With the government disinvesting its holdings in public sector banks, and the new private sector banks set to dilute their large promoter stakes, the issue has come to the fore once again.

According to sources, a change in the ceiling on voting rights is one of the recommendations of the Narasimham Committee at which the Reserve Bank of India (RBI) is taking a hard look. If the amendment does come through, it will be a significant milestone in the sequence of banking-sector reforms and in the rationalisation of a crucial shareholding-related issue in banks.

More specifically, a total amendment linking voting rightsto the quantum of actual holdings (as against the current ceiling of 10 per cent) will pre-emptively rule out some major anomalies and hazards. Under the current skewed legislative framework, promoters of new private sector banks are left holding voting rights of 10 per cent even though their actual holdings could be as high as 65-75 per cent. And as they disinvest further, the hazards of crucial resolutions being stalled at AGMs by the joint opposition of shareholders with minuscule stakes can only increase. In fact, as public sector banks widen their capital base and government holdings get increasingly diluted, they are also likely to face this threat.

The last amendment came into force vide Act 20 in 1994, as a result of which the ceiling on voting rights of all shareholders in a banking company was raised to 10 per cent. Before the amendment was implemented, the ceiling on voting rights of shareholders in banking companies was a meagre 1 per cent (of the total voting rights of all the shareholders ofthe banking company). The 1994 reforms were brought in at a time when the existing ceiling of one per cent was perceived as too unattractive for the numerous new private sector bank promoters waiting in the wings then. This was all the more true since the initial stipulated capital base for these banks was Rs 100 crore as against Rs 5 crore for the older private sector banks.

As of today, the only two shareholding entities which hold voting rights in proportion to their stakes in banks are the RBI (in State Bank of India) and the government of India (in other public sector banks). While the government of India derives these powers from the Banking Companies (Acquisitions and Transfer of Undertakings) Act, 1970, the RBI is empowered by the State Bank of India Act, 1955.

Although there have been no definite indicators as yet about the central bank's stance on the voting rights issue, financial sector circles seem fairly upbeat about a positive outcome. Says ICICI senior general manager Kalpana Morparia: "Weare in dialogue with the Reserve Bank on the issue, and while I would not like to make any definite comments about the outcome at this point. We are optimistic." However, there is some apprehension in other quarters about the bill being stalled in parliament in the absence of a political consensus.

One reason why this major aspect of reforms has been overlooked all along is that unlike corporate AGMs, crucial decisions on issues such as bonus, dividends, and the like, adopted at bank annual general meetings are vetted by the RBI in any case. Also, promoters of new private sector banks have till now been drawing some comfort from the fact that although voting rights are far from commensurate with the actual holdings, their large stakes are worthwhile if for no other reason than that they block off access to a substantial portion of the equity and restrict acquisitions.

However, with RBI increasingly relaxing controls over banks, and with banks being required to take more and more commercial decisions, itis only a matter of time before the question of anomalous voting rights begins posing major hazards.

The other perception that is being voiced universally is that the rules do not serve their purpose anymore -- at least, not in the case of all categories of banks. They were formulated at a time when they had an underlying rationale -- prudential norms were then not in place and unscrupulous bank promoters could subvert public interest when it conflicts with their own.

Even today, the Kerala-based old private sector banks with their large deposit bases, high levels of profitability and small equity are extremely attractive targets for predators. And unscrupulous takeovers are something that the central bank would definitely like to prevent, given the large retail element in the deposit bases of banks in India.

Or, take the case of some of the old private sector banks where, conversely, the promoters' stakes are very low. These are cases where the central bank is likely to take a wary stand on the votingrights issue in order to prevent malpractices. This is especially so since it has a nominee on the boards of the older private sector banks unlike the case of the new private sector banks. "But today, financial institutions like ICICI, IDBI, or housing finance companies such as HDFC with good track records are subject to as close a scrutiny by the RBI as are the banks promoted by them. The voting rights restrictions have no underlying rationale in such cases today, especially since all categories of new private sector banks have been around long enough to allay fears. We are hoping that the RBI will distinguish between different categories of banks," says a senior executive with a new private sector bank.