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THE contentious issue of foreign ownership in local banks is set to be resolved. The Reserve Bank of India (RBI) has suggested to the finance ministry that foreign investment in local banks in the form of American depository receipts (ADRs), global depository receipts, foreign currency convertible bonds and any type of convertible warrants be excluded while calculating the foreign direct investment (FDI) limit for Indian banks.

“The RBI is of the opinion that these forms of foreign investment are quasi-equity and, therefore, should be treated as such,” said a finance ministry official, who did not want to be identified.

The controversy was triggered when the department of industrial policy and promotion (Dipp) issued Press Notes 2,3 and 4 this February, which suggested changes in the rules for calculating FDI. The Press Notes, which are rules for overseas investment in Indian firms, said FDI calculations should club both direct and indirect foreign investments. Going by these norms, a few Indian banks, including leading private banks ICICI and HDFC Bank, besides ING Vysya, run the risk of being deemed foreign.

   ICICI Bank and HDFC Bank have written to the government seeking a clarification on the issue. The government is likely to issue one soon, which would put banks outside the purview of the Dipp-suggested method of calculating foreign investment.

Ownership Terms Remain Critical

THE total foreign holding in ICICI Bank is close to the maximum permissible limit of 74%, with ADRs accounting for 29.07%. In the case of HDFC Bank, the ADR holding is 18.8%. If ADRs or GDRs are excluded while determining whether a firm is foreign-owned, these banks would not be impacted by the rules drafted by DIPP.

The logic is that since ADR and GDR holders do not have voting rights, it hardly makes sense to be guided by a rigid definition of foreign ownership. For these banks, clarity on this issue is important as the definition of whether they are foreign-owned or localowned will impact their local business plans and expansion. For foreign banks, there are several fetters on local expansion.

According to government rules, a company that has more than 50% of foreign investment would be considered foreignowned, even if the management and control lies with Indians. Moreover, if indirect foreign investment in an Indian company exceeds 50%, its investment in subsidiaries will also be treated as foreign investment. The downstream investments of these banks will also be counted as FDI, barring it from investing in sectors that have caps, such as banking itself. Foreign capital forms a substantial portion in the capital structure of both ICICI Bank and HDFC.

   The controversy is not new. In 2007, former RBI deputy governor V Leeladhar had remarked of ICICI Bank and HDFC Bank that they “could be considered as incorporated in India but predominantly foreign-owned”. 

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