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49 pc cap for foreign investment in pvt banks

Our Bureau

MUMBAI, Feb. 16

THE Reserve Bank of India has capped all categories of foreign investment in private banks at 49 per cent, ruling out majority holding (51 per cent). The ceiling of 20 per cent in public sector banks including State Bank of India (SBI) continues.

The RBI has made it easy for foreign banks to bid for private banks without extending the rule to government-owned banks.

Detailed guidelines issued by the RBI today state that foreign direct investment (FDI) from all sources in private banks under the automatic route is permitted up to 49 per cent while FDI in public sector banks, including SBI, is permitted up to 20 per cent.

For the purpose of determining the ceiling under the automatic route, the following category of shares will be included: a) IPOs, b) private placements, c) ADRs/GDRs and d) acquisition of shares from the existing shareholders.

Foreign banks having branch presence in India are eligible for FDI in private sector banks subject to the overall cap of 49 per cent with the approval of the RBI.

The RBI's clarification has not made any difference to the move of Bank Brussels Lambert (BBL) to buy the stake of the promoters in Vysya Bank. Mr Bart Hellemans, Deputy Managing Director, Vysya Bank, told Business Line, "This is only a clarification from the RBI. It no way changes the discussions that we are having with the promoters to increase our stake from 20 per cent to the maximum permissible limit."

The central bank has stated that under the Insurance Act, the maximum foreign investment in an insurance company has been fixed at 26 per cent. The application for foreign investment in banks, which have a joint venture or subsidiary in insurance sector, should be made to the RBI. The RBI in consultation with the Insurance Regulatory and Development Authority (IRDA) will consider such applications.

In a way, today's clarification also enables foreign banks in the country to bid for old and new private sector banks and hold a stake of up to 49 per cent. There have been reports of bidders for Centurion Bank and a host of other banks from many foreign banks operating in India. Some time ago, the chief of Citibank did express his wish to buy stakes in Indian banks.

The RBI also clarified that the issue of fresh shares under the automatic route is not available to those foreign investors who have a financial or technical collaboration in the same or allied field. This category of investors requires FIBP (Foreign Investment Promotion Board) or IRDA approval.

Further, the RBI has stated that the automatic route is not available to transfer of existing shares in a banking company from residents to non-residents.

"This category of investors requires approval of FIPB, followed by an in-principle approval by the Exchange Control Department of RBI," the guidelines state.

The RBI determines the fair price for transfer of existing shares broadly on the basis of the Securities and exchange Board of India (SEBI) guidelines for listed shares and erstwhile CCI (Controller of Capital Issues) guidelines for unlisted shares. After receipt of in principle approval, the resident seller can receive funds and apply to ECD for obtaining final permission for transfer of shares.

Transfer of shares of five per cent and more of the paid-up capital in private banks require RBI acknowledgement.

With regard to voting rights in banks, the RBI has said the maximum voting rights per shareholder will be 10 per cent of the total voting rights for private banks.

In respect of nationalised banks, as per statutory provisions, the maximum voting rights per shareholder (outside of Government) is also restricted to one per cent of the total voting rights.

For SBI, the maximum voting rights per shareholder (other than the RBI) is 10 per cent of the issued capital.

On disinvestment by foreign investors, the RBI has said that sale of shares by non-residents on a stock exchange and remittance of the proceeds thereof through an authorised dealer does not require RBI approval.

Sale of shares by private arrangement requires RBI's prior approval. The RBI grants permission for sale of shares at a price that is market related.

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