Indian federal government has  opened up the banking sector for foreign investors raising the ceiling of foreign direct investment in the Indian private sector banks to 49 percent. However, the ceiling of FDI in the country's public sector banks remains unchanged at 20 percent. Foreign banks having branches in India are also entitled to acquire stakes upto 49% through "automatic routes". It is to be noted that  under "automatic route" fresh shares would not be issued  to  foreign investors who already have  financial or technical collaboration  in banking or allied sector. They would require FIPB approval. However, some statutory approvals of the Reserve Bank of India (RBI), country's central banking authority, would be required. There are 29 Indian private sector banks. RBI  has also specified the voting rights of foreign investors. The scope for disinvestment is also there.

STATUTORY LIMITS

• Foreign direct investment (FDI)  up to 49 percent is permitted in Indian private sector banks  under "automatic route" which includes Initial Public Issue (IPO), Private Placements, ADR/GDRs; and Acquisition of shares from existing shareholders.

• Automatic route is not applicable to transfer of  existing shares in a banking company from residents to non-residents. This category of investors require approval of FIPB, followed by "in principle" approval by Exchange Control Department  (ECD), Reserve Bank of India (RBI).

• The "fair price" for transfer of existing shares is determined by RBI, broadly on the basis of Securities Exchange Board of India (SEBI) guidelines for listed shares and erstwhile CCI guidelines for unlisted shares. After receipt of "in principle" approval, the resident seller can receive funds and apply to ECD, RBI, for obtaining final permission for transfer of shares.

• Foreign banks having branch-presence in India are eligible for FDI  in private sector banks subject to the overall cap of 49% with RBI approval.

• Issue of fresh shares under automatic route is not available to those foreign investors who have a financial or technical collaboration in the same or allied field. Those who fall under this category would require Foreign Investment Promotion Board (FIPB) approval  for FDI in the Indian banking sector.

• Under the Insurance Act, the maximum foreign investment in an insurance company has been fixed at 26 percent. Application for foreign investment in banks  which have joint venture/subsidiary in insurance sector should be made to RBI. Such applications would be considered by RBI  in consultation with Insurance regulatory and Development Authority (IRDA).

• FDI and Portfolio Investment  in nationalised banks are subject to overall statutory limits of 20 percent.

• The 20 percent ceiling would apply  in respect of such investments in State Bank of India and its associate banks.

VOTING RIGHTS OF FOREIGN INVESTORS

RBI APPROVAL

• Transfer of shares of 5 percent and more of the paid-up capital of a private sector bank requires prior acknowledgement of RBI. 
• For FDI of 5 percent and more of the paid-up capital, the private sector bank has to apply in the prescribed form to RBI.
• Under the provision of Foreign Exchange Management Act (FEMA), 1999, any fresh issue of shares of a bank , either through the automatic route or with the specific approval of FIPB, does not require further approval of Exchange Control department (ECD) RBI from the exchange control angle.
• The Indian banking company is only required to undertake two-stage reporting to the ECD  of RBI as follows: (1) 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 govt. approval, if any. (2) Indian banking company  is required to file within 30 days from the date of issue of shares, a report in form FC-GPR (Annexure II) together with a cretificate from the company secretary of the concerned company certifying that various regulations have been complied with. The report will also be accompanied by a certificate from a Chartered Account indicating the manner the manner of arriving at the price of the shares issued.
  
  
  DIVESTMENT BY FOREIGN INVESTORS
• Sale of shares by non-residents on a stock exchange and remittance of the proceeds thereof through an authorised dealer does not require RBI approval.
• Sale of shares by private arrangement requires RBI's prior approval.

Private Sector Banks in India