HDFC Banks plan to boost FII cap likely to be rejected

Written by Agencies | New Delhi | Updated: May 24 2014, 09:52am hrs
The Foreign Investment Promotion Board (FIPB) will take a final decision on HDFC Banks proposal to raise foreign institutional investment cap, finance ministry joint secretary PK Mishra said on Friday.

Mishra said RBI and the Department of Industrial Policy & Promotion (DIPP) are of view that the proposal should be rejected.

Economic affairs secretary Arvind Mayaram, meanwhile , said: It (ambiguities in HDFC Bank's proposal) will be cleared in the FIPB,

HDFC Bank's proposal for increasing foreign holding in the bank to 67.55% from 49% was first listed on the agenda of the FIPB in November 2013. However, the proposal could not be taken up because DIPP, the nodal agency for framing FDI policy, has been arguing that any increase in foreign shareholding would result in breach of the FDI guidelines.

FIPB, headed by the economic affairs secretary, is the nodal body for approving FDI. Other authorities involved in vetting the HDFC Bank proposal include RBI, DIPP, DEA and the law ministry.

The law ministry has suggested that the DEA and the DIPP, a wing of the industry ministry, take a view on the proposal of the country's second largest private bank.

According to sources, if the bank's proposal to raise foreign investment to 67.55% is accepted, it would exceed the cap of 74%, after taking into account parent HDFCs stake. HDFC holds 22.64% stake in HDFC Bank and the DEA and DIPP are deliberating whether that investment is foreign investment or not. FIIs hold 75.7% in HDFC.

At the end of March 2014, FII holding in the bank was 34.08%, according to the BSE data. Further, foreign investors hold another 16.97% shares through ADRs and GDRs.

If the promoter's stake of 22.64% is deemed to be foreign, then the total of the above mentioned three categories would take foreign investment to over 70%. As per the existing guidelines, the foreign holding in a bank cannot exceed 74%.

FDI, FII, NRI holding, ADR/GDR, convertible preference shares, foreign currency convertible bonds are treated as foreign investment under the FDI policy.