With the Centre doing away with sub-limits for foreign investments in Indian companies, domestic banks, especially those in the private sector, could benefit from enhanced capital-raising options from overseas investors.

Currently, the different types of foreign investments include foreign direct investment (FDI), foreign institutional investors (FIIs), foreign portfolio investors (FPIs), non-resident Indians (NRIs), qualified foreign investors (QFIs), and depository receipts (DRs). Each class of these investors is allocated a sub-limit for investment in the capital of an Indian company.

Within the banking sector, foreign investment up to 74 per cent (including investment by FIIs/FPIs) is allowed in private sector banks. This limit stands at 20 per cent (FDI and portfolio investment) in the case of public sector banks.

Sectoral cap

According to Madan Sabnavis, Chief Economist, Care Ratings, the intermingling of sub-limits will help attract foreign investments into Indian banks, especially those in the private sector, where the 74 per cent sectoral cap on foreign investment has not yet been reached.

“This provision may not be of much help to banks which have already hit the sectoral cap,” he said.

Public sector banks could benefit from this move only if the sectoral cap for foreign investment is raised above 20 per cent.

Rana Kapoor, MD and CEO of YES Bank, said, “Approval of the composite FDI cap, while it may appear procedural, is a significant reform for the economy as a whole, as there will be more capital flowing into the system and significantly ease the procedural investment decisions by foreign investors.”

Kapoor added that his bank had received board approval in April 2015, as well as an enabling approval from shareholders for increasing the FII limit to 74 per cent, in the annual general meeting in June 2015. Currently, the bank’s FII holding is below 49 per cent.

“Therefore, from YES Bank’s capital-raising perspective, we now have headroom to substantially increase FII holding…This will enhance flexibility of various capital-raising options, including American Depository Receipt/Qualified Institutional Placement plans,” he added.

‘Significant move’

Aditi Nayar, Senior Economist, ICRA, said the reviewed FDI policy removes the distinction between various sources of foreign capital and this move is important from the operational point of view as it eases tapping funds from overseas investors.

Following the Centre simplifying the FDI policy on Thursday, bank stocks saw a rally.

The benchmark Bank Nifty, comprising shares of 12 banks, vaulted 351.80 points to close at 19,168.05. The shares of five banks – Kotak Bank, Axis Bank, YES Bank, HDFC Bank and State Bank of India – closed up more than 1 per cent.