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Nirmala Sitharaman, finance minister at North block of Central Secretariat building. [Photographer: T. Narayan/Bloomberg]

Nirmala Sitharaman, finance minister at North block of Central Secretariat building. [Photographer: T. Narayan/Bloomberg]

Budget 2022: Government Mulls A Hike In FDI Limit For PSU Banks

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The government is considering a proposal to raise foreign direct investment limit in public sector banks.

The Ministry of Finance is considering raising the FDI limit to 74% from the current 20% cap, according to two people familiar with the matter. This would bring it in line with private sector banks, where 74% FDI is already permitted.

A hike in foreign investment limit is being seen as one way to help the government push ahead with its plan to privatise state-owned banks as it would allow more investors to participate. A recent assessment of the potential investor pool by the NITI Aayog had shown that there's only a small set of domestic investors eligible to participate in the privatisation process, the people cited earlier said. This has prompted the thinking on inviting greater foreign investor participation.

While discussions have taken place, it's unclear whether the proposal will be finally accepted, the people cited earlier said.

As part of the budget announcements in February 2021, Finance Minister Nirmala Sitharaman had said that the government would privatise two public sector banks. This is yet to happen. A planned privatisation of IDBI Bank is also yet to be concluded.

Queries mailed to the Finance Ministry and NITI Aayog on Thursday remained unanswered.

Bigger Changes Needed

Even if the government raises the foreign investment cap, it may not go very far in helping the government's privatisation push. A bigger hurdle remains provisions in the legislation that governs public sector banks.

The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, popularly known as the Bank Nationalisation Act, is yet to be amended. This act requires that the government must hold at least 51% of the paid-up equity capital in any public sector bank, at all times. Further, Section 9 of the act also allows the government to decide on key aspects of the bank, including its capital structure, constitution of the board, amalgamation with other banks, etc.

If the government intends to hold on to these powers, new foreign investors may be hesitant to come in as they will have little or no say in the running of the bank, the second person said.

While the government had announced the privatisation of two banks last year, it is yet to make any concrete steps in that direction. For instance, a decision to bring PSU banks under the Companies Act is yet to be taken. As such, it is difficult to say if changes in the FDI policy will yield immediate results, the second person cited earlier said.

"A foreign investor would like to see bank CEOs with longer tenures, competitive remuneration for executives and greater operational freedom, Abizer Diwanji, partner and head- financial services at EY, said. "Unless these issues are resolved, such investors would not agree to participate in a stake sale by the government."

The government will need to assume the role of a large shareholder and let an independent board take important decisions for the bank, for privatisation to fully succeed, Diwanji said.

Without giving up control, you can't call the process privatisation, said Amit Tandon, founder and managing director of Institutional Investor Advisory Services. "The government has been through a prolonged sale process with Air India, where it eventually had to give up control to affect a sale," he said. "That could function as a blueprint for the government to look at privatisation of banks as well."

Also Read: Budget 2022: Sajjid Chinoy On The Economic 'Speedometer' And What It Means For Policymaking

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