Foreign banks get nod to establish 100% subsidiaries

The government permitted foreign banks to set up 100 per cent subsidiaries in India with a rider that they can acquire a maximum of 74 per cent in existing private banks.

As a result, foreign banks which intend to subscribe to the entire paid-up capital of an Indian bank would have to either convert their existing branch into a wholly owned subsidiary or seek a licence from the Reserve Bank of India to set up a new bank.

"A foreign bank will be permitted to establish a subsidiary through acquisition of shares of an existing bank provided at least 26 per cent of the capital of the private sector bank is held by residents at all times," an official release said.

The foreign investment limit in public sector banks would, however, remain unchanged at 20 per cent.

Following a Cabinet decision in January, the government has notified that foreign investment in private banks, including those through the foreign direct and institutional investment and overseas corporate body routes, as well as those subscribed by non-resident Indians, would be increased to 74 per cent from the earlier 49 per cent.

A large number of foreign banks including ABN Amro and HSBC were looking at higher foreign investment levels before converting their existing branches into subsidiaries.

The government has also put the sector on the automatic route, thus doing away with the need for Foreign Investment Promotion Board (FIPB) approval. But transfer of shares under FDI from residents to NRIs will require FIPB clearance.

The government also notified changes to the limits under the portfolio investment schemes for FIIs and non-resident Indians, for investment in banks.

In case of FIIs, the Centre has stipulated that individual FII holding in a bank would be restricted to 10 per cent, while the aggregate of all such FII holding can be up to 49 per cent, subject to a board resolution by the bank, followed by special resolution at the general body meeting.

It would otherwise have to be retained within 24 per cent.

In the case of NRI investments, the individual limit has been fixed at 5 per with the aggregate ceiling at 10 per cent, which can also be increased to 24 per cent through a special resolution.

The notification also stipulated that foreign banks would be required to choose between having a branch or a subsidiary in India.

Foreign banks which are regulated by a banking supervisory authority in the home country will be allowed to hold 100 per cent paid up capital to enable them to set up a wholly-owned subsidiary. The detailed guidelines for wholly-owned subsidiaries will be issued by RBI later.

It also said that RBI and Insurance Regulatory and Development Authority would jointly monitor the foreign investment level in case of foreign banks acquiring stake in insurance companies.