Voting rights in pvt banks to be linked to shareholding soon

Written by KG Narendranath | New Delhi | Updated: Jan 31 2011, 07:49am hrs
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Even as the Reserve Bank of India (RBI) is set to come out with guidelines for new banking licences shortly, the government is moving in tandem to make the regulatory landscape conducive for the entry of corporate players in the sector. The finance ministry will soon approach the Cabinet for its approval to implement the long-standing proposal to make voting rights in private sector banks proportionate to the shareholding, an official source told FE on condition of anonymity.

At present, the voting right is capped at 10% and this is seen by the industry as a huge disincentive, even though there is enough interest, albeit latent, in the corporate sector in setting up banks. Promoters of private banks like Kotak Mahindra Bank, YES Bank and IndusInd Bank are also peeved at the cap on voting rights which requires them to go through the shareholder resolution route to make any business decision of significance.

While the move is necessary to give confidence to corporate houses aspiring to start banks and introduce more competition in the sector, the government is also planning to amend the Banking Regulation Act to ensure that even under the proposed holding company structure for financial services business, RBI will have the right to seek information from the banking subsidiary about the activities of other arms of the holding company. It is reckoned that this would help avoid any contagion risk to the bank from related entities doing businesses like insurance, asset management, financial advisory services etc. The holding company structure is aimed to ensure that the leveraging of the banking business happens only at one level, allowing better regulatory oversight.

Among the corporate groups which are likely to apply for banking licences are ADAG, Tatas, AV Birla Group and L&T. Non-banking finance companies like Shriram Finance, Srei, Muthoot, LIC Housing, Indiabulls, IL&FS and IFCI also are keen to either set up banks or get themselves converted into banks. The source said even as the Bill seeking comprehensive amendments to the Banking Regulation Act might have to wait a while for Parliament nod, the statutory ceiling on voting rights could be removed through a separate amendment.

The source added that any new foreign bank other than those already present here would have to compulsorily use the wholly owned subsidiary (WOS) route for entry into India. Foreign banks like Citi, HSBC, JP Morgan and RBS apparently prefer to define their presence in India through the restrictive branch-expansion route, even though the WOS route is available to them.

The central bank has recently said more freedom in their operations in India would be allowed if these banks opt for the WOS route, a proposal which the finance ministry also endorses. The finance ministry plans to encourage the foreign banks already present in India to shift to the subsidiary model for further expansion by giving them waiver from capital gains tax for such conversions.

In fact, these banks are keen to use the acquisition route to grow in India, but that seems a tall order as they are now allowed to hold more than 5% stake in any Indian bank right now. The central bank prefers to tread warily on this front. The composite foreign investment limit in the banking sector is 74%. Although there is substantial foreign shareholding in ICICI Bank and HDFC Bank, the equity structure is widely dispersed. Also, for any shareholder to up his holding above 10%, the RBI's approval is required.

In the discussion paper released in August 2010, the RBI had listed the pros and cons of allowing large corporate groups to set up banks, which many seeing an inclination on its part to allow them with proper safeguards. The RBI is keen to ensure the neutrality of the banks set up by conglomerates with other business interests. FE has recently reported that the government had told RBI that only well-capitalised industrial houses which can bring Rs 1,000 crore should be allowed to enter the banking sector. This is in contrast with the opinion expressed by Raghuram G Rajan, honorary economic advisor to Prime Minister Manmohan Singh, that industrial houses should not be given banking licences. The RBI should allow about 20 new, professionally managed, small banks with a minimum capital of Rs 50 crore, Rajan had said.