The Foreign Investment Promotion Board (FIPB) on Friday cleared a proposal by Kotak Mahindra Bank to increase the foreign investment limit in the bank to 55 per cent from about 49 per cent. Sources said the approval came after a clarification from the Department of Financial Services (DFS) that this would not necessarily lead to problems for the bank’s plan to raise the foreign investment limit in Kotak Mahindra Old Mutual Life Insurance.
When the government raised the foreign investment (FPI/FDI) limit in insurance from 26 per cent to 49 per cent in March, it stipulated that the insurance ventures in the country should remain “Indian owned and controlled”. This provision had led to fears that the plans of many insurance companies including those of HDFC and ICICI Bank could stumble upon this condition, enforced by the Insurance Regulatory and Development Authority, given that these (parent) companies are majority foreign-owned, although their foreign ownership is widely dispersed (with various FPI stakes) and management is in Indian hands. Kotak Bank holds 74 per cent in its life insurance arm.
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HDFC holds 74 per cent in HDFC Standard Life while the UK-based Standard Life holds the balance stake.
The DFS is now learnt to have taken the view that if the foreign ownership in these parent companies is not concentrated and does not wield management control, their investment in downstream insurance firms could be treated as Indian. The DFS move, analysts said, would create room for increased foreign investment in the insurance ventures of these firms. With the hike in foreign investment limit in insurance, about $3 billion in foreign capital is expected to come into a sector starved of capital for expansion.
After the merger of ING Vysya Bank with Kotak on April 1, the bank had sought FIPB approval to increase the foreign shareholding. Foreign investors can acquire up to 49 per cent in Indian private banks through the automatic route, but beyond that and up to 74 per cent requires the FIPB’s nod.
Under the FDI policy, downstream investment of a majority foreign-owned company would be considered foreign. By that logic, Kotak’s investment in the insurance company would have been considered as foreign investment, breaching the 49 per cent cap in the sector.
However, the insurance sector is exempted from these general rules and is guided by Irda regulations. However, doubts had emerged after the Irda recently wrote to insurance companies that they will have to ensure “Indian ownership and control” while obtaining higher foreign investment and securing government approval for the same.
Adding to this confusion was a finance ministry notification in February, according to which an Indian insurance firm needed to be controlled by resident Indian citizens or Indian companies, which are in turn “owned and controlled” by resident Indian citizens.
This doubt was removed on Friday with the DFS clarification and the FIPB’s decision in the case of Kotak Mahindra Bank.