Of late, the Indian banking sector has been in the limelight. The reasons are several. This article focuses on the grueling issue of foreign investment through various routes in Indian banks and its trends and patterns over the last couple of years. The foreign investments are basically in the form of FDIs, FIIs, PISs, IPOs, etc. This article tries to make a comprehensive study on the foreign investment pattern in Indian public sector banks, as well as in the private sector banks.
Foreign investment in the Indian banking sector is regulated by the government's Foreign Direct Investment (FDI) policy. For any nationalized bank, a ceiling of 20% on all types of foreign investments in the bank's paid up capital has been stipulated in terms of the provisions of the Banking Companies Act 1970/80. When it comes to investments by Non Resident Indians (NRIs), it is restricted to 40% of the paid up capital and 20% with respect to FDIs. This is also subjected to the condition that the combination of FDI and NRI investment should be within the prescribed limit of 40% foreign equity in the sector. FIIs were allowed to acquire 24% in addition to the 40% prescribed limit.
With the road map pertaining to the foreign holding in Indian private sector banks yet to come out in the open, the central government stands by the March 5, 2004 notification, which states that, foreign banks can acquire up to 74% equity in Indian private banks. But, at the same time, it is to be noted that in spite of such holding pattern, the present cap of foreign share holding does not make much sense, as irrespective of the holding size, foreign shareholders are only allowed to exercise 10% of the voting right.
Interestingly, if one goes carefully through the draft document of the RBI (as seen in the box-1), it is seen that the ceiling of 74% applies to the aggregate foreign investment in private banks from all the sources namely the FDI, FII and NRIs. There can be enough reasons to validate the finance minister's willingness (read as eagerness) to allow foreign participation in private banks. Allowing foreign participation in the equity stake can lead to substantial liquidity in the banking sector. But at the same time, one should take cautious steps as to where the promoters' money is channeled. With problems of the Global Trust Bank still fresh in the mind, one needs to be careful as to the shareholding patterns in banks. |
