Although appreciative of the Reserve Bank of India?s stance that foreign banks should operate in India as wholly-owned subsidiary (WOS) rather than as a branch of the parent, foreign bankers are hoping the conversion would not mean too much of a tax liability.
Moreover, the RBI’s proposal that the WOS become a listed entity over time, resulting in a dilution of the parent bank’s holding, has not gone down too well with the fraternity. A dilution of the parent bank’s stake would mean it would have to give up total control and also some share of the profits. A local listing, foreign banks fear, would restrict their ability to capitalise on the parent bank?s balance sheet.
In a discussion paper on presence of foreign banks in India, released late last week, RBI proposed that foreign banks that are systemically important should voluntarily convert into wholly owned subsidiary (WOS). Foreign bank branches would be considered to be systemically important once their assets touch 0.25% of the total banking assets as at the end of March in the preceding year.
The central bank has observed that the WOS being a locally incorporated bank, may be subjected to the regulations as applicable to Indian banks. Moreover, the RBI has said appprovals for setting up subsidiaries, or making significant investment in associates, will also factor in whether there are NBFCs set up by the parent banking group under FDI rules for undertaking similar activity.
“It is a liberal policy document but we would need clarity on the tax treatment,?? said the CEO of a foreign bank on the condition of anonymity. He added, that decision on listing of the WOS would be taken during the next policy review. ?Listing and dilution have their own costs and listing of every subsidiary would mean servicing new set of investors,??he observed. Currently, Standard Chartered Plc is the only foreign entity that is listed in India through Indian Depository Receipts (IDRs).
?The suggestions on priority sector lending and branches is a relief though we would have to understand if the RBI has an internal policy on branch licenses for foreign banks,?? said the CEO of another foreign bank. To incentivise them to set up or convert into an WOS, the central bank has said it could consider extending, to foreign banks, a branch expansion policy applicable currently to private sector banks. ?Although we will be treated at par with private sector banks, the discretion to grant branch licenses would rest with the RBI,?? a CEO of a foreign bank pointed out.
Some foreign banks are dispapointed that the RBI may restrict the entry of new players as also the expansion plans of existing foreign banks once their assets in India exceed 15% of the assets of the banking system. ?We would suggest that the RBI consider increasing this limit given that the opportunity in the country is tremendous,?? said the CEO of a foreign bank.
There are 34 foreign banks operating in India as branches, accounting for 7.65% of total banking assets as on March 31, 2010, up from 9.03% a year ago. If credit equivalent of off-balance sheet assets are included, their share was 10.52%. The share of top five foreign banks alone was 7.12%. Currently, top five foreign banks account for more than 70% of total balance sheet assets of foreign banks in India.