The Reserve Bank of India has issued consolidated guidelines on foreign direct investments in the banking sector. The consolidated guidelines incorporate the prevailing Government of India policy on foreign direct investment in the banking sector and various statutory provisions and regulatory guidelines issued by the Reserve Bank of India from time to time.

In terms of the Press Note No.4 (2001 Series) dated May 21, 2001 issued by Ministry of Commerce & Industry, Government of India, FDI upto 49 per cent from all sources will be permitted in private sector banks on the automatic route, subject to conformity with the guidelines issued by RBI from time to time.

For the purpose of determining the above-mentioned ceiling of 49 per cent FDI under the "automatic route" in respect of private sector banks, the following category of shares will be included:

1. IPOs,

2. Private Placements

3. ADRs/ GDRs, and

4. Acquisition of shares from existing shareholders [subject to statement below].

It may be clarified that as per Government of India guidelines, issue of fresh shares under automatic route is not available to those foreign investors who have a financial or technical collaboration in the same or allied field. This category of investors require FIPB approval.

It may be further clarified that, as per Government of India guidelines, automatic route is not applicable to transfer of existing shares in a banking company from residents to non-residents. This category of investors require approval of FIPB, followed by "in principle" approval by Exchange Control Department (ECD), RBI. The "fair price" for transfer of existing shares is determined by RBI, broadly on the basis of SEBI guidelines for listed shares and erstwhile CCI guidelines for unlisted shares. After receipt of "in principle" approval, the resident seller can receive funds and apply to ECD, RBI for obtaining final permission for transfer of shares.

Under the Insurance Act, the maximum foreign investment in an insurance company has been fixed at 26%. Application for foreign investment in banks which have joint venture / subsidiary in insurance sector should be made to RBI. Such applications will be considered by RBI in consultation with Insurance Regulatory and Development Authority (IRDA).

Foreign banks having branch presence in India, are eligible for FDI in the private sector banks subject to the overall cap of 49% mentioned above with the approval of RBI.

FDI and Portfolio Investment in nationalised banks are subject to overall statutory limits of 20 per cent as provided under Section 3 (2D) of the Banking Companies (Acquisition & Transfer of Undertakings) Acts, 1970/80. The same ceiling would also apply in respect of such investments in State Bank of India and its associate banks.

In terms of the statutory provisions under the various banking acts, the voting rights, when exercised, have been stipulated which are indicated as under:

No shareholder, other than SBI, shall be entitled to exercise voting rights in excess of one percent of the issued capital of the subsidiary bank concerned.

Under extant instructions, transfer of shares of 5 per cent and more of the paid-up capital of a private sector banking company, requires prior acknowledgement of RBI. For FDI of 5 per cent and more of the paid-up capital, the private sector banking company has to apply in the prescribed form (Annexure I to this circular) to the Department of Banking Operations & Development in the Regional Office of RBI, where the bank's Head Office is located.

Under the provisions of FEMA 1999, any fresh issue of shares of a banking company, either through the automatic route or with the specific approval of FIPB, does not require further approval of Exchange Control Department (ECD) of RBI from the exchange control angle. The Indian banking company is only required to undertake 2-stage reporting to the ECD as follows:

In the first stage, the Indian company has to submit a report within 30 days of the date of receipt of amount of consideration indicating the name and address of foreign investors, date of receipt of funds and their rupee equivalent, name of bank through whom funds were received and details of Government approval, if any.

In the second stage, the Indian banking company is required to file within 30 days from the date of issue of shares, a report in Form FC-GPR (Annexure II) together with a Certificate from the Company Secretary of the concerned company certifying that various regulations have been complied with. The report will also be accompanied by a Certificate from a Chartered Accountant indicating the manner of arriving at the price of the shares issued.

Wherever applicable, FDI in banking companies should conform to the provisions regarding shareholding and share transfer, etc. as stipulated by SEBI, Companies Act, etc.

In terms of Regulations 10 and 11 of RBI Notification No. FEMA 20/2000-RB dated May 3, 2000 issued under FEMA 1999, disinvestments by foreign investors would be governed by the following:

1. Sale of shares by non-residents on a stock exchange and remittance of the proceeds thereof through an authorized dealer does not require RBI approval.

2. Sale of shares by private arrangement requires RBI's prior approval. RBI grants permission for sale of shares at a price that is market related and is arrived at in terms of guidelines indicated in Regulation 10 above.