Seal on Kotak proposal.Fii Holding Will Increase To 55%.Monday-Target 1480-1510 ?

The Foreign Investment Promotion Board (FIPB) has finally approved Kotak Mahindra Bank’s proposal to raise its foreign institutional investor (FII) holding to 55 per cent from 49 per cent.

Sources said the approval came only after the department of financial services and the department of industrial policy & promotion gave their go-ahead. The proposal had been deferred four times before being approved.

The question that had held back the approval was whether a 55 per cent foreign holding in Kotak Mahindra Bank would violate the foreign stakeholding rules in its insurance arm Kotak Mahindra Old Mutual Life Insurance. At present, foreign holding in insurance ventures is capped at 49 per cent.

It is this niggling question that snowballed into a major controversy, deferring the plan so far.

However, sources feel the departments may now have reached a consensus that an indirect foreign equity in an insurance venture will not be counted while calculating ownership.

“The department of financial services is soon likely to amend insurance rules so that indirect foreign equity is not counted while determining ownership,” they said.

The Irda has said in the past that such proposals were not a violation of FDI guidelines and the FIPB may also look at the precedent set in the Warburg Pincus-Max India case.

Warburg Pincus and its associates were allowed to invest in Max India, the promoter of Max New York Life Insurance Company, even though New York Life held the maximum stake allowed in insurers.

The board had ruled that foreign investment in the Indian promoter (Max India) should not be included while computing the foreign shareholding of the insurer. It seems the same principle was followed while deciding the Kotak case.

Kotak holds 74 per cent in its insurance venture with Old Mutual Plc holding the remaining 26 per cent.

Analysts said the implications of this decision would be that banks such as ICICI and HDFC Bank could also sell more stake to foreign investors without compromising the FDI norms which govern their insurance arms.

While India’s FDI policy allows 100 per cent foreign investment in banks, an increase in the foreign limit to over 50 per cent would make the bank “foreign-owned”, leading to the conundrum of how to treat the bank’s stake in its insurance business.

A further clarification from the ministry of finance is likely soon.