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HDFC Bank’s proposal on foreign investment cap goes to CCEA

The Cabinet Committee on Economic Affairs (CCEA) is set to take up HDFC Bank’s proposal to raise the cap on foreign investment in it to 74%, after the Foreign Investment Promotion Board (FIPB) recommended this at a meeting last month.

The government also approved 15 other proposals, involving foreign direct investment (FDI) of Rs 689.35 crore.

At present, foreign investment of up to 49% is permitted through the automatic route. The proposals to raise this to up to 74% require approval — they are routed through FIPB if the money flowing into the company is up to Rs 1,200 crore, and CCEA if the amount is more than that.

“The proposal… has been recommended for consideration of CCEA, as the investment involved in the proposal is above Rs 1,200 crore,” the finance ministry said in a statement on Monday. 

Earlier, sources had said FIPB was in favour of regularising the current foreign investment structure of the bank, but that would not have allowed the private-sector lender to raise much money by way of foreign investment. That is because the board was not in favour of accepting the bank’s plea that promoter stake should not be treated as foreign investment.

According to the source, FIPB was of the view that parent HDFC Ltd’s 22.5% holding in HDFC Bank was foreign investment and, therefore, the total foreign holding in the bank — institutional, direct and those through American Depository Receipts and Global Depository Receipts — stood at 73.20%.

As such, HDFC bank could increase foreign investment by only 0.80%, as the cap on overall forein investment in private-sector banks is 74%.

The bank had approached FIPB to increase the foreign holding limit in it to 67.55%. It has its shareholders’ approval to raise Rs 10,000 crore of capital by July 2015. The proposal was kept on the back burner for long as the definition of FDI was changed through press notes in 2009.

The Reserve Bank of India (RBI) and the department of industrial policy & promotion were of the view that HDFC Bank, after taking into account its parent’s holding, was already close to the 74% cap for foreign investment in private-sector lenders.
After a change in the FDI policy in 2009, downstream investment by any entity controlled by foreign investors was taken as foreign investment.

“Any foreign investment already made in accordance with the guidelines in existence before February 13, 2009 (the date of the issue of Press Note 2) would not require any modification to conform with these guidelines. All other investments, past and future, would come under the ambit of the new guidelines,” the policy said.

HDFC Bank had argued the law could not be applied retrospectively. It had stressed it had got legal opinion and the general view was that HDFC’s holding in HDFC Bank should be exempt from new regulations, as the holding already existed when the law came into force.

However, officials said the bank had increased its holding, though marginally, after the change in policy, without taking FIPB approval.

In December 2013, RBI had barred foreign investors from buying additional shares in the company, after their shareholding hit the upper limit of 49% allowed under the automatic route.

The official added that since the bank was in breach of FDI regulations before Friday’s clearance, there would be some penalty, which would be decided by RBI.

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