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Private sector banks have the potential to attract $16.3 billion of foreign direct investment (FDI) if foreign banks are allowed to buy up to 74 per cent of equity in these banks. Another $2.3 billion of foreign portfolio investment is possible if the government raises foreign institutional investors (FII) ceiling to 30 per cent in public sector banks, according to a study by ICICI Securities (I-Sec) on bank ownership reforms.
I-Sec feels the FII limit in public sector banks would be increased immediately. Although the increase in FII ownership ceiling from 20 per cent to 30 per cent could be the only immediate reform, the increased capital needs of banks could force the government to expedite other reforms such as scaling down government stake to 33 per cent from 51 per cent.
Similarly, a merger of State Bank of India (SBI) subsidiaries could also be possible. Investor interest in the first phase of reforms is likely to centre on frontline public sector banks. SBI and Bank of Baroda (BoB), with FII investment already touching 20 per cent, will be the immediate beneficiaries.
The existing guidelines announced in January 2004 permit FDI to the extent of 74 per cent in private sector banks. But the Reserve Bank of India’s (RBI) draft guidelines issued in July 2004 have put the brakes on FDI flow in private sector banks. The January 2004 guidelines had also raised FII holdings in banks to 49 per cent subject to the concerned bank board and subsequently the shareholders passing a resolution raising FII limit.
The government is soon expected to announce fresh guidelines on banking sector ownership reforms . The FDI potential in private sector banks is based on the assumption that foreign banks acquire stake through new issue of shares.
Guidelines for private banks
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