The government will exempt some equity purchases by leading private sector lenders such as ICICI Bank and HDFC Bank from being counted as foreign investment, but these firms will continue to sport the ‘foreign bank’ tag.
Non-strategic equity investments from the banks’ treasury operations or from the conversion of stressed corporate debt will not be counted as foreign investment, said a government official privy to the development.
But the government is unlikely to make any change in its foreign investment policy that counts an entity as foreign owned if overseas investment in it exceeds 50%.
Both ICICI Bank and HDFC Bank have more than 50% foreign investment, which make them foreign banks under the new investment norms. Overseas investors can hold up to 74% in private banks.
Their ‘foreign-owned’ tag will also not impose any restriction on opening new branches, unlike in the case of other foreign banks. ICICI Bank declined comment on the matter while HDFC Bank officials could not be reached.
The relaxation of norms follows lengthy consultations on the foreign direct investment (FDI) guidelines issued in 2009 between the finance ministry, department of industrial policy & promotion under the commerce ministry and RBI.
The policy unveiled a new methodology for calculating foreign investment in a company.
Under the new methodology, any company with more than 50% overseas investment would be considered foreign-owned. According to the policy all types of overseas ownership, FDI, foreign institutional investment, shares owned by non-resident Indians, those listed abroad, foreign currency convertible bonds and convertible preference shares, will be counted as foreign investment.
Seven leading banks, ICICI Bank, HDFC Bank, ING Vysya, Development Credit Bank, Federal Bank, IndusInd Bank and YES Bank, became foreign banks overnight under the new norms.
The proposal that affected Indian banks the most was that all investment by a majority foreign-owned company was to be considered foreign investment, subjecting them to restrictions and sectoral FDI caps. These banks and banking regulator RBI took up the issue with the finance ministry shortly after the policy was announced.
If a majority foreign-owned private bank lends to a sector such as multi-brand retail and the loan becomes a non-performing one, then it would not have been able to convert that loan into equity as that would have been considered as foreign investment, which is not allowed in multi-brand retail.
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