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.