RBI stalls IFC stake in Fed Bank

The RBI has equated IFC with foreign financial institutions, thus blocking the move.

International Finance Corporation's (IFC) acquisition of 7.77 per cent stake in the Kerala-based Federal Bank has hit a roadblock.

The Reserve Bank of India (RBI) has put on hold its clearance for the purchase of the stake by the World Bank's private sector financing arm from ICICI Bank. IFC finances and provides advice for private sector ventures and projects in developing countries.

Banking sources said RBI has equated IFC with foreign financial institutions and the purchase of shares goes against the central bank's restrictions on acquisition of shares in a private sector bank in excess of 5 per cent.

In its February 2005 guidelines on ownership and governance in private sector banks in India, RBI had stated that banks, including foreign banks having branch presence in India and financial institutions should not acquire any fresh stake in a bank's equity shares, if by such acquisition, the investment bank/FI's holding exceeds 5 per cent of the investee bank's equity capital.

Sources said the IFC issue may lead to a bigger policy issue of whether there should be a separate guidelines on shareholding of multilateral agencies and international financial institutions in Indian financial service entities.

IFC currently has 5 per cent stake in the Bangalore-based ING Vysya Bank. It also had stakes in Centurion Bank and the failed Global Trust Bank. The ownership guidelines also stated that the 5 per cent stake norm would apply to foreign direct investment other than by foreign banks or foreign bank group.

Any acquisition of shares in a bank in excess of 5 per cent requires the acquirer to seek the Reserve Bank of India's approval.

ICICI Bank had sold a total of over 20 per cent stake in Federal Bank to adhere to the RBI guidelines. ICICI Bank exited Federal Bank with the sale of a 7.77 per cent stake in the small-sized bank to IFC.

CMW adds: Kerala-based Federal Bank is actively scouting for an acquisition in its neighbourhood, executive director K S Harshan said today.

"We wish to conclude at least one acquisition by this year end (2006-07)," Harshan said on the sidelines of a global banking summit, organised by Federation of Indian Chambers of Commerce and Industry and Indian Banks Association.

The bank intends to follow an inorganic growth strategy through mergers and acquisitions in the south, south-west, west, and north of India.

The bank may raise Tier-II capital to fund its acquisitions, Harshan said.

"We have headroom to raise up to Rs 400 crore as Tier-II capital. However, we will decide on raising funds based on the deal arrived at with the bank to be acquired, whether it will be cash based or through a share swap," he said.

Federal Bank has tied up with Infosys to implement core banking solution Finacle in its branches. "The pilot will start rolling out by November across 15 branches. After 60 days, we will roll it out in the rest of the branches one by one," Harshan said. Shares of

Federal Bank ended at Rs 211 on the National Stock Exchange, up 5 per cent from Wednesday.