RBI for capping foreign investment in banks at below 50% Read more: RBI for capping foreign investment in banks at below 50% - India Business - Busin

MUMBAI: The Reserve Bank on Wednesday proposed bringing down the foreign investment in new private sector banks to below 50% from 74% now, a suggestion that may help some lenders retain their Indian-owned status.

The prescription contained in the discussion paper on norms for entry of new private sector banks comes at a time when two leading private sector lenders -- ICICI Bank and HDFC Bank--have lost the status of Indian-owned banks.

"Since the objective is to create strong domestic banking entities and a diversified banking sector ... aggregate non-resident investment, including FDI, NRI and FII in these banks could be capped at a suitable level below 50% and locked at that level for the initial 10 years," the central bank said.

ICICI Bank and HDFC Bank were categorised as foreign- owned, Indian-controlled lenders, as FDI in them rose over 50 per cent. This happened after norms on calculating FDI changed to include all types of foreign investment including FDI, FII, NRI, ADR, GDR and foreign currency convertible bonds.

The new norms of calculating FDI may have repercussions on their on downstream investment, like in subsidiaries.

The discussion paper said the downstream investment of banks would not be an issue for monitoring indirect foreign investment, if the foreign investment is below 50%.

Experts, however, said it is not clear whether these proposals even if implemented will cover existing banks or not.

"It is not clear. However, it is possible that even the existing banks will have to comply with the new cap over a period of time for a level playing field," said KPMG Financial Services Tax Leader Punit Shah.

Giving rationale for capping foreign investment at 50%, the discussion paper said, "This would enable foreign capital to be used in the promotion of domestic banks ... This would allow for foreign technical collaboration in setting up domestic banks."

RBI released the paper on issuing new banking licenses to foster greater competition and expand the banking system. It listed the pros and cons of various norms such as minimum capital requirements and caps on promoters as well as foreign shareholding.

Meanwhile, RBI is considering applications from 18 foreign entities, including Goldman Sachs, Morgan Stanley, Industrial and Commercial Bank of China (ICBC) and National Australia Bank to start operations in India.