New Delhi, Nov. 14: The government today cleared a long-pending proposal by HDFC Bank to raise the foreign holding limit in the country’s second largest private sector bank to 74 per cent.

“The Foreign Investment Promotion Board (FIPB) today considered and approved HDFC Bank’s proposal to raise the foreign investment ceiling to 74 per cent,” officials said after the meeting.

The post-facto approval regularises a shareholding structure at the bank that has prevailed for over five years.

The FIPB cleared the proposal after the bank made amendments to its earlier proposal seeking to increase the foreign holding.

The proposal had turned controversial because of a restriction in the foreign direct investment (FDI) policy in the case of private sector banks.

Under the terms of the policy which came into force on February 13, 2009, if foreign entities own and control a company, its downstream investments will be considered as foreign investment.

Mortgage financier HDFC — the parent of HDFC Bank — has a 22 per cent stake in the private bank. Since foreign investors hold a 77.85 per cent in HDFC, the mortgage financier’s stakes in HDFC Bank and other group entities are treated as foreign investment.

Under the sector-specific FDI rules, foreign holding of 49 per cent is allowed in private banks under the automatic route. The FIPB approval is required for any threshold above that and up to 74 per cent. Before a private banks seeks such an approval, its board of directors must pass a resolution to that effect and seek shareholders’ permission by moving a special resolution at the annual general meeting.

Late last year, HDFC Bank sought to raise the FDI limit in the bank to 67.55 per cent. But this proposal ran into trouble since the 74 per cent cap on foreign holding would be breached if HDFC’s 22 per cent stake in the bank was treated as foreign investment.

That is why HDFC Bank moved a revised proposal to raise the foreign holding limit to 74 per cent.

HDFC Bank had argued the law could not be applied retrospectively. It stressed that HDFC’s holding in HDFC Bank should be exempt from new regulations as the holding existed when the law came into force in February 2009.

“The bank will still have a little headroom to raise funds from foreign investors,” a government official said.

HDFC chairman Deepak Parekh has been trying to lobby the government to treat HDFC as a local entity, thereby ensuring that its downstream investments in group entities are not clubbed with other foreign investors such as foreign institutional investors (FIIs), American or global depositary rights holders, non-resident Indians and overseas holders of convertible preference shares and foreign currency convertible bonds.

Meanwhile, the FIPB cleared 14 other proposals including that of Sanofi and Punj Lloyd’s move to enter defence production.