According to sources, if the proposal of the bank to raise its foreign investment limit to 67.55 per cent is accepted, it would exceed the cap of 74 per cent, after taking into account parent HDFC Ltd's stake.
HDFC Ltd, which is 75.71 per cent owned by FIIs, and associate companies hold 22.64 per cent in HDFC Bank. Their investments in HDFC Bank were made before 2009, when the government came out with norms to calculate the level of foreign investment in companies.
"Downstream investment by HDFC Ltd prior to 2009 in HDFC Bank would be deemed as FDI in case there is any change in the shareholding pattern after the cut-off year," sources said.
The bank, however, has said the fresh proposal would not result in breach of the cap as the investments by HDFC Ltd were made before 2009.
"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 had said yesterday.
In February 2009, the government came out with guidelines to calculate the level of foreign investment, direct as well as indirect, in Indian companies. At the time, it clarified that investments made prior to the guidelines would not be impacted by the 2009 norms.
However, sources said the exemption provided in the 2009 guidelines would be valid as long as the existing foreign investment structure is not disturbed.
A bank is required to take FIPB approval to increase its foreign shareholding limit (foreign institutional investment and foreign direct investment) beyond 49 per cent up to 74 per cent. Foreign investment up to 49 per cent can be done through the automatic route.
Last year, HDFC Bank approached the Foreign Investment Promotion Board (FIPB) to increase the foreign holding in the bank to 67.55 per cent from 49 per cent.
As of December 2013, foreign shareholding in the bank was at 52.18 per cent.
As the foreign holding limit in the bank had breached 49 per cent, the RBI directed that no further purchases of the bank's shares would be allowed through Indian stock exchanges on behalf of overseas investors, including NRIs, persons of Indian origin and holders of depository receipts.
In December 2013, the FIPB had deferred a decision on the proposal for want of more details.