The Reserve Bank of India is understood to have recommended to the finance ministry that Global Depository Receipts and American Depository Receipts be excluded from the limits set out for foreign holdings in public sector banks.
However, it is not clear how ADRs and GDRs will be treated.
The RBI is understood to have advised the finance ministry of its view, and now it is for the ministry to take a call. Though the RBI has confined itself to speaking on the issue as pertaining to the banking sector, the principles spelt out in its "advice" could have a bearing on the finance ministry's policy on the general treatment of ADRs and GDRs in the sectoral limits for portfolio and foreign direct investment.
According to the existing norms, foreign holdings in public sector banks are capped at 20 per cent of their total capital. The RBI's "advice" is based on a report submitted by its committee on the compilation of foreign direct investment in India. The committee was constituted jointly by the RBI and the department of industrial policy and promotion in 2002.
The committee had suggested that the conflict between the Foreign Exchange Management Act's categorisation of ADRs/GDRs as foreign direct investment and the International Monetary Fund's definition, which excludes these holdings, may be removed by deleting ADRs/GDRs from Schedule I of FEMA regulations and placing them under a separate schedule.
However, the committee was of the view that ADRs/GDRs may continue to be treated as portfolio investment, taking into account the principles of long-term relationship and management interest.
If the RBI's view goes through, the State Bank of India will be one of the biggest beneficiaries as it is the only bank to have issued GDRs equivalent to 7.88 per cent of its capital.
Many of the public sector banks had earlier represented to the finance ministry to remove the 20 per cent limit on foreign holdings. But neither the RBI nor the government had taken cognisance of that.
Easing fund flows
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