The FIPB is of the view that HDFC Bank’ parent HDFC Ltd’s 22.50 per cent holding in the bank is foreign investment and, hence, the total foreign holding in the bank stands at 73.20 per cent, which includes FII, FDI, ADR and GDR, according to an official.

As such, HDFC bank can increase foreign investment in it only by 0.80 per cent as the cap on overseas investment in private sector banks is 74 per cent. “The bank has a little headroom to raise funds from foreign investors,” an official said after the meeting. Shares of HDFC Bank were up 1.43 per cent to close at Rs 929.30 apiece on Friday. However, the FIPB decision was announced after market hours.

HDFC Bank had approached the FIPB to increase the foreign holding in it to 67.55 per cent from a little over 50 per cent last year.

Since then the proposal had been in cold storage as the definition of FDI had changed by press notes issued in 2009.

The Reserve Bank and the Department of Industrial Policy & Promotion were of the view that HDFC Bank, after taking into account its parent HDFC's holding, was already close to the 74 per cent cap for foreign investment in private sector lenders.

After a change in the FDI policy in 2009, downstream investment by any entity controlled by foreign investors is taken as foreign investment.

"Any foreign investment already made in accordance with the guidelines in existence prior to February 13, 2009 (date of issue of Press Note 2 of 2009) would not require any modification to conform to these guidelines. All other investments, past and future, would come under the ambit of these new guidelines," the policy said.

HDFC Bank had argued the law could not be applied retrospectively. It had stressed it had got legal opinion and the general view was that HDFC's holding in HDFC Bank should be exempt from new regulations, as the holding already existed when the law came into force.

However, officials said the bank had increased its holding, though marginally, after the change in policy without taking FIPB approval.

In December 2013, RBI had barred foreign investors from buying additional shares in the company, after their shareholding hit the upper limit of 49 per cent allowed under the automatic route.

The official added that since before Friday's clearance the bank was in breach of FDI regulations, there would be some penalty, which would be decided by the RBI.