Banking Act changes may take a while

Government to table fresh Bill.

It could be a while before amendments to the Banking Regulations Act become effective. The government will take a fresh Banking Regulation (Amendment) Bill to Parliament after including changes to the earlier Bill based on recommendations of the standing committee on finance.

This will bring the banking regulation law in line with RBI's guidelines on ownership in banks. While private sector banks will enjoy proportionate voting rights, the government will also have proportionate voting rights in public sector banks once the Bill is passed.

This will be significant when the government decides to offload stake in a public sector bank, because the buyer will also enjoy proportionate voting rights.

The RBI's circular on a cap on stake holding has been in place since 2004.

"There is no time limit for reducing the equity holding and the RBI can allow higher holdings in cases it feels that the stakes are justified. Therefore we could continue to see many banks having stakes of over 5 or 10 per cent," a private-sector bank executive said. Banks like ING Vysya, Kotak Bank, Yes Bank, HDFC Bank, among others, continue to have promoter ownership well above 10 per cent.

The Banking Regulations (Amendment) Bill approved by the Cabinet proposes to do away with a cap on voting and instead provide a 5 per cent cap on shareholding for a single entity in a bank except when approved by the RBI.

The amendment is an important step to do away with control on voting rights and instead regulate the ownership through level of equity holding.

The committee, which submitted its report in December 2005, while endorsing the move to remove the cap on voting rights, had suggested that sufficient safeguards be put in place to ensure that the ownership levels are regulated.