The Comprehensive Economic Co-operation Agreement (CECA) signed last year between India and Singapore has become a bone of contention, with the Reserve Bank of India and the Monetary Authority of Singapore (MAS) at loggerheads on a variety of issues. MAS has taken up with RBI the issue of Temasek Holding not being allowed to raise its stake in ICICI Bank at the time of the latter's recent public issue. The RBI has taken the position that both Temasek and the Government of Singapore Investment Corporation (GIC) are owned by the Singapore government, whose combined stake in ICICI would therefore cross the 10 per cent limit allowed to any one party in a private bank. Singapore has insisted that Temasek and GIC operate as independent entities. Confirming the development, Heng Swee Keat, Managing Director of the Monetary Authority of Singapore (MAS), told Business Standard: "We have written to the Indian regulator last month and the RBI has assured us that it would look into the issue." The finance ministry is also discussing the issue with the Reserve Bank. "We are in talks with the RBI and trying to find out how things can be sorted out," said a source in North Block. Banking industry sources said the finance ministry and ministry of commerce have been discussing the finer points of the CECA. Commerce Minister Kamal Nath met Singapore's minister for trade and industry Lim Hng Kiang on March 31 for a mid-term review of CECA. However, it is not clear whether the visit was linked to the dispute over banking investments. Teams from both countries will start discussions to follow up and improve on the CECA by August 1. The RBI, when refusing to allow Temasek to raise its stake in ICICI Bank, was exercising its rights under Annexture 7(A) of the treaty, which says, "All commitments (in relation to financial services) are subject to entry requirements, domestic laws, rules and regulations, guidelines and the terms and conditions of the Reserve Bank of India, Securities and Exchange Board of India and any other competent authority in India." However, an MAS spokesperson said, "There is no exception to the understanding that GIC and Temasek are separate entities, each with the right to invest up to 10 per cent (in a private bank)." This is only one of many differences of opinion that have cropped up since the signing of the CECA. Under the treaty, both the governments have promised to open up the financial sector. Singapore banks have been allowed to set up wholly owned subsidiaries in India, but they have preferred to take the branch route to expand, as setting up subsidiaries requires more capital. Three Singapore banks will be allowed to open 15 branches in India, while three Indian banks will be given the status of qualifying full bank (QFB), which can raise retail deposits and operate at 25 centres in Singapore. However, Indian banks have not been able to kick off full-fledged banking activities in Singapore as yet, as MAS has been insisting on ratings as a precondition to offering QFB status to Indian banks. The RBI too does not seem to be too eager now to allow Singapore banks to open more branches. Since the signing of the treaty last year, Development Bank of Singapore (DBS), the largest bank in Singapore, has been allowed to open one new branch in addition to its existing branch. United Overseas Bank (UOB) and OCBC Bank will be allowed entry in due course. Singapore, meanwhile, has allowed Bank of Baroda and UTI Bank to open an offshore bank and a merchant bank branch, respectively, but no Indian bank has been given the QFB status which allows it to undertake all banking activities (which a foreign bank branch in India is entitled to do). Sources in Mumbai said the MAS has been insisting on "ratings" of Indian banks as a precondition to offer QFB status even though the treaty does not stipulate that. In fact, MAS has asked for a sovereign guarantee for granting QFB status to the State Bank of India (SBI). This has not gone down well with the Indian banking regulator. An MAS spokesperson said, "Under CECA, Singapore is prepared to offer up to three QFB licences to Indian banks that meet our prudential requirements... CECA does not provide for automatic entry. Applicants will have to meet our prudential criteria. This is consistent with the general principle under WTO and other FTAs (free trade agreements)." But sources in Mumbai said: "At the signing of the treaty, MAS knew that India did not have investment grade rating and hence no Indian bank can get an investment grade rating. How will the get the QFB status then?" sources in Mumbai asked. The MAS spokesperson pointed out that six QFBs that now operate in Singapore -- Citibank NA, The Hong Kong and Shanghai Banking Corporation Ltd, BNP Paribas, ABN Amro Bank, Standard Chartered Bank and Malayan Banking Berhad -- were admitted based on prudential considerations which include the bank's financial strength, credit ratings, capital and global asset size, reputation and track record. The criteria included a minimum threshold rating by established, international and independent rating agencies. "Other regulators in developed jurisdictions use similar criteria and MAS applies these to all financial institutions intending to operate in Singapore. SBI will have to meet similar criteria and we are currently working with RBI and SBI in reviewing their QFB application," the spokesperson said. "Singapore's domestic market is small. For financial stability reasons, we have chosen to carefully manage foreign entry into our retail market, while being more open in the wholesale market," the spokesperson added. At present, eight Indian banks are licensed to operate in Singapore. "This is one of the highest banking entities from a single country in Singapore. In contrast, only one Singapore bank, DBS Bank, has two branches in India. We welcome the presence of Indian banks in Singapore and hope this would catalyse deeper economic linkages," the spokesperson said. Each QFB licence holder has the right to establish up to 25 customer service locations and a QFB can choose how it wants to make use of its 25 service locations. It could either set up brick-and-mortar branches, off-site ATMs or a combination of the two. "This represents a network with considerable reach in a small market like Singapore. Compare that to the total of 15 branches allocated to our three Singapore banks to operate in India which is many times larger than Singapore," the spokesperson said. The trade relations between the two countries have improved despite the spat between the regulators. Between 2003 and 2005, bilateral trade doubled with India moving up in the rankings to become Singapore's 13th largest trading partner in 2005. India's exports to Singapore more than doubled during this period, rising from US $1.4 billion in 2003 to US $3.6 billion in 2005. "Indian exports to Singapore are growing faster than to any of India's other major trading partners. It is a strong indication that Indian exporters have benefited from these efforts," MAS sources said. Last year was also a record year for Singapore investments into India. About US $321 million worth of investment was made by Singapore companies in India last year, up five times from US $62.1 million in the whole of 2004. Overall, Singapore was the third largest investor in India in 2005, behind Mauritius and the US.
