Private sector bank stocks were in demand on Wednesday after the Centre approved a proposal to allow 74% FDI in banking companies, through all sources under the automatic route.

In response, Karnataka Bank (up 4.27% to Rs 55), Karur Vysya Bank (up 2.66% to Rs 175), ING Vysya (up 2.06% to Rs 262), Federal Bank (up 1.97% to Rs 93.05), Bank of Punjab (up 1.42% to Rs 14.250), J&K (up 1.29% to Rs 114.10), Centurion Bank (up 1.14% to Rs 8.85) and Global Trust Bank (up 1% to Rs 15.10), all moved upstream.

The government has also promised that it will remove the 10% ceiling on voting rights of foreign investors in banks and make voting rights in proportion to the equity owned by the shareholders. The move is aimed at increasing foreign investment in the sector.

The cabinet approval is in line with the earlier announcement made by the finance minister in his budget speech on 28 February 2003, which proposed to enhance FDI limit in private sector banks to 74% from the present 49%.

The bill to amend the Banking Regulation Act, 1949 will be introduced in the post-recess budget session of Parliament. Sub-section II of Section 12 of the Act will also be amended to allow voting rights in proportion to the shares held by foreign investors.

Analysts say the hike in foreign direct investment limit under the automatic route in private sector banks from the current 49% to 74% is a positive development for these banks.

Moreover, many private sector banks, which are facing difficulty on account of low capital adequacy ratio and are unable to lend to the extent of their potential, will now have the option to raise capital from overseas investors at a much more competitive price. Also, the extension of Section 72A benifits of the Income Tax Act to nationalised banks will encourage the merger of private sector banks with state-run banks, boosting merger and acquisition activity in the banking segment.

As for indice movements, over the last one week, 18 private sector banks lost Rs 798.84 crore (Rs 7.98 billion), or 3.96%, in market capitalisation to Rs 19,354.99 crore (Rs 193.54 billion) from Rs 20,153.83 crore (Rs 201.53 billion).

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