Investment Board to Take Final Call on HDFC Bank's FDI proposal: Finance Ministry

The final decision on HDFC Bank's proposal to raise foreign shareholding will be taken by the Foreign Investment Promotion Board, the Finance Ministry said on Friday.

"It (ambiguities in HDFC Bank's proposal) will be cleared in the FIPB," Economic Affairs Secretary Arvind Mayaram said, adding that individual departments have their views on the proposal.

HDFC Bank's proposal for increasing foreign holding in it to 67.55 per cent from 49 per cent was first listed on the agenda of the investment board in November 2013.

However, the proposal could not be taken up because the nodal agency for framing FDI policy - Department of Industrial Policy and Promotion (DIPP) - 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 Reserve Bank (RBI), Department of Industrial Policy & Promotion (DIPP), Department of Economic Affairs (DEA) and 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 per cent is accepted, it would exceed the cap of 74 per cent, after taking into account parent HDFC Ltd's stake.

HDFC Ltd holds a 22.64 per cent stake in HDFC Bank and the DEA and DIPP are deliberating whether that investment is foreign investment or not. Foreign institutional investors (FIIs) hold 75.7 per cent in HDFC.

At the end of March 2014, foreign institutional investment (FII) in the bank was 34.08 per cent, as per data from the BSE. Further, foreign investors hold another 16.97 per cent shares through American (ADRs) and global depositary receipts (GDRs).

If the promoter's stake of 22.64 per cent is deemed to be foreign, then the total of the above mentioned three categories would take foreign investment to over 70 per cent.

As per the existing guidelines, foreign holding in a bank cannot exceed 74 per cent.

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

Investments by HDFC Ltd, which is 75.71 per cent owned by FIIs, and associate companies in HDFC Bank were made before 2009, when the government came out with norms to calculate the level of foreign investment in companies.