Revision of existing sectoral guidelines and equity cap on Foreign Direct Investment FDI). IncIuding investment by Non Resident Indians NRIs) and Overseas Corporate Bodies (OCBs)/ Foreign Institutional Investors (Flls) in the Banking Sector - FEMA - 02/2004

Government of India Ministry of Commerce Industry Department of Industrial Policy Promotion Secretariat for Industrial Assistance PRESS NOTE NO. 2 (2004 SERIES) Subject : Revision of existing sectoral guidelines and equity cap on Foreign Direct Investment FDI). IncIuding investment by Non Resident Indians NRIs) and Overseas Corporate Bodies (OCBs)/ Foreign Institutional Investors (Flls) in the Banking Sector With a view to further Iiberalising foreign investment in Banking Sector. The Government have effected the following changes: 1. FDI limit in Indian Private Sector Banks (a) FDI limit in Private Sector Banks s raised to 74 per cent under the automatic route including investment by Flls. This will include FDI Investment under Portfolio Investment Scheme (PIS) by Flls NRIs and shares acquired prior to September 16, 2003 by OCBs, and continue to include IPOs, Private pIacements GDRs/ADRs and acquisition of shares from existing shareholders. (b) The aggregate foreign investment in a pr bank from 5:1 sources w'll be allowed up to a maximum of 74 per cent of the paid up capital of the Bank. At all times. At least 26 per cent of the paid up capital will have to be held by residents, except in regard to a wholly-owned subsidiary of a foreign bank. (c) The stipulations as above will be applicable to all investments 'in existing private sector banks also. (d) The permissible limits under portfolio investment schemes through stock exchangers for Fll and NRIs w be as follows: (i) In the case of His, as hitherto, individual Flls holding is restricted to 10 per cent, aggregate limit for all Flls cannot exceed 24 per cent, wnich can be raised to 49 per cent by the bank concerned passing a resolution by its Board of Directors followed by passing of a special resolution to that effect by its General Body. (ii) Thus, the Fll investment limit wiIl continue to be within 49 per cent. (iii) In the case of NRIs, as hitherto, individual holding is restricted to 5 per cent and aggregate limit cannot exceed 10 per cent. However, NRI holding can be allowed up to 24 per cent provided the u company passes a special resolution to that effect in the General Body. (e) Applications for foreign direct investment (FDI route) in private banks having Joint venture/subsidiary in insurance sector may be addressed to the Reserve Bank of India (RBI) for consideration in consultation with the Insurance Regulatory and Development Authority (IRDA) in order to ensure r the 26 per cent limit of foreign shareholding applicable for the insurance sector is not being breached. (f) Transfer of shares under FDI from residents to non-residents will continue to require approval of Foreign investment Promotion Board (FIPB) under Foreign Exchange Management Act FEMA). (g) The policies and procedures prescribed from time to time by RBI and other institution such as SEBI,D/O Company Affairs and IRDA on these matters will continue to apply. (h) RBI guidelines relating to acquisition by Purchase or' other of shares of a private bank, f such acquisition results in any person owning or controlling 5 per cent or more of the paid up capital of the private tank will apply to foreign investors as well. 2. Setting up of a subsidiary by foreign banks (a) Foreign banks will be permitted to either have brandies or subsidiaries not both. (b) Foreign banks regulated by a banking super authority in the home country and meeting Reserve Bank licensing criteria wili be allowed to hold 100 per cent paid up capital to enable them to set up a wholly-owned subsidiary in India. (c) A foreign bank may operate n India through only one of the three channels viz., (I) branch/es (ii) a wholly-owned subsidiary; and (iii) a subsidiary with aggregate foreign Investment up to a maximum of 74 per cent in a private bank. (d) A foreign bank will be permitted to establish a holly-owned subsidiary either through conversion of existing branchhes into asubsidiary or through a fresh banking lincence. A foreign bank will be permitted to establish a subsidiary through acquisition of shares of an existing private sector bank provided at east 26 per cent of the paid capital of the private sector bank is held by residents at all times consistent with para 1(b) above. (e) A subsidiary of a foreign bank w be sub to the licensing requireme and Conditions broadly Consistent with those new private sector banks. (f) Guidelines for setting up a wholly-owned subsidiary of a foreign bank will be issued separately by RBI. (g) All applications by a foreign bank for setting up a subsidiary or for conversion of their existing branches :o subsidiary' in India will have to be made to the RBL 3. At present there is a limit of Ten per cent on voting rights n respect of banking companies, and this should be noted by potential investor. Any change in the ceiling can be brought about only after final policy decisions and appropriate parliamentary approvals. (UMESH KUMAR) Joint Secretary to the Government of India No 5/6/2000-FC dated 5 th March,2004 Copy forwarded to Press Information Officer, Press information Bureau For giving wide publicity to the above Press Note,