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Foreign investment in an increasing number of Indian banks is close to hitting the upper limit set by the government, shrinking the headroom available for offshore investors to buy more.

Several banks have been witnessing sustained institutional buying of late, driven by hopes of better prospects for the sector. The security enforcement law, hopes of post-polls reforms in the sector and rumours of a greater consolidation in the days to come may have buoyed the sentiment, feel analysts.

The net foreign holding (including FII, NRI, OCB and GDR) in two large PSU banks - Bank of Baroda (BoB), Oriental Bank of Commerce (OBC) - and a small private bank - Centurion - has already reached the trigger limit of 18% and 72%, respectively.
Recently, ICICI Bank, the second largest bank in the country, saw the foreign holding rise to 72% of its equity capital. The holding has risen above the trigger limit at 72.7%, as reflected in the shareholding pattern for the quarter ended March '04. Of this, 46.7% is held by FIIs, while nearly 26% is in the form of ADS holding. However, subsequent to the share allotment of its recent public issue, the combined foreign holding will come down.

Under the new foreign direct investment (FDI) guidelines, the total foreign holding in private sector banks cannot exceed 74% of the equity capital. The central bank has fixed a trigger level of 72% to ensure that investment plans in the pipeline do not result in foreign shareholding breaching the limit. In the case of public sector banks, which are governed by the Banking Companies (Acquisition & Transfer of Undertaking) Act, the upper limit for foreign holding is fixed at 20%, with the trigger limit at 18%.

State Bank of India (SBI), the largest commercial bank in the country, has a total foreign holding of 19.3%, including the 11.4% held by FIIs and 7.9% by GDR holders. The banking behemoth wants the government to exclude GDR from the foreign holding limit, but no action has been taken on it.

There are several other non-banking companies who have hiked their respective FII holding limits. FII holding in companies such as Moser Baer, SSI, Alok Inds, Amtek Auto and Suven Life Sciences has been going up steadily, following which the companies have decided to hike the upper limit.

Alok Industries and Amtek Auto have hiked the FII limit to 49% from 22%, while Suven Life Sciences and Moser Baer India have passed necessary resolutions for raising FII limits to 40% and 74%, respectively.
Foreign holding in M&M and MphasiS have touched the 22% limit, subsequent to which RBI has barred any further FII purchases in the two companies without its prior approval.

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