional investors, convertible debentures, Global Depository Receipts and American Depository Receipts will be considered to calculate the total foreign investment in a company.