The government on Friday hiked foreign investment ceiling in private banks from 49 to 74 per cent and allowed foreign banks to set up subsidiaries in the country.

A government notification said the overall foreign holding of 74 per cent will include foreign direct investment, foreign institutional investments, investments from non-resident Indians, initial public offers, private placements and ADRs/GDRs.

Individual FII holding cannot exceed 10 per cent while the aggregate FII limit would be restricted to 26 per cent, which can go up to 49 per cent through the approval of the bank's board.

Government also allowed foreign banks to open subsidiary in the country or operate through branches or a private bank with a maximum holding of 74 per cent stake.

This assumes importance for foreign banks like HSBC, ABN AMRO Bank, Standard Chartered Bank and Nova Scotia, which are eyeing subsidiaries in India following the relaxation of FDI norms.

A foreign bank can set up a subsidiary either through conversion of existing branches into a subsidiary or through a fresh licence from the Reserve Bank of India.

The FDI hike in banking sector was first suggested by the N K Singh panel but the finance ministry and RBI have added a slew of stringent conditions to prevent ownership of banks going into wrong hands.