RBI nod must for higher voting rights in banks

Finance ministry to approach the Cabinet for permission to amend the law.

The Reserve Bank of India (RBI) and the government have narrowed their differences on easing the voting right restrictions for foreign investors in private banks, with North Block finalising a fresh Cabinet note for lifting the 10 per cent ceiling.

Officials said the government had incorporated the central bank's suggestions and was providing for voting rights in line with the shareholding, subject to approval from the RBI. At present, irrespective of the shareholding, the voting right of foreign investors is limited to 10 per cent.

On December 8, the Cabinet had deferred a decision on the matter following objections from the RBI and had decided to wait till a fresh recommendation was received. The RBI submitted a roadmap for gradual opening up the banking sector to the government last week.

The finance ministry is approaching the Cabinet for permission to amend the law. A Bill to amend the Banking Regulation Act is proposed to be introduced during the Budget session of Parliament.

The government had proposed to amend the law during the current session itself but the Cabinet deferred a decision till the RBI's comments were incorporated.

The central bank has, however, decided stick to its earlier stand of restricting the leeway available to banks for increasing their holdings beyond 5 per cent immediately. The RBI wants few foreign players in banking till domestic banks acquire sufficient muscle.

The RBI had factored in the nuances of World Trade Organisation negotiations on services while preparing the draft guidelines, an official said.

The central bank wants to keep the option to limit the entry of foreign banks open.

In its second set of draft guidelines, the RBI has also specified a minimum capital requirement of Rs 200 crore, which is to be raised to Rs 300 crore over a three-year period.

Finance Minister P Chidambaram has repeatedly proposed an increase in the foreign investment ceiling in phases. The RBI has, however, not specified any threshold. The draft is to be cleared by the finance ministry before a revised version can be made public. The new rules will be notified subsequently.