FM to raise foreign holding ceiling in PSU banks

NEW DELHI: As part of the financial sector reforms package, the government is planning to raise the ceiling on foreign holding in Indian banks in the forthcoming Budget.
Finance minister Jaswant Singh is expected to announce a virtual bonanza for foreign investors, by allowing them to increase their holdings in the Indian public sector banks to more than the currently prescribed ceiling of 20%. In fact, this may even be hiked to 49%, the current ceiling for private banks.
Top government officials confirmed to ET that Mr Singh will announce this measure along with the proposal to exempt dividends from income tax and steps for demutualisation of the bourses, to provide a boost to the capital markets and the financial services sector. Officials indicate that there is consensus on these crucial policy decisions among the finance ministry brass.
The move to allow higher foreign stake in PSU banks has been keenly debated by the policy makers. While RBI had last year clarified that it would allow up to 49% foreign holding in private sector banks, it still retained a cap of 20% with respect to public sector banks. This restriction had put a brake on FII fund flows into the fast emerging banking sector.
Top-rung PSU banks like SBI had suffered on account of this policy as foreign holding in SBI has been at 20% for several months now. The cap prevented SBI from raising fresh resources from overseas markets through ADRs/GDRs while restraining foreign investors from investing in this premier banking institution.
Other PSU banks, which have been attracting foreign investors lately, would also be benefited.
The decision to exempt dividends from income tax in the hands of the recipient is also likely to find favour in the Budget speech. A dividend distribution tax may be imposed on the companies, as was the practice until last year.
Imposing income tax on dividends had disappointed the investors and evoked strong protests from the middle class. The move to restore the exemption is seen as providing a boost to the beleaguered capital market.
The government will have to amend the Securities Contracts Regulation Act and the I-T Act to pave the way for demutualisation of the bourses and their conversion into corporate entities.
Justice MH Kenia Committee appointed by Sebi had proposed such a move. The Sebi board too had approved the conversion of these stock exchanges into corporate entities.
In the coming Budget session, the government is likely to take the final steps in amending the legal framework to enable such a conversion.