RBI should stay with the draft guidelines on NOHC for corporates entering the banking space

It comes as no surprise that a few industrial and business houses have suggested that the Reserve Bank of India (RBI) revisit the holding structure proposed by it for new banks which is a wholly-owned non-operative holding company (NOHC). Corporate India continues to lobby against the amendment to the new Companies Bill which seeks to reduce layering or the number of levels of subsidiarisation. In the draft guidelines relating to new banking licences, the central bank had made it clear that an NOHC, which would hold the bank as also all the other financial services companies regulated by RBI or other financial sector regulators, was the way forward. And so it should be, registered as the NOHC will be, with RBI, and governed by an altogether separate set of prudential guidelines. The need for a transparent ownership structure cannot be over-emphasised. Well tried, but businesses houses need not be concerned about ?corporate governance? and their request for a ?diversified? shareholding at the NOHC level can be politely declined.

Companies have also apparently pointed out, in their feedback to RBI, that the NOHC model could result in ?regulatory overlap?. Why the corporate sector is losing its sleep about regulatory overlap is not quite clear. Anyway, the problem today is one of inadequate regulatory oversight, which is why the government is looking to amend the Banking Regulation Act to allow RBI to supersede the board of directors of a bank. Moreover, the central bank has made it clear that the NOHC cannot borrow to invest in the companies that it holds.

Indeed, going by the alarming rise in the number of companies that are queueing up outside the CDR cell and the enormous bailouts that they?re looking for, businessmen should be focusing on running their companies rather than on regulation.

As RBI had rightly explained, the NOHC is aimed at ring-fencing the bank from the group?s other activities, especially those businesses not under the ambit of RBI. India?s industrialists are known to be exceptionally skilful at routing funds through the most complex maze of companies; in this context RBI should, and surely will, stay with its model. It cannot yield ground on the issue of independent directors and must insist that at least half the directors on the NOHC are independent of those on the boards of companies also owned by the promoters or their business associates. One industrial house has apparently suggested that some directors could be common between the NOHC and the bank or even group companies, which isn?t really desirable.

That business houses want some more time?three to five years?to bring down their stake to 40% is not totally unjustified, given that they may have a much bigger ownership to begin with, and RBI may want to consider allowing another year perhaps than the two years it had suggested. RBI could also be a little more lenient, allowing banks to list perhaps in three years rather than in two years, which is a somewhat short span of time. But the central bank shouldn?t budge on the other timelines; it should stay with the 10-year horizon for the shareholding to be brought down to 20% of the paid-up capital of the bank and the 12-year deadline for further lowering the stake to 15%. Twelve years seems a long-enough time for promoters to bring down their stake; there should be at least three bull runs in that time. More important, RBI should be firm on the minimum stakeholding of 15% and not give in to the demand for a higher ownership of between 26-40%. The Indian government, though, should seriously consider bringing down its shareholding in the banks it owns to 33% so that they are not starved for capital; the higher free-float would also help make the stocks more liquid. RBI should also stick to the 5% ownership cap for a non-resident shareholder, whether an individual or a group; the argument that a 5% ceiling would not attract strategic buyers or limit synergies seems somewhat far-fetched. It is hard enough for the country?s investigation agencies to keep track of money coming into India without adding to their work.

RBI had pointed out in the draft guidelines that businesses like capital markets and real estate are inherently more risky and ?misaligned? with banking. So, while requests for excluding advisory services while calculating the candidate?s exposure to the real estate sector may be considered, it would be hard to justify the exclusion of any investments in the construction of real estate or mortgages to corporate customers. The central bank would do well to keep out entities that earn 10% or more from either capital market activity or real estate. Also, while diversifying revenue streams may appear harmless, the NOHC should not be allowed to venture into any new financial areas for at least three years after the bank is set up. This may seem conservative but the management should be focusing on the bank and not be distracted by other businesses. In any case, the bank itself can offer a wide range of services and it only seems rational that the available capital should be channelled into these opportunities. Incidentally, banks too have been lobbying to protect their turf with some of them having suggested that the minimum capital be upped to R1,000 crore from the R500 crore that RBI had suggested. More intriguingly, one ?business house? has asked the central bank about what information would be put out in the ?public domain? during the licensing process. That?s India Inc for you. Terrified of transparency!

shobhana.subramanian@expressindia.com