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RBI Propose changes in private Bank Provisions-Makes it difficult for Banks with Insurance Ventures to attract FDI 26/09/2010
In an indication of continuing differences over the new foreign direct investment policy, the central bank has proposed changes in the provisions relating to private banks that will make it difficult for them to attract foreign investment if they have insurance ventures. Also, private banks that have sizeable foreign investment will find it difficult to float insurance ventures with foreign partners.

The Reserve Bank of India has proposed that foreign direct investment, or FDI, proposals of private banks that have an insurance joint venture or subsidiary should seek approval of the RBI and insurance regulator IRDA. The central bank has suggested these changes to ensure that 26% foreign investment limit in insurance sector is not breached even indirectly.

“The new rules will ensure that there is no violation of the current (sectoral limit) guidelines for future players,” said an RBI official, adding that the central bank was not decided on the existing insurance ventures of banks that have sizeable foreign investment. This will also mean that private sector banks that have substantial foreign investment will need permission from the two regulators for new insurance ventures.

“Some of these (private) banks have not yet made a foray in the insurance sector. In any case, entrants have to seek permission from their respective regulators,” said a finance ministry official, adding that the ministry supports the RBI move. As per the new FDI guidelines, all downstream investments by a majority Indian-owned and/or controlled by Indian company are considered as Indian investment.

In the case of banks, the policy allows 49% FDI through automatic route and a further 25% through approval of the foreign investment promotion board, taking the total to 74%. Currently, a majority Indian-owned-and-controlled bank can set up an insurance venture with 26% foreign stake. But it would be violating the sectoral limit as its foreign investors will also have a proportionate stake in the downstream insurance venture.

The RBI is keen to preclude such investment beyond the sectoral limit and the proposal underscores the conservative approach of the central bank. In its discussion paper on new banking licences, the central bank has suggested lowering the foreign investment limit in new private sector banks to below 50%. In its paper, the RBI had mentioned that since the objective is to create strong domestic banking entities and a diversified banking sector, the aggregate non-resident investment, including FDI, NRI and FII, could be capped at a suitable level below 50% and locked at that level for the initial 10 years. The suggestion goes against the spirit of the new foreign direct investment policy that has done away with the concept of indirect calculation of foreign investment.

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