Private lenders such as Kotak Mahindra Bank, YES Bank, Federal Bank and Axis Bank will be key beneficiaries of the Centre moving towards a composite cap of 74 per cent on foreign investments in private banks. In July, the Cabinet had allowed composite foreign investment caps, merging all forms of foreign investments. The composite caps applied on most sectors except defence and private banking.
The sectoral cap in private banks was 74 per cent where the foreign portfolio investment (FPI) limit was 49 per cent. But the government has now removed the sub-limit restrictions within the overall sectoral limit of 74 per cent for private sector lenders.
According to a press note released on Monday, “the Centre has decided to introduce full fungibility of foreign investment in banking-private sector. Accordingly, FIIs/FPIs/QFIs, following due procedure, can now invest up to sectoral limit of 74 per cent, provided that there is no change of control and management of the investee company.”
From a capital-raising perspective, private banks now have more headroom to increase their FPI holding. Earlier banks wanting to raise additional funds were unable to do so, because they had reached the FPI limit of 49 per cent.
But now private banks, particularly those that have been edging close to their FPI limit, such as Axis Bank (42 per cent), YES Bank (41 per cent), Kotak Bank (34.7 per cent) and Federal Bank (30.5 per cent), can raise funds from overseas and have headroom to increase foreign investment.
ICICI Bank and HDFC Bank already have very high foreign holdings.
As of September 2015, FIIs had a 38 per cent stake in ICICI Bank. But foreign stake — includes shares held by foreigners, including promoters, non-resident Indians, overseas corporate bodies, qualified foreign investors and foreign direct investment — stood at about 67.7 per cent. This means that the bank’s foreign investment level can go up by only 8 per cent.
In the case of HDFC Bank, while the FII holding is 32.4 per cent, the overall foreign holding is 73 per cent. This is because the 21.5 per cent holding by parent Housing Development Finance Corporation (HDFC) in the bank is considered to be foreign investment. This means that HDFC Bank can increase foreign investment by only 1 per cent.