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Foreign Stake: HDFC Bank Says Law Can't Apply Retrospectively

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Private sector HDFC Bank said on Tuesday (22 April) parent HDFC, which is majority-owned by FIIs, shouldn't be considered as foreign because changes in the law defining overseas stake in a firm cannot apply retrospectively.

The remarks come in the backdrop of RBI banning foreign investors from picking up more shares in HDFC Bank.

Under the present laws, with HDFC's 22 per cent stake, foreign holding in HDFC Bank exceeds the permissible limit of 74 per cent.

HDFC Bank, however, says HDFC held the stake in its before 2009 and changes in law cannot apply retrospectively.

"We have got legal opinion from one (former) chief justice and another (former) Supreme Court judge, which fundamentally says that since HDFC's holding was there in HDFC Bank prior to the law on deemed foreign companies being passed, that they should be grandfathered," HDFC Bank MD and CEO Aditya Puri said.

"Normally, you do not have retrospective application of the law. So, when that law came in, HDFC already had the holding. Now you have changed the law, that will have to be for future," he added.

At the end December, 2009, FIIs held 59.37 per cent in HDFC.

The government had amended the foreign holding definition in 2009, under which an entity with over 50 per cent overseas investment or controlled by foreigners, is considered foreign-owned.

Parent HDFC is considered foreign as FIIs hold 74 per cent stake in it as on December, 2013.

As per the existing norms, a bank is required to take FIPB approval for increasing its foreign shareholding limit (FII and FDI) beyond 49 per cent and up to 74 per cent respectively. The investment till 49 per cent can be done through automatic route.

As the foreign holding limit in the bank was breached, the RBI had directed that no further purchases of HDFC Bank shares would be allowed through stock exchanges on behalf of overseas investors, including NRIs, persons of Indian origin and holders of depository receipts.

Apart from HDFC's 22.64 per cent, foreign institutional investors own 34.08 per cent in the bank, 0.03 per cent is with qualified foreign investors, 0.33 per cent with NRIs and 16.97 per cent with overseas depository receipt holders.

Puri said the bank has taken the advice of former Chief Justice of India SP Bharucha and former Supreme Court judge B N Srikrishna on the matter, to come to this conclusion.

It can be noted that HDFC Bank has also approached the Foreign Investment Promotion Board to raise its foreign holding limit to 67.55 per cent from the present 49 per cent.

When asked if he is expecting a favourable decision from the FIPB, Puri said: "We are hoping so."

On the move by MSCI India Index to reduce its weight on the bank stock, Puri said it is a natural action for a "dispassionate" player like MSCI to do because of the official action.

Meanwhile, on the bank's sustainability initiatives, Puri said it is already devoting 1-2 per cent of its net profit to CSR activities.

"We were doing it without the mandate. We do believe that all corporations owe a due to society. The quantum you can debate, but the fact that you can do something for the society as a corporate citizen is a must," he said.

Scale and sustainability are key for the bank in its CSR efforts, Puri said, specifying that it has been working in the fields of blood donation, sustainability (by uplifting people from below poverty line), education and replacing moneylenders.

Puri said under its sustainability programme the bank has already helped 2.2 million come above the poverty line through interventions on the loan disbursement front which stresses on know-how sharing, and announced that in the next three years it targets to take up the number to 10 million people.

On the blood donation front, where it set a Guinness record for the largest single-day blood drive with 61,902 participants, Puri said the bank will be targeting to take up the total amount of blood collected to 1 lakh units from the 86,000 in 2013.


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