Key takeaways
- Private banks: FDI cap 74%; RBI approval to reach 5%.
- NBFCs: 100% automatic, but RBI approval for control, 26%+ or 30%+ board change.
- Diligence: asset quality, provisioning, funding, RBI findings, related-party loans.
Quick answer: foreign investment in private banks is capped at 74% (up to 49% automatic, above that with government approval), and anyone reaching 5% of a bank needs RBI’s prior approval. NBFCs can be 100% foreign-owned under the automatic route, but a change in control, 26% or more of the shares, or more than 30% of the directors needs RBI’s prior approval.
The rules side by side
| Private sector bank | NBFC (RBI-regulated) | |
|---|---|---|
| FDI limit | 74%: up to 49% automatic, 49% to 74% government route | 100% automatic |
| RBI approval | Prior approval to reach a “major shareholding” of 5% or more (2023 Master Direction); fresh approval to go back above 5% after falling below | Prior approval for a change in control, acquisition of 26% or more, or a change of more than 30% of directors (excluding independent directors) |
| Holding caps | Limits on individual and non-promoter holdings; promoters capped at 26% after 15 years. RBI can allow more case by case | No general cap; fit-and-proper test for the acquirer |
| Listed target | SEBI takeover code: acquiring 25% or more, or control, triggers an open offer | |
| Competition | CCI approval if asset, turnover or deal-value thresholds are crossed | |
How the approvals fit together
- Structure the deal (primary issue, secondary purchase or both) and check the sector cap, including indirect foreign holding.
- Apply to RBI through the target with the acquirer’s fit-and-proper information, source of funds and business plan. Expect detailed questions on the ultimate owners.
- File with CCI where thresholds are crossed; prepare the open offer if the target is listed.
- Close, then report the foreign investment (FC-GPR for a fresh issue, FC-TRS for a purchase).
Investors with any Chinese or other land-border-country owners face an extra layer: see Press Note 2 (2026).
Due diligence on an Indian lender
- Asset quality: gross and net NPAs, special-mention accounts, restructured and written-off loans, and how the book behaves when you re-age it yourself.
- Provisioning and capital: whether provisions cover the real stress; capital adequacy before and after your money.
- Funding and liquidity: borrowing concentration, asset-liability mismatches, reliance on short-term money.
- Regulatory history: RBI inspection findings and penalties, compliance with directions on digital lending, co-lending, KYC and outsourcing.
- Related parties: loans to promoters’ group companies, evergreening through connected borrowers.
- Collections and conduct: recovery agents, customer complaints, mis-selling risk.
- Technology and data: loan management systems, data localisation and cyber-security audits.
Read red flags in Indian company financial statements and our due diligence service.
Sources
- Business Standard: RBI prior approval needed for over 5% stake in banks
- Chambers: new RBI directions on bank acquisitions in India
- Reuters via TradingView: Blackstone to buy over 15% stake in IIFL Finance
- CNBC: India to sell IDBI Bank stake to Fairfax for $5.5 billion
- Business Standard: Fairfax India raises stake in IIFL Capital to 38%
Frequently asked questions
Can a foreign company own an Indian bank?
Foreign investment in a private sector bank is allowed up to 74%: up to 49% under the automatic route and up to 74% with government approval. Anyone reaching 5% or more of a bank also needs the RBI's prior approval, and RBI caps on individual holdings apply.
Can an NBFC in India be 100% foreign-owned?
Yes. NBFCs regulated by the RBI can take 100% foreign investment under the automatic route, subject to minimum capitalisation norms. A change in control, acquisition of 26% or more, or a change of more than 30% of directors needs the RBI's prior approval.
When is RBI approval needed to buy shares in an Indian bank?
Before reaching a major shareholding of 5% or more of the bank's paid-up capital or voting rights, under RBI's 2023 Master Direction on acquisition and holding of shares or voting rights in banking companies.
What should due diligence on an Indian NBFC cover?
Asset quality (NPAs, restructured and written-off loans), provisioning and capital, funding and liquidity, RBI inspection findings and penalties, compliance with digital lending, co-lending and KYC rules, related-party lending and collection practices.
Please note: this guide is general information based on the rules as they stood on the review date above. Regulations and RBI/CBDT procedures change often — please get advice on your specific facts before acting.