The department of Industrial Policy and Promotion (DIPP) under the Ministry of Commerce is of the view that Indian private sector banks breaching the sectoral cap of 74 per cent under the new Press Notes 2, 3 and 4 should be treated as Indian companies of foreign origin.
“It will be like any other Indian company of foreign origin. The issue is being looked into by an inter-ministerial group, but DIPP thinks there is no need for a clarification to the Press Notes related to the banks specifically, since there are so many such companies operating in India. Any downstream investment by such companies in other ventures thus will be a foreign holding. The Press Note cannot be changed for banks alone.”
The mode of calculation of foreign holding prescribed in new guidelines released under the mentioned Press Note have made many Indian private sector banks to be classified as of foreign origin.
Highly placed sources said that though all banks are breaching the sectoral cap, the structures and nature of the shareholding defining them as foreign differ from bank to bank. They added that this is because various instruments through which foreign holding is defined may or may not have voting rights or other clauses, which offer control.
“Therefore, these cases will be treated individually as and when they come for any downstream foreign investment depending on whether or not these instruments have voting rights or other factors defining control,” they said.
Downstream investment is defined as an investment by a parent company to form a new entity either alone or in joint venture with others.
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Official sources in Reserve Bank of India, however, said while they sought a clarification when the Press Notes were issued in February 2009, it did not make any difference in treatment of these banks as far as banking operations were concerned. The sectoral cap and treatment of a bank as foreign comes only when it invites foreign investment or participate in any other ventures.
“These Press Notes were issued almost a year ago. They do not change the status of Indian banks as far as RBI is concerned. Their domestic status is retained for branch licensing and other banking related approvals. A clarification is needed only to check their foreign investment,” the sources added.
Ministry sources said that even if there was no clarification to the Press Notes 2, 3 and 4, the Foreign Investment Promotion Board last week rejected the case of EADS Deutschland, Germany, for a joint venture with Larsen & Toubro for manufacturing and servicing of defence equipment in India.
Official sources said even though the case was made as per the mentioned Press Notes, it was scrutinized by the board for contravention of sectoral caps in the joint venture, both from the view of ownership and control structure.
Therefore, this was a test case to justify that the language of the Press Note is not the only criterion. The underlying meaning has to be analyzed. For this, while the clarification is necessary, it can be done without it for sensitive sectors where there are concerns or references from other regulators.