Indian Banking FDI Policy (Rules for Investing in the Financial Services Sector)

GUIDELINES FOR FOREIGN DIRECT INVESTMENT (FDI) IN THE BANKING SECTOR

GUIDELINES FOR FOREIGN DIRECT INVESTMENT (FDI) IN THE BANKING SECTOR

1. Limit for FDI under automatic route in private sector banks
   1. In terms of the Press Note no. 4 (2001 series) dated May 21, 2001 issued by Ministry of Commerce & Industry,Government of India, FDI up to 49% from all sources will be permitted in private sector banks on the automatic route, subject to conformity with the guidelines issued by RBI from time to time.
   2. For the purpose of determining the above-mentioned ceiling of 49% FDI under the “automatic route” in respect of private sector banks, following categories of shares will be included.
      1. IPOs,
      2. Private placements,
      3. ADRs/GDRs, and
      4. Acquisition of shares from existing shareholders [subject to (d) below]
   3. It may be clairified that as per Government of India guidelines, issue of fresh shares under automatic route is notavailable to those foreign investors who have a financial or technical collaboration in the same or allied field.This category of investors requires FIPB approval.
   4. It may be further clarified that, as per Government of India guidelines, automatic route is not applicable totransfer of existing shares in a banking company from residents to non-residents. This category ofinvestors require approval of FIPB followed by “in principle” approval by Exchange Control Department(ECD), RBI. The “fair price” for transfer of existing shares is determined by RBI broadly on the basis ofSEBI guidelines for listed shares and erstwhile CCI guidelines for unlisted shares. After receipt of “inprinciple” approval, the resident seller can receive funds and apply to ECD, RBI for obtaining final permissionfor transfer of shares.
   5. Under the Insurance Act, the maximum foreign investment in an insurance company has been fixed at26%. Application for foreign investment in banks, which have joint venture/subsidiary in insurance sector,should be made to RBI. Such applications will be considered by RBI in consultation with InsuranceRegulatory and Development Authority (IRDA).
   6. Foreign banks having branch presence in India are eligible for FDI in the private sector banks subject tothe overall cap of 49% mentioned above with the approval of RBI.
2. Limit for FDI in public sector banks
   FDI and portfolio investment in nationalised banks are subject to overall statutory limits of 20% as provided underSection 3 (2D) of the Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970/80. The sameceiling would also apply in respect of such investments in State Bank of India and its associate banks.
    
3. Voting rights of foreign investorsIn terms of the statutory provisions under the various banking acts, the voting rights, when exercised, which arestipulated as under:
   1. Private sector banks – [Section 12 (2) of Banking Regulation Act, 1949] No person holding shares, in respect of any share held by him, shall exercise voting rights on poll in excess of tenper cent of the total voting rights of all the share holders
   2. Nationalised Banks – [Section 3(2E) of Banking Companies (Acquisition and Transfer of Undertakings) Acts,1970/80] No shareholder, other than the Central Government, shall be entitled to exercise voting rights in respect of any shares held by him in excess of one per cent of the total voting rights of all the share holders of the nationalized banks State Bank of India (SBI) – (Section 11 of State Bank of India Act, 1955) No shareholder, other than RBI, shall be entitled to exercise voting rights in excess of ten per cent of the issued capital (Government, in consultation with RBI can raise the above voting rate to more than ten per cent).
   3. SBI Associates – [Section 19(1)&(2) of SBI (Subsidiary Bank) Act, 1959] No person shall be registered as a shareholder in respect of any shares held by him in excess of two hundred shares. No shareholder, other than SBI, shall be entitled to exercise voting rights in excess of one per cent of the issued capital of the subsidiary bank concerned.
4. Approval of RBI and reporting requirements
   1. Under extant instructions, transfer of shares of 5 per cent and more of the paid-up capital of a private sector banking company, requires prior acknowledgments of RBI. For FDI of 5 per cent and more of the paid-up capital, the private sector banking company has to apply in the prescribed form to the Department of Banking Operations and Department in the Regional office of RBI, where the bank’s Head Office is located.
   2. Under the provisions of FEMA 1999, any fresh issue of shares of a banking company, either through the automatic route or with the specific approval of FIPB, does not require further approval of Exchange Control Department (ECD) of RBI from the exchange control angle. The Indian banking company is only required to undertake 2-stage reporting to the ECD as follows:
      1. In the first stage, the Indian company has to submit a report within 30 days of the date of receipt of amount of consideration indicating the name and address of foreign investors, date of receipt of funds and their rupee equivalent, name of bank through whom funds were received and details of Government approval, if any.
      2. In the second stage, the Indian banking company is required to file within 30 days from the date of issueof shares, a report in form FC-GPR together with a certificate from the Company Secretary of the concerned company certifying that various regulations have been complied with. A certificate will also accompany the report from a Chartered Accountant indicating the manner of arriving at the price of the shares issued.
5. Conformity with SEBI Regulations and Companies Act provisionsWherever applicable, FDI in banking companies should conform to the provisions regarding shareholding and share transfer, etc. as stipulated by SEBI, Companies Act, etc.
    
6. Disinvestments by Foreign Investors in terms of regulation 10 and 11 of RBI Notification No. FEMA/20/2000-RB dated May 3, 2000 issued under FEMA 1999; disinvestments by foreign investors would be governed by the following:
   1. Sale of shares by non-residents on a stock exchange and remittance of the proceeds thereof through an authorized dealer does not require RBI approval.
   2. Sale of shares by private arrangement requires RBIs prior approval. RBI grants permission for sale of shares at a price that is market related and is arrived at in terms of guidelines indicated in Regulation 10 above.
7. All commercial banks, which either have foreign investments or intending to have foreign investments, need to observe the above guidelines.