Private banks: cap on voting rights may go

Foreign shareholders can breathe easy.

The government is likely to remove the 10 per cent cap on voting rights on foreign shareholders of private Indian banks. In addition, the guidelines for banks eligible to invest in the country are also expected to be fine-tuned.

Top sources told Business Standard that the finance ministry was contemplating allowing only foreign banks with diversified holdings in the parent company to enter the Indian market.

If the proposal goes through, foreign banks can acquire up to 74 per cent stake in private Indian banks and also set up wholly owned subsidiaries in the country.

In its draft proposal, the central bank had proposed to allow foreign banks to a maximum 10 per cent holding in private banks. The decision was also proposed to be made applicable for existing banks, which is being opposed by the finance ministry. RBI is to come up with a revised draft on the subject.

A decision on voting rights restrictions hanging for a while with the Reserve Bank of India opposing the move after agreeing to it earlier. A Bill to amend the provisions of the Banking Regulation Act had been introduced in Parliament and had also been cleared by the standing committee on finance before RBI decided to review its position.

The finance ministry is of the opinion that policy formulation is its domain while regulation of banks was RBI's responsibility. The position was made clear by Finance Minister P Chidambaram after his meeting with public sector bank chiefs last week.

A number of banks like ABN Amro, HSBC, Citibank and Standard Chartered have opened branches in the country and are awaiting the decisions. Some have kept their future expansion plans on hold for the time being.

"Matching the voting rights with shareholding is a pre-requisite for any inflow of foreign direct investment," said ABN Amro country head Ramesh Sobti.

"A vast majority thinks that FDI is the most stable source of foreign investment. So it's for the government and the regulator to decide if they want foreign institutional investors or private equity funds, who take am opportunistic view, or large and well regulated foreign banks," added a senior foreign bank executive.

Welcome mat

Fin Min's plan The finance ministry is said to be mulling over a proposal allowing only foreign banks with diversified holdings in the parent company

Wide open If the proposal goes through, foreign banks can acquire up to 74% in private Indian banks