The Telegraph
Since 1st March, 1999
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Govt to raise FDI limit in banks

New Delhi, Dec. 16: The BJP -led government today said it has decided in principle to increase the foreign direct investment limit in banks to allow foreign banks to set up subsidiaries here.

However, details are still being worked out.

Finance minister Jaswant Singh told the Rajya Sabha that the modalities for implementing the decision are being worked out by his ministries.

The minister, however, made it clear that the decision would have no impact in terms of ownership control and regulation of nationalised banks.

The ministry wants to increase the percentage of foreign equity allowed in banks from a current 49 per cent to between 51 per cent and 74 per cent. It hopes this will allow foreign banks to set up subsidiaries here more easily.

However, the move will also encourage acquisition and mergers of privately-owned banks by larger transnational banks which wish to see quicker growth by taking over a larger network of branches.

Early this month, HSBC struck a deal to pick up a 20 per cent stake in UTI Bank. Other foreign banks are believed to be eyeing other Indian privately- held banks and M&A moves by them could be expected once a final decision is taken.

The move is also expected to lift bank stock valuations and fetch the government better prices for PSU bank stock when it markets them in later years.

The BJP-led government is also working on a new bank equity buyback plan which is likely to place a premium on stock at a considerable discount to market.

However, if banking stock prices go up because of a decision on raising FDI limits, then the premium would also go up. The government needs to earn good returns from this measure which is expected to be completed before the end of the fiscal to bolster revenues and beat down the rising fiscal deficit.

The banks had earlier demanded that equity return should be at par value since much of the recapitalisation done earlier was not through cash infusion but through placement of recapitalisation bonds with the banks with a 10 per cent coupon. This was, however, rejected by the government.

State-owned banks like Punjab National Bank, Oriental Bank of Commerce, Syndicate Bank and Bank of Baroda have been seeking capital buyback partly to improve to their book values and earnings per share which eventually reflects on their market value and partly because they have excess Tier I capital on their books.

While the prescribed ratio of capital to risk weighted assets is 9 per cent, most banks have between 11-12 per cent.

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