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FDI: Private banks get a leg up

Mar 1, 2003

In a key development, Finance Minister Jaswant Singh has proposed a hike in Foreign Direct Invesment (FDI) limit of private (and foreign) banks from the current 49% to 74%. The move is aimed at encouraging foreign strategic investment in the Indian banking sector. A snapshot of the shareholding structure of some of the top private sector banks reveals that presently none of these banks have even 49% foreign stakeholders. The 44% stake of Bank Brussels Lambert in ING Vysya Bank is the highest FDI stake in any private sector bank. So why would the FDI suddenly start flowing in the sector, if they have not even utilised the existing norms.

Bank Name Foreign Partners* FIIs
H D F C Bank Ltd. 11.6 18.6
I C I C I Bank Ltd.** - 37.2
I N G Vysya Bank Ltd. 44.0 5.6
United Western Bank Ltd. - 0.0
Federal Bank Ltd. - 1.4
U T I Bank Ltd. - 9.3
I D B I Bank Ltd. - 1.4
Global Trust Bank Ltd. 20.9 0.3
Indusind Bank Ltd. 25.0 0.0
Karur Vysya Bank Ltd. - 0.6
Centurion Bank Ltd. 17.7 19.6
Vysya Bank 19.4 6.7
* As per the latest company release
**ICICI Bank has not indicated clearly on the foreign collaboration.
However, at one time, it did sell a 4.9% stake to Prudential

The reason is simple. A 74% stake gives foreign partners the crucial management control in India's banking sector. Till date, a lot of foreign banks have shied away from acquiring stakes in key Indian banks due to the FDI restrictions. Post the easing of these norms, it is likely that the private banking sector may see a lot of M&As or strategic investments going forward. This consolidation in the industry will prove beneficial for the sector in the long term owing to the technological inputs these strategic partners will bring.

On that note, please look at the above list carefully, for you may find some of these very names getting acquired by foreign banking majors in the times to come. So in that sense, it is a good investment opportunity. However, before taking the plunge, make sure that the fundamentals of the bank you are looking at are rock solid, for it is the most efficient banks that will see foreign suitors lining up.

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