The government will wait for the Reserve Bank of India to take the first step before deciding on whether to reduce the foreign investment cap on private sector banks to below 50 per cent from the current 74 per cent.Currently, the government is not in a mood to cut the cap, a proposal mooted in a discussion paper on entry of new banks, released by the RBI last year.
The finance ministry said it would wait for RBI guidelines, a development which will provide much relief to ICICI Bank and HDFC Bank.
Both are already known as Foreign Owned Indians Controlled entities, after foreign investment in them rose much above 50 per cent, following new norms of calculations by the commerce ministry.
"We are not thinking in terms of cutting the cap on foreign investment in private sector banks.
"The proposal is not under consideration. We will wait for RBI norms on new banks before taking any decision in this regard," a key official with the financial services department of the finance ministry told Business Standard.
The department of economic affairs in the ministry has already objected to the proposal, saying such a move was retrograde.
Officials in the department of industrial policy and promotion in the commerce ministry, which formulates policy in regard to foreign investment, also said they were not contemplating reducing the foreign investment cap to below 50 per cent.
DIPP officials said the issue was about reading the fineprint of Press Notes 2, 3 and 4 issued in 2009. The foreign investment cap in banks remains 74 per cent.
However, the rule says it's only automatically okayed till 49 per cent. Once it exceeds that limit, government approval is required, they added.
The press notes changed the way foreign investment was calculated in an entity, by including various types of investment from abroad -- FDI, FII, NRI, ADR, GDR and FCCBs -- in foreign investment.
This led to ICICI and HDFC losing their tag of Indian-owned banks.
Speculation on the government mulling a proposal to reduce the cap on foreign investment in private sector banks is doing the rounds after RBI mooted such a proposal in the discussion paper.
"Since the objective is to create strong banking entities and a diversified banking sector which includes public sector banks, domestically owned private banks and foreign owned banks, aggregate non-resident investment including FDI, NRI and FII in these banks could be capped at a suitable level below 50 per cent, " says the paper, floated in August last year.
It said a foreign investment limit below 50 per cent could be locked at that level for the initial 10 years.
Even though the proposal was mooted for new banks, if allowed entry, analysts believe separate norms on foreign investment rules, for new and existing private sector banks, respectively, are unlikely.
The paper gave pros and cons of such a proposal and noted such a policy would contravene the existing rules that cap foreign investment in private sector banks to 74 per cent.
The feedback received was also mixed. While feedback from non-bank financial companies said prescribing a cap below 50 per cent was incongruous with foreign investment in the NBFC sector permitted up to 100 per cent, those from industry associations had mixed reactions.
