Tonic For Private Banks

In what could be good news for the investors of select private sector banks and the lenders themselves, the government today permitted full fungibility, or a composite cap, for foreign investment in private sector banks.

This effectively means that the holding of foreign portfolio investors (FPIs) or foreign institutional investors (FIIs) in these banks can go up to 74 per cent, which is the sectoral ceiling for foreign investment.

At present, FPIs are permitted to invest up to 49 per cent in these lenders. It may be recalled that in July this year, when the Centre had allowed fungibility across all sectors, defence and private sector banks were left out. 

Market circles said the development will benefit a few private sector banks where headroom is available for FPIs to increase their stake, subject to the total foreign ceiling of 74 per cent.

“It will help them in raising capital. These banks can come out with qualified institutional placement (QIPs) issuances,” an analyst said.

“I welcome the government’s decision to ease foreign investment norms in 15 sectors. Today’s announcement is in line with the government’s ongoing reforms process and its objective of enhancing the ease of doing business in India. The decision to remove the sub-limit restrictions within the overall limit of 74 per cent for private sector banks will provide greater flexibility to banks and investors,” Chanda Kochhar, MD & CEO of ICICI Bank, said.

Data available from the stock exchanges for the period ended September 30 reveal that while the foreign holding of ICICI Bank (including FPIs and depository receipt holders) is a little over 67 per cent (FII holding at 38.24 per cent), the foreign holding is 46 per cent in the case of Axis Bank, 43 per cent for IndusInd Bank and nearly 35 per cent in Kotak Mahindra Bank.

Incidentally, while the FPI/FII cap in these banks now stands at 49 per cent, in many of the cases the actual holding is much below. In the case of Axis Bank, the FII holding is 42.13 per cent for the quarter ended September 30 and it has come down from 44.51 per cent in the preceding three months. Kotak Mahindra Bank has also seen a drop in FII holding on a sequential basis.

While some of this could be on account of the challenging conditions now faced by the country’s banking sector, it is felt that bringing in a composite cap for foreign investment will benefit these banks when sentiments improve.