The finance ministry may allow foreign institutional investors to pick up a larger stake in public sector banks in Budget 2003.

FII stake through American depository receipts and global depository receipts will not be counted while determining their overall exposure in banks.

The proposal was initially mooted by the State Bank of India, but is yet to be cleared by the finance ministry.

At present, FIIs are allowed to pick up 20 per cent stake in public sector banks and up to 49 per cent in private banks.

Their total holding in a bank includes the stake acquired through purchase of ADRs/GDRs.

According to government sources, the move would require an amendment to both the Banking (Acquisition and Transfer of Undertaking) acts of 1970 and 1980, and the SBI Act.

Not only would the liberalisation benefit the banks which have already issued depository receipts abroad, it can be used by other banks also, provided the concommitant legislation to reduce government equity in PSU banks to 33 per cent gets the nod from Parliament.

Finance Minister Jaswant Singh is expected to endorse the move in this year's Budget, as part of the measures to bolster investment activity in the capital markets. Several FIIs have bought heavily in the SBI counter.

The entire issue is also linked with the liberalisation of share holding in the banking sector.

The finance ministry had, for instance, rejected a proposal to push the FII investment in private sector banks to above 49 per cent a few months ago.

In the present instance, removing the fetters on SBI investment would also involve transferring the Reserve Bank of India's holding in SBI to the government.

The Centre would also have to be cautious and ensure that the share holding pattern of these banks are not manipulated by vested interests after the relaxation. Incidentally, the Banking Companies (Acquisition and Transfer of Undertaking) Bill has been pending with the standing committee on finance since December 2000.

Run-up to the Budget 2003