Multilateral Fis Allowed 40% Pvt Bank Stake

The government yesterday altered foreign direct investment norms for private banks, facilitating multilateral agencies like the World Bank and the Asian Development Bank to increase their stake up to 40 per cent of the paid-up capital of private banks. A press note by the department of industrial policy and promotion, ministry of industry, said the measure is taken "with a view to attract foreign direct investment up to the permissible 40 per cent in private sector banks".

Under the existing policy, there is a 40 per cent ceiling on foreign direct investments in private sector banks. Out of this 40 per cent, foreign banking companies or finance companies including multilateral financial institutions are allowed investments up to 20 per cent of the banks' paid-up capital.

Non-resident Indians (NRIs) are allowed equity participation in private banks up to 40 per cent, which is, howeve,r inclusive of the equity participation of the foreign investors indicated above.

Hence, the overall foreign investment in private banks is fixed at 40 per cent. But the new guidelines issued yesterday said that multilateral financial institutions would be allowed to contribute foreign equity to the extent of the shortfall in NRI contributions within the overall limit of 40 per cent.

This technically allows multilateral agencies to have a 40 per cent stake in private sector banks.

The press note by the ministry of industry, said: "With a view to attracting foreign direct investment up to the permissible limit of 40 per cent in private sector banks, in case of shortfall in NRI contributions, multilateral financial institutions would be allowed to contribute foreign equity to the extent of the shortfall in NRI contributions within the overall limit of 40 per cent". The finance ministry had last month permitted multilateral institutions to raise their stakes to 20 per cent of the paid-up capital of the banks. The foreign direct investment component in the banks' capital was retained at 40 per cent and NRIs could go upto the 40 per cent ceiling.

But in several banks the NRI investments are short of the 40 per cent ceiling. In IndusInd Bank for instance, the NRI promoters hold 25 per cent of the capital, while the public NRI holding is 8.13 per cent.

There is no foreign equity participation in the bank. Other private banks like the Times Bank, UTI Bank, and IDBI Bank also do not have any foreign equity holding in their banks.