The Reserve Bank of India has, finally, corrected a major anomaly in the regulations for private sector banks by allowing Indian promoters to hold upto 49 per cent equity. It was rather strange that foreign direct investment in banking should be allowed up to 49 per cent, while domestic promoters conformed to a 40 per cent stipulation. Now, there?s a level playing field as far as pure holdings go.
However, the issue of voting rights and eligibility criteria are much more important. In the case of private sector banks, voting rights are restricted to a maximum of 10 per cent irrespective of actual holdings, large industrial houses are debarred from setting up banks and corporates connected with such houses can only hold up to 10 per cent. These restrictions together are major roadblocks to growth at a time when size and balance sheet strength are of critical importance to private banks? existence.
Consider the options available to private banks when they seek to raise capital in the present environment. Promoters can hold only upto 49 per cent, financial institutions cannot be approached for equity holdings since most of them already have their own banking arms, corporates cannot hold more than 10 per cent, and the final option ? the stock market ? is dull. So where does a private bank go to raise capital? Willy nilly, the option is to go abroad, either by way of a private placement with a foreign strategic investor, or an overseas listing. In both cases, it?s almost as if the Indian banking entity is being forced to go overseas.
A highly respected private sector bank chairman recently told me that?s exactly the feeling he had when he was looking for capital for his bank. With Indian options either restricted or unavailable, the bank eventually had to settle for an overseas option. Both, the Reserve Bank and government will now have to think hard whether Indian investors should in fact be deprived of quality equity offerings because of these archaic rules. Or whether a new era needs to be ushered into Indian banking in line with the sweeping changes both in India and the world over.
Restricting voting rights to 10 per cent wards off potential investors and comes in the way of creating a true market for buying and selling of bank equity. Together with that, keeping industrial houses out just because of the actions of a few errant groups earlier is akin to throwing the baby out with the bathwater. Today, the RBI supervisory system is more extensive than it ever was. Besides, the RBI can always spell out strict do?s and don?ts for these corporates when they come into banking operations. But keeping this large constituency out of the purview of banking is irrational and against the basic tenets of a free market economy.
Apart from prescribing detailed lending rules for the banks in relation to their corporate equity holders, RBI can always step in if it feels a particular corporate house is unfit to get into banking because of a poor track record. But a 10 per cent voting rights cap and a 10 per cent limit on corporate holdings effectively keep out good quality corporate groups whose involvement may help these listed private banks to service shareholders better. After all, banks are not just about depositors and borrowers. They?re about shareholders as well.
With a 49 per cent FDI limit and FII holdings in banks, together with the restrictions on Indian equity holders, the government and RBI are, in fact, ensuring that over time the managements of these banks are handed overseas. In fact, even private equity funds which belong to large business families overseas are eligible to pick up equity in private banks through the FDI route, but Indian corporates are still kept out by way of the restrictions. This bias in favour of overseas investors needs to be done away with quickly. If the government is hesitant, RBI will have to take it upon itself to ensure that the playing field is truly level between Indian and foreign players. Short of this, any relaxation in norms will only be seen as tinkering at the periphery.