Other downstream investment by Indian-owned foreign banks to be treated as FDI.
Two of India's largest private sector lenders — ICICI Bank and HDFC Bank — have succeeded, albeit partially, in their attempt to retain the Indian tag. Investment by these banks and others, where foreign shareholding exceeds 50 per cent, in their subsidiaries will be treated as foreign investment with insurance being the sole exception, they have been told.
Currently, there are five such lenders in India, including IndusInd Bank, ING Vysya and Yes Bank. These banks were classified as foreign banks when the norms were altered in February 2009. Since then, these lenders, which are private sector Indian banking companies, have been petitioning the department of industrial policy and promotion (DIPP), the finance ministry and the Reserve Bank of India for a review of the norms.
“It has been clearly communicated to the banks that they are foreign-owned Indian banks as they are registered in India but their equity is owned by foreigners for purposes of downstream investment. They are companies owned by foreigners. They have the right to open branches, as they are registered here and they are not like foreign banks. But if they invest in any subsidiary, except in their insurance businesses, then that investment would be treated as FDI (foreign direct investment),” a DIPP official told Business Standard.
DIPP, the nodal agency for FDI policy, is expected to soon release a detailed clarification on how the downstream investment would be calculated, the official said, requesting anonymity. The issue was initially raised by ICICI Bank and HDFC Bank, whose ownership had come under the scanner in the backdrop of new norms as foreign stakes in these two banks are 77 per cent and 64 per cent, respectively.
“A problem would arise when the banks intend to put in money into sectors that have specified FDI caps on them because that would be calculated as FDI,” said a Mumbai-based banker who refused to be identified.
“This (the DIPP move) would impact the subsidiary businesses of the banks. They would now be more cautious in making any downstream investment, as the new rule would definitely act as a big deterrent. It might also lead to some restructuring of the groups in their shareholding patterns to comply with the norms,” said Punit Shah, leader of financial services (taxation) at KPMG.
| Who’s affected? > ICICI Bank, HDFC Bank, IndusInd Bank, ING Vysya and Yes Bank Why? > Foreign shareholding of these lenders exceeds 50 per cent What will happen? > They will be more cautious in making downstream investment > May lead to restructuring of shareholding pattern |
An exemption from including insurance subsidiaries would particularly help ICICI Bank-promoted ICICI Prudential Life and ICICI Lombard General Insurance, as foreign investors hold 26 per cent each in the two joint ventures. If ICICI Bank’s holding is treated as foreign holding, there would be a breach of the sectoral foreign investment ceiling of 26 per cent for insurance.
The fate of HDFC Standard Life and HDFC Ergo are, however, unclear as the companies are promoted by HDFC, which operates like a holding company with HDFC Bank also as a subsidiary.
In case of other subsidiaries of banks, such as mutual funds and brokerages, the problem of sector caps does not arise as foreign investors can set up wholly-owned Indian ventures.
A banker said the other sector where FDI cap would be breached was pension fund managers. The ICICI group had set up a pension fund management company to manage the New Pension Scheme corpus.
