Source: ET
Context:
India’s long-term growth prospects, coupled with a more accommodative regulatory environment from the Reserve Bank of India (RBI) and the government, are driving a wave of foreign investments in the country’s banking sector. These transactions aim to create larger and stronger banks, signaling confidence in India’s financial stability and growth potential.
Modes of Foreign Investment in Indian Banks
- Equity Investment / Stake Acquisition:
- Direct purchase of shares from promoters or private placements (e.g., SMBC in Yes Bank).
- Can be structured as preferential allotments, warrants, or secondary market purchases.
- FDI through Wholly-Owned Subsidiaries (WOS):
- Some foreign banks operate in India via subsidiaries fully owned by them, approved by RBI (e.g., Emirates NBD).
- Private Equity and Strategic Partnerships:
- Foreign investors invest pre-IPO or during reconstruction phases to gain significant stakes.
- These investments often precede public listing to improve capital structure and governance.
- Preferential Allotment with Open Offers:
- Foreign investors may subscribe to new shares via preferential allotments and follow up with mandatory open offers under SEBI rules to acquire additional shares.
Regulatory Environment:
- FDI in private banks is capped at 74%, with individual foreign financial entities limited to 15% without RBI approval.
- Foreign investors’ voting rights in private banks are capped at 26%, but the regulatory stance is becoming more supportive of larger foreign stakes, especially from countries with strong bilateral ties with India.
- Accommodative measures allow well-diversified banks to attract majority foreign stakes, enhancing capital bases and supporting long-term growth.
