RBI clashes with the Government over FDI issues in Banks
Post By Harsh Chaudhary on 22-December-2015
The supreme authority in the Indian economic field, The Reserve Bank of India (RBI) has turned down a proposal from the government to allow up to 100% Foreign Direct Investment (FDI) in all types of Indian banks including the cooperative sector ones too this time. This move of RBI may come as a severe damper for the various leading private sector banks namely, ICICI bank, HDFC bank, etc.
According to the recent sources, the reason for the rejection of this proposal from the Department of Industrial Policy and Promotion (DIPP) which deals with the FDI policy; is not evident till now. But, in the past of Indian economy, the regulator has been working as a sensitive sector and opposing significant shareholding by different foreign investors, who are largely seen as short-term investors and enter the stock markets for short periods of time, solely to book profits. Thus, the department has been working to protect the economic integrity of the nation over the past years and regulating the foreign investments.
Private sector banks were generally expecting a higher ceiling and investors were hoping for a relaxation through this proposal. Recently, sources said that HDFC bank got permission for 74% foreign investment and was also found to be in breach of the norms laid down by the RBI for a short period for which the HDFC bank was penalized under the Indian Economic Services Act. A few years ago, in the draft norms for new startup banks, the RBI had suggested limiting the FDI to 49% against the 74% cap. The Finance Ministry of India, however, saw it as a retrograde step and asked the regulator to stick to the predefined ceiling. In fact, a few years before that, during the UPA’s tenure, the RBI and the Finance Ministry had undergone several internal cold wars on how the FDI norms should be applied, with the final discretion from the North Block saying that setting the foreign investment rules was very well in its domain.
Currently, the RBI permits 74% FDI in private banks, up to 49% of which are allowed under the automatic route. Foreign holdings beyond 49% need to be verified and cleared by the Foreign Investment Promotion Board (FIPB). Portfolio investment in the sector is capped at 49% and banking is the one of the segments where the composite caps have not been applied as the government argued that it is a “sensitive sector”.
In any case, there are sub limits on ownership by a group in a bank and even promoters are expected to cut their stake over a period of time to encourage wider public participation and reduce concentration of risk.