The Reserve Bank of India (RBI) has turned down a proposal from the government to allow up to 100% foreign direct investments (FDI) in banks. This move may come as a restriction for several private sector lenders such as ICICI Bank and HDFC Bank.

The clear reason to turn down the proposal from the department of industrial policy and promotion (DIPP) that deals with FDI policy is not known. But in the past the regulator has opposed allowing significant shareholding by foreign institutional investors, who are seen as short-term investors and can enter or exit a stock for short duration’s, largely to book profits.

What happened?

Few years back, in the draft norms for new banks, the RBI had suggested limiting FDI to 49%, against the 74% cap. The finance ministry, saw it as a reverse step and got the regulator to stick to the prescribed ceiling. There had been a major battle between the finance ministry and the RBI on how the FDI norms should be applied, with the ministry finally saying that setting the foreign investment rules was in its domain.

Now..

The government permits 74% FDI in private banks, with up to 49% allowed under the automatic route. Foreign holdings beyond 49% need to be cleared by the Foreign Investment Promotion Board (FIPB). Portfolio investment in the sector is capped at 49% and banking is one of the segments where the composite caps, which allow substitution between FDI and FII flows, have not been applied as it is a “sensitive sector”.

Try it…

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