Govt. asks RBI to decide ‘Indian-ness’ of private sector banks

The ‘Indian-ness’ of the country’s leading private sector banks will be decided by the Reserve bank of India (RBI). Based on the RBI's decision, the Indian government will figure out a solution for them without relaxing the provisions of the new foreign direct investment policy.

From over a year government has been having discussion on this issue and finally it has asked the apex bank to draft a framework for deciding the ownership and control of such banks.

According to a senior government official the new norms will be drafted on the parameters such as voting rights and the power to appoint directors of the banks.

He said, “We need to recognize that the structure of each bank is different and accordingly redefine the concept of ownership and control for the banking sector.”

However seven private sector lenders will get official pardon from this move of government. The seven private lenders which have been branded as foreign banks under the current norms include- ICICI Bank, HDFC Bank, ING Vysya, Development Credit Bank, Federal Bank, IndusInd Bank and YES Bank.

This issue has been pending for long with its roots in Press Note 2 of 2009, finally it was taken up for discussion at a recent meeting of the finance ministry, departmental of industrial policy and promotion and the RBI.

In Press Note 2 a structure for calculation of total foreign investment in Indian companies is given, which is based on ownership and control of such firms. According to this all types of overseas ownership will be counted as foreign investment.

It also states that any company who owns over 50% overseas investment will be considered foreign owned. As per its definition control is the power to appoint majority of directors on the board of a company.

Most important is that all the downstream investments by a foreign-owned company will be considered as foreign investment and be subject to sectoral caps and restrictions. When these norms were circulated to the banks, the banks took up the issue with the RBI and had sought clarifications on their exact status and investments.

However RBI had also written to the finance ministry and pointed out that ownership and control may not be limited to just equity holding and power to appoint directors.

Although analysts have welcomed the move but have to be done carefully. “There is no straight jacketed approach. The formula would have to be based after a careful review of the interplay of voting rights and economic ownership of banks,” said Nimai Vijay, associate director, PricewaterhouseCoopers.