The Hindu Business Line : Private bank FDI cap only at 74 pc

The Ministry of Finance has decided that the FDI limit would be capped at 74 per cent and not at a higher limit as was being contemplated due to the ambiguous announcement made by the Finance Minister, Mr Jaswant Singh, during his presentation of the Union Budget.

Speculation in the banking industry has been rife about the eventual limit that would be fixed ever since Mr Singh said in his Budget speech that the FDI limit in private banks would be raised to "at least 74 per cent."

Prior to this, the maximum permissible FDI limit in these banks stood at 49 per cent.

"For the time being, the cap would be 74 per cent. A higher limit would not be permitted," a top official of the Ministry of Finance said.

However, foreign interest in private banks can be 100 per cent of the paid-up capital given the current level of investment allowed by foreign institutional investors (FIIs).

Under the existing norms, which are still applicable, FIIs are allowed to hold 49 per cent over and above the FDI limit in banks. "The FII norms have not been touched. They remain as they were earlier," officials said.

Thus, earlier, FDI and FII investment could total 98 per cent in a private bank with a maximum cap of 49 per cent in each of the segment.

With the raising of the FDI cap and no change in FII norms, even the remaining two per cent holding can now be lapped up by foreign investors should a bank so desire.

The move to raise the FDI cap has ostensibly been done to facilitate the setting up of subsidiaries by foreign banks and to attract greater investment in private banks in the country.

Private sector banks have welcomed the move on FDI. In fact, a couple of private banks such as Centurion Bank and ING Vysya Bank would be immediate gainers from the move.

The earlier 49 per cent cap was coming in the way of Centurion Bank in offering any sizeable amount to a strategic partner that it had been looking for. The total foreign holding in the banks was around 37 per cent from various sources, including Keppel Bank and ADB, thereby leaving very little room for bringing in another strategic investor.

On the other hand, the ING group's stake in ING Bank had reached a shade over 43 per cent though it was willing to breach the 49 per cap if permitted under the regulations.

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