ICICI Bank, HDFC Bank to get 'foreign' tag

With the government's decision not to make further changes to its new policy on foreign investment, two of the country's biggest private lenders, ICICI Bank and HDFC Bank, in which foreign entities have more than 51 per cent equity holding, will now be treated as foreign banks.

The decision will impact future investment plans of the banks in subsidiaries as also in sectors with a cap on foreign investment. However, investments in financial services, including insurance, made prior to the announcement of the new policy in February 2009 would not be excluded from the ambit of the new rules, according to a senior government official with knowledge of the proposal.

Under the new rules firms would be categorised either as predominantly foreign-owned or controlled as foreign companies.

In the case of ICICI and HDFC Bank, the foreign investment is over 51 per cent even though management is in Indian hands. Foreign investment rules allow overseas investors to hold a maximum of 74 per cent in banks, through purchases in secondary markets, or through global depository receipts of American depository receipts.

According to an unidentified government official quoted by The Economic Times newspaper, new investments made by the banks would be treated as foreign investment.

The official added that the government would not change its policy or providing exemptions to banks from the new foreign direct investment norms issued. He said the matter had been communicated to the finance ministry, which was also in agreement with the government's decision.