RBI breather likely for HDFC, ICICI

NEW DELHI: The Reserve Bank of India (RBI) has untangled a knot which could have jeopardised the ownership of the insurance business of home loan major HDFC and the country���s largest private lender ICICI Bank.

The RBI has told the government that control of a company, not just its ownership, should be taken into account while determining foreign investment, particularly in the financial services sector.

Such an interpretation will mean that investments by ICICI Bank and HDFC, both majority foreign-owned but controlled by Indians, will be regarded as domestic investment. This will enable them to retain their investments in their businesses in insurance, a sector where foreign ownership is capped at 26%.

���More particularly in the financial sector, the concept of control should include qualitative parameters and percentage of resident directors,��� the RBI wrote in an October 12 letter to the department of industrial policy and promotion (DIPP).

DIPP, an agency in the ministry of commerce and industry, sets foreign investment guidelines.
The RBI also said it wants the government to clearly define terms such as ���control,��� ���equity interest��� and ���beneficially owned��� before operationalising the new foreign investment guidelines that were announced in February.

The guidelines said investment through companies owned and controlled by Indians would not count in the calculation of foreign investment. But it also said investments by companies that are majority foreign-owned are counted as foreign investment, putting HDFC and ICICI Bank in a fix.

Under the new guidelines, all direct and indirect overseas investments were counted as foreign investment, putting the foreign ownership of ICICI Bank at 65% and HDFC at 74%.

ICICI Bank operates a life insurance JV with Prudential of the UK and a general insurance business with Lombard of Canada. HDFC has partnered Standard Life and Germany���s ERGO.

The February guidelines have created confusion and led to concerns that it could allow indirect foreign entry into forbidden sectors such as multi-brand retail through layered corporate arrangements where the initial foreign investment is kept below 50%.

���Since the existing sectoral regulations on FDI, including sectoral caps, are not in conformity with the inclusive definition, the same need to be redefined to include all non-resident investments under a single head,��� the RBI wrote.

The central bank is also of the view that a decision on the requests by HDFC and ICICI Bank seeking exemption from the new guidelines may have to be taken after the government clarifies issues so that foreign investment does not travel a circuitous route and enters sectors where it is not allowed.