New Delhi, April 30: The government could make changes in the FDI norms for banks to provide much needed clarity as to whether ICICI Bank, HDFC Bank and five others are Indian or foreign entities.

Top finance ministry officials said one option was to keep American depositary receipts (ADRs) and global depository receipts (ADRs) out of foreign investment calculations in special industries such as banking.

ADRs and GDRs do not carry voting rights and are classified by the RBI as bonds.

Such a move would resolve the controversy surrounding banks such as HDFC Bank and ICICI Bank where total foreign stake, including FIIs, ADR and GDR holders, exceeds 50 per cent though the promoters and the management remain Indian. Majority of the voting rights are also with Indians.

Officials in the industry ministry said the government planned to come out with a discussion paper within a fortnight on foreign-owned, Indian-controlled banks.

Besides ICICI Bank and HDFC Bank, others under the scanner are ING Vysya, Yes Bank, Development Credit Bank, IndusInd Bank and Federal Bank. Their functioning and downstream investments in sectors such as insurance have now come under doubt.

“The (discussion) paper would cover different financial instruments which can be considered for calculating the foreign direct investment. We are trying to resolve the confusion created by the Press Notes (2, 3 and 4 of last year),” said R.P. Singh, secretary in the Department of Industrial Policy and Promotion (DIPP).

New FDI rules club FII and ADR/GDR investments with foreign direct investment to determine sectoral caps. Private banks can have 74 per cent foreign investment, but the voting rights of foreigners are restricted to 10 per cent.

Press Notes 2, 3 and 4 which were announced last year had widened the definition of FDI to include foreign institutional holdings, NRI investments, foreign depository receipts such as GDRs and ADRs, foreign currency convertible bonds, foreign convertible preference shares and foreign convertible currency debentures.

After the changes, foreign investments in ICICI Bank and HDFC Bank are more than 50 per cent but they remain Indian controlled because of the voting right stipulation. The RBI has pointed out that there was a need to change the rules to allow the banks to continue running as Indian entities. If redefined as foreign banks they will be governed by more stringent rules on aspects such as branch opening.

“There is a way of resolving their (banks’) problem. We will try to find a solution for that. The handicap they are suffering, we will try to resolve it. Some relaxations of the rules might be considered,” Sharma said.

The DIPP is expected to clarify the policy relaxation for banks soon in consultation with the finance ministry.

The problem is FII investment in banking cannot be totally excluded from any calculation of FDI as NBFCs will demand the extension of this facility to their businesses too. This has led the government to suggest keeping ADRs and GDRs out of the ambit of foreign investments.

RBI considers such instruments as bonds, though these are bonds with underlying equity. Once the issue of FDI calculations is resolved, downstream investments of ICICI Bank and HDFC Bank in their insurance firms may also not be counted as FDI, sources said.

While maximum FDI in insurance is 26 per cent, ICICI Bank and HDFC Bank have 74 per cent stakes in ICICI Prudential Life and HDFC Standard Life, respectively.

According to Press Notes 2,3 & 4, the banks have breached sectoral norms and must restructure their downstream holdings.