Decks cleared for 74% FDI in weak private banks

Panel also clears RBI's proposal to reduce its stake in SBI to 51%.

In a move that clears the decks for 74 per cent foreign direct investment in weak private banks, the Parliamentary Standing Committee on Finance has approved the necessary amendment to the Banking Regulation Act.

B C Khanduri, chairman of the committee, said the 74 per cent FDI limit has been approved along with a proportionate hike in voting rights. At present, the voting rights is capped at 10 per cent irrespective of the FDI limit, now at 49 per cent.

The Reserve Bank of India had submitted the draft proposals in February 2005 for the committee's approval.

In addition to this, the committee has also approved reduction of the RBI's stake in State Bank of India to 51 per cent from the current level of 59.73 per cent.

This comes as a shot in the arm for SBI, which proposes a second public issue. It will be also raising around Rs 3,000-4,000 crore from the debt market. These funds will be used for overseas expansion and funding of domestic assets. At present, foreign institutional investors and public hold 20 per cent each in the bank.

SBI has also approached the Union government for a stock split in its three associate banks and doing away with the cap on individual shareholding limits in these banks.

Currently, individual shareholders are not allowed to hold more than 200 shares in SBI's three associate banks, which are listed. Foreign direct investment in banking, on the other hand, has been a bone of contention between the government and the RBI.

Initially, the RBI had preferred hiking the FDI to 74 per cent in banking without proportionate hike in voting rights. Later it had agreed for increase in voting rights to 15 in an incremental manner.

However, in the draft guidelines, the RBI had recommended hiking the FDI to 74 per cent in weak private sector banks till 2009. After 2009, the foreign banks will be allowed to pick up 74 per cent in other banks as well.

The committee has also approved the proposal to allow the RBI to supersede the board of co-operative banks following financial irregularities.

However, it has categorically pointed out that the administrator of the bank will have to be a professional in law, finance , banking or accountancy, and not a bureaucrat.