DIPP rejects finance ministry proposal for FIPB clearance for downstream investments by banks with foreign equity

In a move that would be welcomed by Indian companies in which top banks like HDFC Bank and ICICI Bank hold stakes, the Department of Industrial Policy & Promotion (DIPP) today rejected a proposal from the finance ministry that Foreign Investment Promotion Board (FIPB) clearance be made mandatory for such investments in case of sectors such as telecom and insurance that are subject to FDI ceilings.

Countering the finance ministry and the Reserve Bank's arguments, DIPP secretary Ajay Shankar said subjecting such investments to FIPB approval would increase workload.

Since the FDI level in a number of banks like ING Vysya, Indus Bank, Federal Bank, Development Credit Bank, ICICI Bank and HDFC Bank exceeds 50 per cent, the finance ministry and the RBI had proposed that FIPB clearance be made mandatory for downstream investments by such banks. In other words, downstream investment by the banks be treated as foreign investment, reducing the available space for the concerned companies to attract FDI.

The foreign investment level increased as indirect foreign holding like ADR, GDR and FII investment also needed to be taken into account for calculating FEI levels under the new regime introduced through Press Notes 2,3 & 4.

The DIPP communication to finance ministry was sent last week according to highly placed government sources who requested anonymity. By countering the finance ministry's arguments, the DIPP has also virtually ruled out any further clarification at this stage on the indirect FDI regime established through Press Notes 2,3 & 4 or 2009.

The DIPP says the control of these banks is with Indian citizens even though they many not have majority share holding.