ICICI Bank and HDFC Bank are in violation of the foreign investment norms, the commerce and industry ministry said on Tuesday.
The stand of the ministry, which governs foreign investments in India, could be the first of the steps that forces the two banks to increase their domestic shareholding, sources said.
Commerce and industry minister Anand Sharma said no changes would be made to foreign investment rules specifically for the banking and financial sector, three days after R P Singh, secretary, the Department of Industrial Policy and Planning within the ministry, hinted at a compromise to solve the problem.
“We are not going to revisit the foreign direct investment (FDI) norms for banks,” Sharma categorically replied when asked on the compromise talk.
“Ownership and control ... have been defined with clarity, calculation of FDI is also much simpler. The policy has worked well,” Sharma said.
ICICI Bank CEO Chanda Kochhar was forceful when queried on the issue after she inaugurated the bank’s 2000th branch in Mumbai on Monday.
“We are an India-originated bank, controlled by an Indian management and governed by the Reserve Bank of India (RBI),” she said.
But the RBI doesn’t seem keen to arbiter the case either.
“Yes, both ICICI Bank and HDFC Bank are foreign entities despite being managed by Indians. But the RBI has no say in the issue. It’s for the government to decide,” a very senior RBI official told DNA Money on Monday.
Separately, another top RBI official, deputy governor Shyamala Gopinath, said “the issue needs to be studied in greater detail”, when queried along the sidelines of the Indian Venture Capital Association event on Tuesday night in Mumbai.
The problem started a year ago when the government issued clarifications saying that foreign investment will also include indirect investments through instruments such as bonds later convertible to shares, depository receipts issued to foreign investors in lieu of actual shares held in India by the issuer, portfolio investments etc.
With one stroke, it put HDFC Bank and ICICI Bank, two of the largest private banks in India, in violation of the foreign investment norms in the country as they have more than 74% of their equity held by foreigners.
Besides being in violation of foreign investment norms, the clarification also raised new questions about whether the RBI would consider them ‘foreign banks’ or not.
According to law, an entity is considered foreign if more than half of its shares are held by outsiders.
In the case ICICI Bank, HDFC Bank and others like Yes Bank, IndusInd Bank and ING Vysya, more than half the equity, calculated under the new rules, is held by foreigners.
Once a bank is considered ‘foreign’ it impacts expansion programmes. Foreign banks are not allowed to open branches without special permission etc.
Against the scores of branches opened by the big players like ICICI every year, they would be restricted to opening new branches in single digits, if at all.
Under the circumstances, analysts said ICICI and HDFC Bank are likely to be given a specific period to comply with the rules.
Abizer Diwanji, head of financial services practice for auditor and consultant, KPMG India, believes RBI will have a role to play.
“Clarity will come only when the government will try to force some structure. Even if it is insisted upon, I don’t think RBI will insist everyone will have to do it immediately. There will be a transition plan or even an exemption,” he said.
Ananda Bhoumik, analyst with Fitch Ratings, said RBI is free to frame its own rules on this.
“I think too much is being read into the foreign investment-based calculations. To interpret these banks as foreign just because they have more than half of their equity with foreigners is too simplistic,” he said.
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