Expansion plans of foreign banks need to wait more

Dec 20 2012, 09:08 IST
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The banks wanted the government to introduce a key clause that would have allowed the Reserve Bank of India to waive stamp duty or capital gains tax on their conversion.  (Reuters) The banks wanted the government to introduce a key clause that would have allowed the Reserve Bank of India to waive stamp duty or capital gains tax on their conversion. (Reuters)
Summary* Waiver from stamp duty and capital gains tax not in the Banking Bill

Foreign banks planning to expand operations in India by setting up wholly owned subsidiaries after the passage of the Banking Laws (Amendment) Bill are in for a disappointment.

The banks wanted the government to introduce a key clause that would have allowed the Reserve Bank of India to waive stamp duty or capital gains tax on their conversion to a wholly owned subsidiary from a branch mode of operation. All the 41 foreign banks operating in India do so on the branch mode.

This means the expected surge of foreign investments from abroad into the sector might not happen soon. Foreign banks do not anticipate buying into existing private sector banks and so the most significant entry route they were contemplating was that of wholly owned subsidiary.

These provisions, however, did not find their way into the final Bill cleared by Lok Sabha on Tuesday. Instead it is expected that the changes could figure in the amendments to the Indian Stamp Duty Act and possibly the Finance Bill for 2013-14.

For the foreign banks in India and those planning to apply for a licence from the RBI, it means a stand still, possibly till the time RBI hands out new bank licences to domestic companies. Several of them plan to convert into wholly owned subsidiaries which the RBI too prefers as this makes it easier to track their India based assets and liabilities.

Finance ministry officials had at one stage assured several bank representatives that these provisions had been written in the Bill. But they were omitted in the version tabled in Parliament by finance minister P Chidambaram on Tuesday.

Speaking on the subject, Shinjini Kumar, director, PricewaterhouseCoopers, said, ďAlthough the shareholding rights are aligned to the extent of 26 per cent, joint ventures between foreign banks and Indian banks may still not be a real possibility unless further changes are in place. Clarity on the WOS framework will be a pre-requisite to any strategic discussions as far as foreign banks are concerned.Ē

For domestic companies however the new Bill is expected to create a surge in planning for new licences. ďThe work from our side is now done. The ball is in the RBIís court. Things should start moving in the New Year,Ē a senior finance ministry official said. Private sector entities such as Reliance Capital and L&T that have been planning to apply for

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