The government has finally cleared a long-pending proposal from the country’s second largest private lender, HDFC Bank, to enhance its foreign direct investment to 74 per cent. But it could attract a penalty to be decided by the Reserve Bank of India.
The decision was taken at a meeting of the Foreign Investment Promotion Board (FIPB) on Friday. “FIPB today considered and approved HDFC Bank’s proposal to raise foreign investment ceiling to 74 per cent,” said an official after the meeting, adding that the parent HDFC’s stake in the bank would be considered as foreign direct investment (FDI). Further, the compounding for the breach in FDI cap and the consequent penalty would be decided by the banking regulator — RBI and not the FIPB, he added.
According to FDI norms, foreign investment up to 49 per cent in banks is permitted under the automatic route beyond which, FIPB clearance is required. HDFC Bank had last year approached the FIPB to increase the foreign holding in the bank to 67.55 percent from 49 percent. But the point of debate was whether the parent HDFC’s 22.56 per cent stake in the bank should be considered as FDI.
So, HDFC Bank’s proposal was not approved as both the finance ministry as well as the department of industrial policy and promotion were of the view that HDFC’s stake should be considered as FDI. Meanwhile, the FIPB considered a total of 26 FDI proposals of which it cleared 15 plans. These include proposals by Punj Lloyd and Sanofi.