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Asia-PacificJanuary 3 2005

India relaxes private bank investment rules

Foreign investors will be allowed to acquire up to 74% of private Indian banks, up from 49%, India’s finance minister, Palaniappan Chidambaram, announced in early December. This clears up doubt over whether foreign investors could participate in the consolidation of the fragmented private banking sector.
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Mr Chidambaram also promised a road map, laying out investment rules in private banks. Foreign investors are likely to have to seek central bank approval at cut-off limits along the way.

The Reserve Bank of India, the central bank, is finalising new investment rules in private banks after draft rules that it put out early last year stirred wide debate.

The draft rules proposed a cut-off limit of 10% on a single shareholder, including a foreign investor, in a private bank. Investors seeking to buy a higher stake would require approval from the central bank.

The draft also proposed that cross-holdings between banks of more than 5% would require approval from the regulator. So a foreign bank in India would require the regulator’s nod to buy more than 5% in a private bank.

ING is the only foreign bank so far to have acquired an Indian bank. It seems likely that other foreign banks seeking to make an Indian acquisition may have to take a similar route.

ING gradually increased its minority stake in Vysya, a private bank, over three to four years, merging its local operations with it to form INGVysya, in which ING owns a controlling stake of about 40%. Managing director Bart Hellemans said that ING was open to raising its stake in the listed bank once the foreign direct investment limit was hiked. Some bankers pointed out that a “creeping acquisition” route was expensive and could create governance issues in “the period of uncertainty” during which the acquisition is being made.

“An acquisition should ideally be an outright purchase, so that there is no uncertainty for the stakeholders in the bank,” said Rana Kapoor, managing director at Yes Bank, a private bank in which Dutch bank Rabobank owns a 20% stake.

Among the other foreign banks that own minority stakes in private Indian banks are HSBC, in UTI Bank, and BankMuscat, in Centurion Bank.

The cap of 10% on the voting rights of a single shareholder was an “impediment to consolidation” in private Indian banks, said Mr Hellemans.

The new coalition government in New Delhi is considering the removal of this hurdle, which requires parliament to pass an amendment to India’s Banking Regulation Act.

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Read more about:  Analysis & opinion , Asia-Pacific , India