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Friday, Mar 19, 2004

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Money & Banking - Foreign Direct Investment
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Between devil and deep sea

P. Devarajan

AS of March 6, 2004, the combined shareholding of Government-controlled shareholders in ICICI Bank Ltd is 15.03 per cent (LIC: 7.85 per cent; GIC and government-owned general insurance companies: 6.59 per cent; other government-controlled institutions, corporations and banks: 0.59 per cent).

Other Indian investors: Individual domestic investors: 7.43 per cent; Bajaj Auto Ltd: 3.19 per cent; Indian corporates and others (excluding Bajaj Auto): 1.04 per cent; mutual funds and banks (other than government-controlled banks): 0.26 per cent; Total other Indian investors: 11.92 per cent.

Total Indian investors: 26.95 per cent.

Foreign investors: Deutsche Bank Trust Company Americas, as depository for American Depositary Reciept holders: 25.94 per cent; Allamanda Investments Pte Ltd.: 9.26 per cent; FIIs, foreign banks, OCBs and NRIs (excluding Allamanda ): 35.75 per cent. Total foreign investors: 73.05 per cent.

Going by the government circular on FDI investment in private sector banks (Jan.15, 2004), it will be hard for any class of investors to even think of grabbing board seats in ICICI Bank.

And even if an extant foreign bank thinks of acquiring majority stake in ICICI Bank, the bidder will have to dissolve existing operations and surrender the licence. It is happening in the case of ING Bank, with has dissolved its two foreign branches and merged it with ING Vysya.

The Finance Ministry and the RBI have decided against allowing foreign banks a free romp in the Indian banking industry, going by the January 15, 2004 circular. New Delhi and RBI are only following international practice in reining in the predatory ambitions of foreign banks.

Section 2 (c) of the press note is amply clear: A foreign bank may operate in India through only one of the three channels viz., (i) branch/es (ii) a wholly-owned subsidiary and (iii) a subsidiary with aggregate foreign investment up to a maximum of 74 per cent in a private bank.

Per se there is nothing to fault as Indian banks do not have a free say in foreign countries. In fact, branches of Indian banks in UK have to maintain a capital adequacy of 16 per cent when the parent banks in India have to maintain a minimum of 9 per cent, as the UK regulator is not comfortable with the Indian banking system.

A second filter has been put in place to trip any surge in bidding for Indian private banks by foreign and Indian investors. The Government has for the time being decided to stick to the 10 per cent cap on voting rights.

"Banking is not like any other industry," is the argument for the tough showing though the entire strategy could have been placed in public domain for an open debate. The banking Bills, which initially scrapped the ceiling on voting rights, have been altered and the revised version will be taken up by a new Parliament.

Politicians across the spectrum are not keen on the changes. The Narasimham Committee has favoured removing the limitations on voting rights but New Delhi and RBI are nervy over banks falling into the hands of either foreign or private interests.

The policy could and will be extended to nationalised banks, even when the Government brings down stake to 33 per cent.

"The public sector character of the nationalised banks will not be tampered with," said a top source.

The bank boards could be more professional with retail interests picking up stakes when banks make public issues to bring down government equity holding to 33 per cent. The RBI is quite likely to hold up anyone running away with a stake beyond five per cent as is now the case in Indian private banks.

Some top bankers are quite unhappy with the field being set for free entry of foreign and Indian corporates, at a time when the Indian banking system is still putting on muscles. All this makes sense, if the government-run banks have much to show.

Recently IFCI was merged with PNB, with RBI kept out of the deal; the matter was not referred to RBI, which in the first place regulates both the entities. Over the last 11 years, some Rs 30,000 crore of taxpayers' money went to boost the capital of banks after the Government-run banks were ripped off by political diktats from New Delhi.

Bank ownership by the Government and the private sector at least in India has not helped any, making a choice hard.

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