India Eyes Higher Foreign Bank Stakes: RBI May Ease 15% Cap to 26% via New Rules

The Reserve Bank of India (RBI) is preparing to ease long-standing restrictions on foreign ownership in Indian banks, a move driven by growing interest from overseas lenders and India’s expanding demand for capital.

Recent Landmark Deal

In April and May, Japan’s Sumitomo Mitsui Banking Corporation (SMBC) acquired a 20% stake in Yes Bank—a $1.58 billion deal that became the most significant cross-border banking transaction in India’s history. 
That deal took advantage of case-by-case regulatory exemptions, offering a glimpse into the policy flexibility under consideration.

Current Regulatory Environment

India allows up to 74% foreign direct investment (FDI) in private banks, but strategic investors—those seeking management influence—are capped at 15%. Additionally, promoters must reduce their holdings to 26% over 15 years, and voting rights are capped at 26% for any entity. These rules have kept foreign bank participation low, just under 4% of outstanding bank credit.

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Why Change Now?

RBI Governor Sanjay Malhotra recently confirmed that the central bank is conducting a comprehensive review of shareholding and licensing norms. Sources say the RBI is open to case-by-case exemptions, allowing stronger foreign banks to hold larger stakes—possibly up to 26%—through locally regulated subsidiaries. 

Economic analysts express optimism. Madhav Nair of the Indian Banks Association notes, “The interest is driven by India’s strong economic growth and large under‑penetrated market”. Alka Anbarasu from Moody’s adds, “India will need much more banking capital over the medium term”. 

Who’s Watching?

Global institutions, such as Canada’s Fairfax Holdings and the UAE-based Emirates NBD, are aiming to acquire a 60% stake in IDBI Bank. Emirates NBD has already received approval to establish a banking arm in India, joining DBS and the State Bank of Mauritius as wholly owned foreign lenders. 

Legal Obstacles Remain

While the RBI sets FDI and ownership caps, the voting rights limit is enshrined in law and would require an amendment by the Ministry of Finance.  However, the RBI may grant longer compliance timelines for diluting promoter shareholdings.

RBI’s Rationale

Governor Malhotra emphasised the need for “scaling up banks to meet the economy’s growing demands” while maintaining financial stability. India’s banking system is now robust enough to consider structural change, especially amid rising foreign interest and continued domestic economic momentum. 

Outlook and Implications

Should policy revisions be finalised, they could open new capital channels, attract international best practices in risk management and governance, and foster competition in India’s under-penetrated banking landscape. But significant changes—especially to voting rights—must await legislative action. For now, RBI appears to favour a gradual, case-by-case rollout.

Conclusion

The RBI’s contemplation of easing bank ownership norms marks a significant policy pivot. If implemented carefully, it could bolster India’s banking capital, attract global expertise, and support growth, while mitigating concentration risk. The coming months will reveal if case-by-case ease evolves into a broader regulatory overhaul.