Private sector banks, such as ICICI Bank and HDFC Bank, that have majority foreign holding will not be considered foreign banks under a compromise solution thrashed out between the Reserve Bank of India and the government.
The updated foreign direct investment policy that is expected anytime could give a special status to these banks, on par with Indian-owned banks.
This will mean that these banks will not face any restriction on their downstream investments that are applicable to foreign companies.
"The broad understanding is that these banks may be foreign-owned but are controlled and run by Indians and needed to be treated like domestic banks," a government official privy to the discussions told ET.
Officials from RBI and departments of industrial policy and promotion, economic affairs and financial services last month had decided to work out a new formulation to ensure that these banks are not constrained by the FDI rules when they pick equity though strategic investments, corporate debt restructuring or treasury operations.
A policy revamp in 2009 had said that any company with more than 50% overseas investment would be considered foreign-owned.
It also expanded the definition of foreign investment to include FDI, foreign institutional investment, shares owned by non-resident Indians, foreign currency convertible bonds and convertible preference shares.
As per this rule, many private banks such as ICICI Bank, HDFC Bank, ING Vysya, Development Credit Bank, Federal Bank, IndusInd Bank and YES Bank became foreign banks under the FDI policy.
HDFC Bank, for instance, had 47% foreign holding though FII investments and depository receipts alone at the end of December 31, 2011.
What hurt these banks more was another proposal that said that any investment by a foreign company in an Indian venture would be considered foreign investment, subject to various sectoral limits and restrictions.
This meant these banks could, for instance, not set up wholly owned insurance venture where only 26% FDI is allowed.
Classification as a foreign-owned bank also exposed them to regulatory restrictions such as opening new branches.
The banks and the RBI had taken up the issue with the finance ministry and the department of industrial policy and promotion, but the issue could not be settled.
The clarification will ensure that Indian private banks that have majority foreign ownership will enjoy the same rights as majority Indian-owned bank.
"This move will provide the much-needed clarity, certainty and regulatory flexibility to these institutions," said Punit Shah, partner (tax & regulatory services) at KPMG.
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