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Sarbajeet K. Sen

NEW DELHI, Sept. 19

FOR once it appears that the Reserve Bank of India has slipped heavily, and that too in its own banking backyard. Or so the Government thinks.

The Ministry of Finance feels that the RBI Governor, Dr Bimal Jalan, had erred in stating recently that the Government needs to clarify its position on the limits on foreign institutional investor (FII) investments in the banking sector, since the policy parameters on the issue have already been clearly enunciated.

"We have clearly stated that FII investment in private banks can go up 49 per cent over and above the 49 per cent foreign direct investment that has been permitted for these banks. In fact, we have made the policy clear even in a reply in Parliament in this regard," a top official of the Finance Ministry said.

Thus, he said that, in effect, the total foreign investment, FDI and portfolio investment (FII investments) in private banks can go up to 98 per cent at any point of time. "We are very clear about the policy and have made our position well known. The RBI should not have any doubts in this regard," officials said.

The RBI Governor's observations on the haziness of FII policy in banking were made during a recent seminar in Mumbai. Dr Jalan had mentioned that the Government should expedite taking a decision on the FII ceiling in various sectors, including banking. The RBI Governor's comments were reported widely in the Press.

Officials pointed out that the clarification on the Government's stand on FII limit in banking was made in the Rajya Sabha in March this year by the then Minister of State for Finance, Mr Balasaheb Vikhe Patil. The Minister had made it clear that the 49 per cent FII limit was outside the FDI limit of 49 per cent. However, the limit of FII investment to be allowed at any time would have to be approved by the board of directors of the bank.

The clarification came soon after the Government announced a decision to raise the FDI cap in private banks to 49 per cent from the earlier 20 per cent.

The debate on the foreign investment limits in banking had come into sharp focus during attempts by certain private banks to source additional foreign investment. Centurion Bank had sought a clarification on this while seeking to bring in a foreign strategic partner.

More recently the cap had been under discussion during efforts by one of the foreign equity holders to hike its stake in Vysya Bank. For the public sector banks, the overall foreign investment cap, however, has been retained at 20 per cent. This cap includes FDI as well as any other portfolio investments.

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