India Pushes Lifting Bank Restrictions After Vote

By Paul Gordon and Cherian Thomas

July 24 (Bloomberg) -- India's government, victorious in a confidence vote this week, will push to lift restrictions on overseas investors' control of privately run banks, Finance Minister Palaniappan Chidambaram said.

Stalled legislation removing a 10 percent cap on foreigners' voting rights in banks may be revived before laws on pensions and insurance, Chidambaram said today. Prime Minister Manmohan Singh remained in power Tuesday with support from new allies who replaced communists opposed to foreign investment.

``We seem to have acquired the political space to take the liberalization process forward,'' Chidambaram said in a telephone interview from New Delhi. ``We are looking into various aspects of the foreign direct investment regime, trying to see whether further liberalization is possible.''

The Bombay Stock Exchange's banking index is set for its biggest weekly gain since it was created 6 1/2 years ago after Singh's victory. The bill would give ING Groep NV, the largest Dutch financial services company, more control over Bangalore- based ING Vysya Bank Ltd. with its 44 percent stake.

``There is likelihood of further reforms,'' said Tushar Poddar, a Mumbai-based economist at Goldman Sachs Group Inc. ``Given the limited time at the government's disposal, and the motley group of new allies, reforms are by no means certain.''

India's stock market surged more than fourfold in the first 3 1/2 years of Singh's administration as the 75-year-old prime minister presided over an economic expansion that averaged 8.9 percent a year, the fastest since independence in 1947. The prime minister's five-year tenure comes to an end in May.

Easing Legislation

Amar Singh, whose Samajwadi Party replaced the communists as the government's main ally, said on July 10 he may back legislation easing curbs on foreign companies seeking to expand in insurance, pensions and banking.

The bill to remove a 10 percent cap on the voting rights of foreign investors in non-state banks is pending in parliament while a parliamentary committee is considering a bill to open the pensions business to overseas investors, Chidambaram said.

The draft bill to raise the foreign investment ceiling for insurers to 49 percent from 26 percent is with the government, he said. The banking and pension bills have been languishing in parliament for three years and the finance minister announced the insurance measures in 2006.

``All three are on the agenda of the ministry of finance,'' Chidambaram said. ``Bills in advanced stages of consideration will be taken up first.''

Amending the legislation won't be enough for foreign banks to buy stakes as they can only invest in privately held lenders that have failed or need a bailout. The central bank plans to review its policy after April 2009.

Insurance Restrictions

New York-based American International Group Inc., the world's largest insurer by assets, New York Life Insurance Co. and Prudential Plc, based in London, are among insurers that are restricted to 26 percent stakes in their ventures in India.

``Insurance companies that aren't here and waiting for this to happen will come to India,'' said Analjit Singh, chairman of Max New York Life Insurance Co. ``New York Life will exercise its option to raise its stake if the FDI limit is raised.''

Reviving the reforms may entice Lloyd's of London, the world's largest insurance market, to scale up its operations in India, where it writes about $400 million of business, spokeswoman Louise Shield said July 10.

Manmohan Singh's plans to give overseas companies a greater role in India's financial industry were blocked by his erstwhile communist partners, who this month withdrew support over the nuclear accord with the U.S.

Opposition Parties

Singh got 275 votes in his favor and 256 against in the confidence vote in the 541-member lower house, a margin that will force Chidambaram to secure backing from opposition parties to ensure the government's pending legislation is approved.

``In a parliamentary democracy, the ruling party reaches out to all opposition parties,'' Chidambaram said.

Chidambaram also said the government will revisit plans to list shares of government-run companies.

``Listing improves governance. There are many companies looking for capital,'' Chidambaram said, without revealing which company will sell shares. ``We have to see what the market is like and what the appetite in the market is like.''

This year, foreign investors, who bought a record $17.2 billion of stocks in 2007, have turned sellers as the benchmark equity index has lost about a third of its value. The central bank expects growth in Asia's third-largest economy may slow to 8 percent this year, dragged down by record high oil prices.

To contain inflation, Reserve Bank of India Governor Yaga Venugopal Reddy has raised interest rates 15 times and ordered banks to set aside more reserves eight times since October 2004. The governor will unveil the next monetary policy statement on July 29, which will be Reddy's last policy announcement if he retires as scheduled in September.

India will announce its decision regarding the country's next central bank governor ``well in time,'' Chidambaram said.

To contact the reporters on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net; Paul Gordon in Hong Kong at pgordon6@bloomberg.net.