Discussion paper says M&As may be allowed only after performance review
The Reserve Bank of India (RBI) has come out strongly in support of a subsidiary-led model for foreign banks operating in India, instead of the existing branch mode of expansion.
A discussion paper issued by RBI today also said incentives were necessary to promote the subsidiary route.
Among the incentives RBI has proposed are liberal branch expansions and allowing the wholly-owned subsidiaries (WOS) of foreign banks to raise rupee resources by issuing non-equity capital instruments in form of hybrid instruments and subordinate debt.
The current regulations allow foreign banks to raise resources only from their parent body or head office through Innovative Perpetual Debt Instruments.
The central bank also said a WOS of a foreign bank in India, on the completion of a minimum period of operation, could be allowed to go public, by diluting a minimum of 26 per cent stake.
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RBI has sought feedback on the discussion paper by March 17, following which comprehensive guidelines on the issue will be issued.
For foreign banks already operating in India, the regulator is in favour of voluntary conversion of existing branches to WOS and a five-year window for the entire transition. However, any capital gains tax arising out of transfer of assets and properties during this procedure would be applicable under the Indian Income Tax Act to the foreign bank concerned.
RBI said lessons from the financial crisis support domestic incorporation of foreign banks or allowing new foreign banks entry via the subsidiary route versus the branch model. Weighing the pros and cons of the branch form of presence against the subsidiary form of foreign banks, the advantages in WOS outweigh the downside risks, the discussion paper said.
“In fair weather, it may not be of much relevance but in times of crisis, the distinction between the branch and the rest of the bank, and the legal location of assets and liabilities, may well become very important,” the paper noted.
From a financial stability perspective, there would be a need to mandate the subsidiary form of presence at the entry level, it said.
The central bank also noted that keeping in mind India’s commitments to the World Trade Organization (WTO), it may not be possible to mandate conversion of existing foreign bank branches into subsidiaries.
“The branch expansion of both the existing foreign banks and the new entrants present in the branch mode would be subject to WTO commitments,” it said.
Minimum capital requirements for the entry-level WOS of foreign banks may be in line with new private sector banks, the paper said. “The WOS shall be required to maintain a minimum capital adequacy ratio of 10 per cent of the risk-weighted assets or as may be prescribed from time to time on a continuous basis from the commencement of operations,” the paper stated.
The other factors that will be taken into account while considering an application for setting up a foreign bank presence in India include economic and political relations between India and the country of incorporation of the foreign bank, financial soundness, ownership pattern, international and home country ranking, rating and international presence of the foreign bank.
In a move that would pave the way for consolidation in the Indian banking system, RBI also said foreign banks might be allowed to acquire any domestic private sector bank. But in what could dampen the spirits of foreign banks, RBI said this would be considered only after foreign banks set up WOS and a review was made of the experience gained on the functioning of such subsidiaries.