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Indian promoters of banks may be allowed higher stake

Sarbajeet K. Sen

NEW DELHI, April 3

PARITY may soon be restored for Indian promoters of domestic private sector banks, with the Ministry of Finance examining the possibility of permitting them to hold a higher stake, which might even go up to 74 per cent as was recently allowed for foreign direct investment in the sector.

At present, the holding for Indian promoters remains capped at 49 per cent, even though the FDI limit ceiling has surged past the level.

"We are looking into the pros and cons of allowing Indian promoters to have a larger holding in banks. The matter will be decided in consultation with the Reserve Bank of India," a senior official of the Ministry of Finance said.

Demands for being allowed a higher holding, preferably with the bar raised substantially to ensure parity with the FDI limit, was voiced by promoters after the recent Union Budget announcement which, for the first time, raised the maximum permissible foreign holding limit to 74 per cent.

Among those who have voiced the demand for a hike has been Mr Uday Kotak, promoter of the newest private sector bank, Kotak Mahindra Bank, who has expressed his unhappiness at not being allowed to hold a majority stake in the bank under the present regulations.

The RBI has asked Mr Kotak to prune his holding in the erstwhile non-banking finance company, Kotak Mahindra Finance Ltd, which stood at 60 per cent, to 49 per cent in the new bank to ensure conformity with the regulations. The reduction in the holding can be done through a public offer of equity or the induction of a strategic partner into the new bank.

Prior to the hike in the FDI limit in private banks, holding by both Indian promoters and foreign was capped at 49 per cent.

In fact, previous moves by the Government and the RBI suggested that they had preferred a level-playing field between the two sides. Thus, the cap on Indian holding was raised to 49 per cent from the previous 40 per cent after the FDI limit in banks was hiked to 49 per cent from the earlier 20 per cent.

While announcing the decision to allow the FDI cap to be raised to 74 per cent in banking companies, the Finance Minister, Mr Jaswant Singh, had said in his Budget speech that the move was aimed at facilitating the setting-up of subsidiaries by foreign banks and to attract greater foreign investment in the sector.

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