Govt liberalises FDI norms for banking, petroleum

NEW DELHI: In a slew of measures to attract foreign investment, the government on Thursday liberalised FDI norms for banking and petroleum sectors, and in scientific and technical journals but deferred a decision on raising the ceiling of foreign investments in the telecom sector.
A foreign bank or its wholly owned subsidiary regulated by a financial sector regulator in the host country can now invest up to 100% in an Indian private sector bank. Other foreign investors can invest up to 74% in an Indian private sector bank, through direct or portfolio investment. Prior approval by the Reserve Bank of India is, of course, a must. This big-ticket liberalisation was announced by the government after today’s meeting of the Union Cabinet.
The Cabinet also approved significant liberalisation of foreign investment in the petroleum sector and 100% foreign investment in scientific and technical journals. In the case of oil marketing, the cap has been raised to 100% from 74% and it would be done through the automatic route. However, the government failed, once again, to take a decision on hiking the foreign investment limit in telecom.
The aviation sector did not figure on the agenda at all. While hiking the FDI limits, the government has also greatly reduced the scope of discretionary approvals by the Foreign Investment Promotion Board, allowing automatic approval in most cases. The government also took a host of decisions meant to spread the ‘feel-good factor’ to different target segments of society: farmers, tribals, students, IT-aspirants, scheduled castes, the ailing and the unwell.
The decision on foreign investment in the banking sector, the most radical since the one in 1991 to allow new private sector banks, is likely to open the doors to a host of mergers and acquisitions.

The government, however, could not take a decision on raising voting rights beyond the present 10% cap to the extent of shareholding. Such a change requires parliamentary approval and can take place only later. This is likely to put the actual working of foreign investment liberalisation on hold. The implication of the Cabinet decision is that a foreign bank, say, Citibank, wants to acquire any private bank in India, it can go to the extent of buying out the whole equity of the bank and not just 74%.This option of 100% FDI will be only available to a regulated wholly owned subsidiary of a foreign bank and not any investment companies.
“Wholly owned subsidiaries of banking companies regulated by a financial regulator in the host country would be permitted to hold 100% equity,� says an official release.
“Banking entities are highly regulated in their parent country, unlike the investment subsidiaries. That’s the reason the government has agreed to accede to their demand to have 100% subsidiary,� explained a highly placed government source.
All entities making FDI in private sector banks will be mandatorily required to have credit rating.
The increase in foreign investment limit in the banking sector to 74% includes portfolio investment [ie, foreign institutional investors (FIIs) and non-resident Indians (NRIs)], IPOs, private placement, ADRs or GDRs and acquisition of shares from the existing shareholders.
This will be the cap for any increase through an investment subsidiary route as in the case of HSBC-UTI deal.

In real terms, the sectoral cap has come down from 98% to 74% as the earlier limit of 49% did not include the 49% stake that FII investors are allowed to hold. That was allowed through the portfolio route as the sector cap for FII investment in the banking sector was 49%.
The new FDI norms will not apply to PSU banks, where the FDI ceiling is still capped at 20%.
Also, hiking of foreign investment in private banks having insurance subsidiaries will be addressed by RBI in consultation with Insurance Regulatory and development Authority (IRDA) so that the sectoral cap of 26% in the insurance sector is not breached.
The prior policy of taking FIPB approval for proposals requiring government approval in terms of FDI policy will continue.
The move is expected to tighten the grip of the foreign banks through the acquisition route and also augment the capital needs of the private banks.