Kotak Mahindra Bank has written to the Foreign Investment Promotion Board (FIPB) seeking to allow it to increase foreign institutional investor (FII) limit from the current 48 perent to 55 percent and the board will meet today to decide.
Under current laws, FII limit till a limit of 49 percent is allowed for banks under the automatic route. It can, however, go up all the way to 100 percent with approval.
However, if the FIPB does allow Kotak to up FII limit to 55 percent, an increase in the foreign limit to over 50 percent would automatically qualify the bank as 'foreign-owned', leading to the conundrum of how to treat the bank's stake in its insurance business.
The question has already arisen before, in the cases of both HDFC (FII stake: 80 percent) and ICICI Bank (foreign stake: 70 percent), both of which cannot technically be called Indian institutions.
But if by extension, the stakes held by HDFC (it holds 71 percent in its insurance biz) and ICICI Bank (owns 73 percent) in their insurance businesses respectively are also considered 'foreign', the ventures are already in violation of the FDI limit, which was raised amid much fanfare from 26 percent to 49 percent by the government this year.
The confusion stems from the fact that while the Insurance Amendment Act passed in March 2015, which upped the FDI cap in the sector, said that "an Indian insurance company must be 'Indian owned and controlled'", a month before that (February 2015), the government passed a notification under the Foreign Investment Rules that said: "'Indian control' means control of such Indian insurance company by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens."
Since no action has been taken in cases where FDI in insurance limit is apparently being flouted, it is being considered that Indian banks are exempt from the above-mentioned definition of 'Indian control' -- and that a similar implicit understanding will be assumed for Kotak Mahindra Bank if it is also allowed to hike its FII limit.
But the confusion has led to much investor concern, and is likely the reason why the insurance sector has not seen much action in terms of FDI inflows despite the hike in limit
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