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New FDI guidelines may be amended for banking sector |
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The new foreign direct investment (FDI) norms may get revised for the banking sector in India to avoid any adverse disagreement for Indian banks with majority foreign equity.
Any downstream investment by a firm with more than 50 per cent foreign equity will be considered as FDI under the new regime, as defined by Press Notes 2, 3 and 4.
Hence, banks such as ICICI Bank, which have more than 50 per cent foreign equity, will be treated as foreign-owned but Indian-controlled entities and any downstream investment by them will be subject to FDI restrictions.
Recently, the Reserve Bank of India had said to the finance ministry that the press notes, released by the Department of Industrial Policy and Promotion (DIPP) in February 2009, could influence seven Indian private sector banks.
The central bank observed that as per the provisions of the these press notes, ICICI Bank, ING Vysya, YES Bank, HDFC Bank, Development Credit Bank, IndusInd Bank and Federal Bank are foreign-owned Indian-controlled banks.
Therefore, their downstream investments will have to obey restrictions applicable to the FDI route. As per DIPP feels, since banking is a regulated sector, it may need some additional provisions on FDI.
A government official stated, "The issue will be examined, followed by inter-ministerial consultations between DIPP, Department of Financial Services, Department of Economic Affairs and even the RBI. If there is a consensus in these discussions that specific relaxations need to be provided to the banking sector, they would be carried out."
The new regulations will come into effect only after they are notified under the Foreign Exchange Management Act (FEMA). However, this process will take time due to inter-ministerial consultations.
ICICI Bank has communicated to DIPP, stating its current shareholding pattern, and asking for a clarification on its status. The official added, "DIPP has not received any other communication from other banks."
The official further added, "Concepts like ownership and control, which were incorporated in the FDI policy for the first time, ensure this. These definitions were finalised after consulting legislation like the Companies Act, lawyers and industry experts."
DIPP said that the new FDI guidelines were finalised after inter-ministerial discussions and approved by the Union Cabinet, after the nod of a Group of Ministers headed by Finance Minister Pranab Mukherjee.
Press Note 2 broadly means that downstream investments by companies having more than 50 per cent shareholding by Indians, and majority Indian directors, need not follow FDI related restrictions like sectoral caps.
As per Press Note 3, government approval is necessary for transfer of ownership or control of Indian companies to overseas firms and individuals. According to Press Note 4, companies are divided into four categories based on their type of operations investing or operating or both.
(Posted on : 28/04/2009)
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| New FDI guidelines may be amended for banking sector |
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