Path paved for deals

The government has cleared the decks for more equity deals such as HSBC-UTI Bank in the country following its announcement to allow foreign banks having branch presence in India to pick up take a stake in private sector banks.

Foreign banks operating in India would also look at converting their branches into subsidiaries as the government has now allowed them to set up wholly owned subsidiaries.

According to the finance ministry, "Foreign banks having branch presence in India will be permitted to participate in the equity of private sector banks, subject to the overall cap of 74 per cent and subject to the approval of the Reserve Bank of India."

The new guidelines in effect allows foreign banks to have both branches operations and subsidiaries in the country.

HSBC had picked up 14.71 per cent in UTI bank from CDC Financial Services and South Asia Regional Fund. It will also pick up another 5.37 per cent stake from CDC.

Speaking on the UTI Bank deal, HSBC's India head Niall S K Booker said, "We've always said that UTI Bank was a financial investment. We would look at increasing the stake according to the law of the land. It would depend on whether other investors are willing to sell to us and also at an economical price."

According to a senior foreign banker this would mean that foreign banks operating in the country would now look at taking a stake in private sector banks even as they have their own independent operations.

Foreign banks looking at subsidiary route would now have to look at the pros and cons of having a large branch network and lower their tax burden.

"Subsidiary route is now an attractive opportunity. Banks will have to weigh the pros and cons. There are benefits of branch licensing but more stringent rules on priority sector lending and branch opening. There is also a benefit of tax. Once the administrative guidelines are out, we will weigh the pros and cons," said ABN Amro Bank's chief executive Romesh Sobti.