No more foreign funds allowed in HDFC Bank: Government

NEW DELHI: The government has turned down HDFC Bank’s proposal to raise the cap on foreign institutional investment to 67.55% from 49% after a prolonged debate. This implies that foreigners will not be able to invest further in the country’s second largest private bank, rated among the best in the region and on almost every ‘buy’ list.

Senior officials of the department of industrial policy and promotion ( DIPP) and the department of economic affairs (DEA), which come under the finance ministry, felt the proposal could not be cleared under the current policy framework, said two government officials aware of the development.

The Reserve Bank of India had stopped further purchases by foreign institutional investors ( FIIs) in the bank after the 49% ceiling was breached last December. The law ministry, which was asked to give its opinion on the proposal, had wanted both DIPP and DEA to take a call on the matter. DIPP and RBI had earlier said the bank’s proposal was not in line with the foreign direct investment ( FDI) policy.


A formal communication was sent to the Foreign Investment Promotion Board (FIPB) in this regard. An HDFC bank spokesperson declined to comment. At the core of the rejection is the 22.64% stake held by parent Housing Development Finance Corp. Under the 2009 FDI policy guidelines, any company with more than 50% overseas investment or controlled by foreigners is considered overseas owned and its downstream investment in any Indian company is treated as foreign investment.

Moreover, FDI, foreign institutional investment, shares owned by non-resident Indians, foreign currency convertible bonds, convertible preference shares, American Depository Receipts and Global Depository Receipts are all counted as foreign investment, according to the policy. Since HDFC is majority foreign owned, its stake in the bank is also regarded as overseas investment under the policy.

This takes HDFC Bank’s foreign holding to almost 74%, the sectoral cap for banks, leaving no room for further FII investment, according to the two departments. As per the National Stock Exchange, at the end of March, HDFC Bank had 34.08% foreign institutional investment. In addition, foreigners owned another 16.97% shares indirectly through ADRs and GDRs. Along with the 22.64% HDFC stake, the total foreign holding adds up to more than 73%.

FIPB didn’t take up the proposal at its last meeting on April 23 pending DIPP and RBI views. After the law ministry said DEA and DIPP should decide the issue, officials of the two departments met to discuss the matter. A formal communication in this regard may be sent to HDFC Bank shortly.

Any policy change that could exempt non-banking finance companies (NBFCs) such as HDFC from the 2009 guideline will now depend on the new government. But for now the FII limit in HDFC Bank has been reached, something that could weigh on its stock price.

MSCI has already said it will reduce HDFC Bank’s weight in the MSCI India Index because of lack of buying opportunities for foreign investors. The bank’s weight could decline to below 2% from 5.78% by the end of the month in its semi-annual review and if investors adjust their portfolio accordingly, the stock could face some selling. In the last 30 days, HDFC Bank has risen 11.74% compared with a 16.18% rise in the Bank Nifty and a 22.36% appreciation in Axis Bank.