The Reserve Bank on Wednesday permitted wholly-owned subsidiary (WOS) of foreign banks to acquire domestic private sector banks as well as set up branches anywhere in the country.
It also allowed foreign bank subsidiary to list on local stock exchanges.
However, foreign bank subsidiary will not be allowed to hold more than 74 per cent, the sectoral cap for overall foreign investment, in the private banks they may acquire.
"As a locally incorporated bank, the WOSs will be given near national treatment which will enable them to open branches anywhere in the country at par with Indian banks (except in certain sensitive areas where the Reserve Bank's prior approval would be required)," the RBI guidelines said.
Such conversion is also desirable from the financial stability perspective, the framework for setting up of WOS by foreign banks in India said.
"The issue of permitting WOS to enter into merger and acquisition transactions with any private sector bank in India subject to the overall investment limit of 74 per cent would be considered after a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks (branch mode and WOS)," it said.
To provide safeguards against the possibility of the Indian banking system being dominated by foreign banks, it said, the framework has certain measures to contain their expansion if the share of foreign banks exceeds a critical size.
RBI will put a stop on further entry of new WOSs of foreign banks or capital infusion, when the capital and reserves of all foreign banks in India exceed 20 per cent of the capital and reserves of the entire banking system.
As per the guidelines, the initial minimum paid-up voting equity capital or net worth for a WOS would be Rs 500 crore (Rs 5 billion).
As per the norms, it will not be mandatory for existing foreign banks set up before August 2010 to convert into WOSs, however, they will be incentivised to convert into WOSs by the attractiveness of the near-national treatment.
Banks with complex structures, inadequate disclosure in their home jurisdiction, which are not widely held etc, would be mandated entry into India only in the WOS mode, it said.
However, it said foreign banks in whose case the above conditions do not apply can opt for a branch or WOS form of presence.
"A foreign bank opting for branch form of presence will convert into a WOS as and when the above conditions become applicable to it or it becomes systemically important on account of its balance sheet size in India," it said.
The parent of the WOS would be required to issue a letter of comfort to the RBI for meeting the liabilities of the WOS, it said.
With regard to meeting priority sector lending, the guidelines said, it would be 40 per cent for WOS like domestic scheduled commercial banks with adequate transition period for existing foreign bank branches converting into WOS.
As per the current norms, priority sector lending target is 32 per cent of the total lending for foreign banks with over 20 branches. In India, there were 43 foreign banks operating through a network of 333 branches as of March 2013. Also, 47 foreign banks have representative offices in the country.
Standard Chartered, the largest foreign bank by branch presence in India, has its depository shares trading on the domestic bourses, although it hasn't adopted a subsidiary route here.
Only multinational banks Standard Chartered, HSBC and Citi have more than 30 branches in the country. Although the Royal Bank of Scotland has 31 branches, it is winding down local retail operations.