The Hindu : FDI ceiling raised to 74 p.c.

Online edition of India's National Newspaper
Saturday, Mar 06, 2004

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Business

FDI ceiling raised to 74 p.c.

NEW DELHI, MARCH 5. The Government today hiked the foreign investment ceiling in private banks from 49 to 74 per cent and allowed foreign banks to set up subsidiaries in the country.

A Government notification said the overall foreign holding of 74 per cent would include foreign direct investment (FDI), foreign institutional investments (FII), NRI investments, initial public offers, private placements and ADRs/GDRs.

Individual FII holding cannot exceed 10 per cent while the aggregate FII limit would be restricted to 26 per cent, which can go up to 49 per cent through the approval of the bank's board. The Government also allowed foreign banks to open subsidiary in the country or operate through branches or a private bank with a maximum holding of 74 per cent stake.

This assumes importance for foreign banks such as HSBC, ABN AMRO Bank, Standard Chartered Bank and Nova Scotia which are eyeing subsidiaries in India following the relaxation of FDI norms.

A foreign bank can set up a subsidiary either through conversion of existing branches into a subsidiary or through a fresh licence from the Reserve Bank of India. The FDI hike in the banking sector was first suggested by the N. K. Singh panel but the Union Finance Ministry and the RBI had added a slew of stringent conditionalities to prevent ownership of banks going into wrong hands.

The FDI ceiling will not be applicable for PSU banks while the limit remains at 26 per cent for insurance companies.

The RBI will separately issue the guidelines for foreign banks to set up wholly-owned subsidiary and such a subsidiary would be subjected to licensing requirements broadly consistent with those for the new private sector banks.

Foreign banks have to intimate the RBI when they hike stake in a private bank by over 5 per cent of the paid-up capital.

Applications for foreign investments in private banks having joint ventures in the insurance sector would be addressed to the RBI for consideration in consultation with the Insurance Regulatory and Development Authority. This was necessary to ensure that the 26 per cent equity cap in the insurance sector was not being breached.

Wholly-owned subsidiaries of banking companies regulated by a financial regulator in the host country would be permitted to hold 100 per cent equity.

Although the FDI limit has been hiked, the Foreign Investment Promotion Board approval will be required for transfer of shares from residents to NRIs under the Foreign Exchange Management Act. — PTI

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