ICICI Bank and HDFC Bank, two of India’s biggest banks in which foreing investors hold over 51% equity, will now be treated as ‘foreign’ banks.
The government’s decision will affect the prospective investment plans of these banks in associates or in segments which have a ceiling on foreign investment.
However investments in financial services, like insurance, which were done prior to the new policy was declared in February 2009 will lie outside the purview of the new rules, according to a top government official.
The new rules divide companies into either primarily foreign-owned or monitored as foreign companies. In the instance of ICICI and HDFC Bank, foreign investment exceeds 51% although the management is Indians. As per India’s foreign investment rules, foreign investors can hold up to 74% in private banks via secondary market purchases or ADRs and GDRs.
Immediately after the policy was declared, the RBI and few local banks wrote to the government asking for exemption from the rules. However their request was not accepted.
Foreign investment in private banks has an upper limit of 74%. Many Indian private banks like ING Vysya Bank, ICICI Bank, HDFC Bank and IndusInd Bank have at least 51% foreign investment. Others like YES Bank and Federal Bank have foreign investment very close to 51%.
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