World Trade Organization Organisation Mondiale du Commerce Organización Mundial del Comercio

US FQ 34:

(on US 98)

Report by the Secretariat (WT/TPR/S/249): IV. TRADE POLICIES BY SELECTED SECTOR: (3) Services: (ii) Financial services: Page 141, Paragraph 61:

The Secretariat notes that "Foreign investment participation [in India] is allowed in both public and private sector banks, up to a threshold of 74% for all forms of foreign investment (i.e. FDI and FII) in private banks, and of 20% in public banks." On August 11 2010, however, the RBI released the "Discussion Paper on Entry of New Banks in the Private Sector," seeking feedback from all stakeholders and the general public with respect to new private bank licenses. This discussion paper states that: "Since the objective is to create strong domestic banking entities and a diversified banking sector which includes public sector banks, domestically owned private banks and foreign owned banks, aggregate non-resident investment including FDI, NRI and FII in these banks could be capped at a suitable level below 50 percent and locked at that level for the initial 10 years…this [capping foreign investment to below 50% for the initial 10 years] would be in contrast to the present FDI policy which allows 74 percent foreign equity in private sector banking." When does India intend to release final guidelines, and will the new bank licenses cap foreign investment below the current 74% threshold?

Reply: Reserve Bank of India has released the Draft Guidelines for Licensing of New Banks in the Private Sector on 29 August 2011 on its website for public comments and feedback and has given time up to 31 October 2011. The draft guidelines cap the aggregate foreign investment in the new private sector banks at 49% for the first five years from the date of licensing of the bank. After the expiry of five years from the date of licensing of the bank, the permissible foreign shareholding would be as per the extant policy, which is presently at 74%. The lower foreign investment cap in the initial five years for a new private sector bank is stipulated with an objective to create strong domestic banking entities.

U.S. Follow-Up Question: Could India please explain how it believes limiting foreign investment to a level lower than that provided for in its current policy framework will contribute to development of strong domestic banking entities and a diversified banking sector? Does India believe lowering FDI caps will attract more investment?

Reply: As per the Draft Guidelines for Licensing of New Banks in the Private Sector released on 29 August 2011 only entities in the private sector that are owned and controlled by residents would be eligible to promote banks. Further, the promoters would be required to hold a minimum of 40% of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. The requirement of a major stake from the promoters in the new banks is to ensure support and direction to the bank from the promoters in the formative years to realize the vision envisaged for the new bank. Consistent with these requirements, the aggregate foreign investment in the new private sector banks is capped at 49% for the first five years from the date of licensing of the bank. Five years after the date of licensing of the bank, foreign shareholding would be permitted as per the extant policy, which is 74% for the present. It is felt that a new bank would require a time period of at least five years to establish itself, and as such, the foreign investment has been capped at 49% for the new banks for a period of five years from the date of licensing.

A final view on all aspects of the Draft Guidelines for Licensing of New Banks would be taken after examining the comments and suggestions from all stake holders and members of general public.