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Private sector HDFC Bank today said parent HDFC, which is majority-owned by FIIs, shouldn't be considered as foreign because changes in the law defining overseas stake in a firm cannot apply retrospectively.
The remarks come in the backdrop of RBI banning foreign investors from picking up more shares in HDFC Bank.
Under the present laws, with HDFC's 22% stake, foreign holding in HDFC Bank exceeds the permissible limit of 74%.
HDFC Bank, however, says HDFC held the stake in its before 2009 and changes in law cannot apply retrospectively.
"We have got legal opinion from one (former) chief justice and another (former) Supreme Court judge, which fundamentally says that since HDFC's holding was there in HDFC Bank prior to the law on deemed foreign companies being passed, that they should be grandfathered," HDFC Bank MD and CEO Aditya Puri said.
"Normally, you do not have retrospective application of the law. So, when that law came in, HDFC already had the holding. Now you have changed the law, that will have to be for future," he added.
At the end December, 2009, FIIs held 59.37% in HDFC.
The government had amended the foreign holding definition in 2009, under which an entity with over 50% overseas investment or controlled by foreigners, is considered foreign-owned.
Parent HDFC is considered foreign as FIIs hold 74% stake in it as on December, 2013.
As per the existing norms, a bank is required to take FIPB approval for increasing its foreign shareholding limit (FII and FDI) beyond 49% and up to 74% respectively. The investment till 49% can be done through automatic route.
As the foreign holding limit in the bank was breached, the RBI had directed that no further purchases of HDFC Bank shares would be allowed through stock exchanges on behalf of overseas investors, including NRIs, persons of Indian origin and holders of depository receipts.
Apart from HDFC's 22.64%, foreign institutional investors own 34.08% in the bank, 0.03% is with qualified foreign investors, 0.33% with NRIs and 16.97% with overseas depository receipt holders.
Puri said the bank has taken the advice of former Chief Justice of India SP Bharucha and former Supreme Court judge B N Srikrishna on the matter, to come to this conclusion.
