Last month, ING Group became the first foreign firm to increase its stake in an Indian bank under newly increased foreign direct investment (FDI) limits. ING proposed to purchase a 24% stake for Rs3.40 billion from Indian conglomerate GMR Group in Vysya Bank at Rs626.92 per share. ING already has a 20% stake in Vysya Bank through its subsidiary, Bank Brussels Lambert (BBL).
The deal marks the largest foreign direct investment in an Indian bank following the decision by Reserve Bank of India (RBI), the central bank, in February this year, to allow foreign firms to hold up to 49% stake in Indian banks. Prior to the announcement, foreign firms were allowed to hold a maximum of 20% stake. While more than doubling the limits, RBI, however, retained a cap on foreign investors' voting rights to 10%, thereby limiting the extent of management control.
The deal awaits approval from regulators in Belgium, the Netherlands and India. According to observers the Indian regulators, especially RBI and the Foreign Investment Promotion Board (FIPB), are said to be looking at the transaction as a step in the right direction. Under Securities and Exchange Board of India (SEBI) regulations, the deal does not trigger a general offer as it is a transfer of stake between the sponsors.
The crucial part of the deal is securing approval from the Insurance Regulatory Development Authority (IRDA), which is reviewing the transaction closely as ING's increased shareholding would imply an indirect increase in foreign ownership in ING Vysya Life. ING owns a 26% stake in ING Vysya Life, the maximum permissible for foreign insurers. Vysya Bank owns a 49% stake in ING Vysya Life, while the remainder 25% is held by the GMR Group.
However, Vysya Bank is looking to bring down its stake to 20%. Market sources believe the GMR Group is interested in taking up the 29% stake that Vysya Bank would sell. Sources also suggested that ING Vysya Life would be looking to increase its capital base from the current Rs1.10 billion to expand its operations that started in August 2001. Currently state-owned behemoth, Life Insurance Corporation of India (LIC) controls the life insurance market in India. Following the increase in capital base and Vysya Bank's sale of its 29% stake, ING would be able to remain within the ceiling permissible for foreign insurers.
ING is also interested to increase its stake in Vysya Bank to 49% within the next 12 months. However, the present proposal to increase it to 44% hinges largely on whether International Finance Corporation (IFC) sells its 10% stake in Vysya Bank. Industry sources suggest that IFC is expected to sell its entire stake in Vysya Bank. That may happen in the form of a sale to another strategic investor or in the open market.
Vysya Bank has 1.5 million customers and a network of 480 branches, 90% of which are in southern India. The GRM Group is a privately owned conglomerate with interests in infrastructure, information technology, manufacturing, banking and insurance.
The transaction marks the first M&A deal in the banking sector for ING's 13-strong investment banking team in India comprised of former Bank of America bankers who were hired by ING following their retrenchment from Bank of America.