Rethink time for foreign banks on acquisitions

Foreign banks, which had expected the government to allow 10 per cent acquisition year-on-year, will now have to relook at their options.

This follows the Reserve Bank of India (RBI) making clear that foreign banks would only be allowed to acquire stressed private banks identified by RBI for restructuring.

This could mean that Bank of Nova Scotia, which recently took 4.99 per cent in Bank of Punjab, may not be permitted to hike its shareholding in the private sector bank, unless RBI wants it to do so.

While the guidelines permit corporate houses to hold up to 10 per cent in a private bank, any existing shareholding by an individual entity/group of related entities in excess of 10 per cent will call for the bank to reduce the holding to the permissible level.

This means that Ashok Leyland with over 16 per cent stake in IndusInd Bank, will have to pare its stake. This will also apply to Yes Bank.

Rana Kapoor, CEO and managing director of the bank, along with Ashok Kapur (non-executive chairman) together hold 52 per cent in the bank. Moreover, the Netherlands-based Rabobank with its 20 per cent stake, might also need to pare it down.

This is even as private sector banks will have to raise their capital requirement to Rs 300 crore within a period of three years. Majority of old private sector banks including Lord Krishna Bank, Catholic Syrian Bank and Bank of Rajasthan would need to hike their capital.

Meanwhile, the finance minister has in the budgetary address has permitted banks to issue preferential shares for the first time. This will help banks to add to their share capital.

Within the overall foreign investment cap of 74 per cent, the central bank has maintained a sub ceiling for foreign institutional investment in private banks at 24 per cent, which can be raised to 49 per cent at the discretion of banks' boards.

There is also a sub-ceiling for NRI holding. Currently there is a limit of 5 per cent for individual NRI portfolio investment with the aggregate limit for all NRIs restricted to 10 per cent which can be raised to 24 per cent with the approval of board/general body.

In other words, while FII stake is capped at 49 per cent and NRI stake at 24 per cent, there is no cap on FDI limit. This alone can be up to 74 per cent.

So far as permitting expansion by foreign banks in the country, the RBI seems to be following in the footsteps of its counterpart in Indonesia, which is discouraging overseas banks from setting up their presence there, unless they choose to acquire existing domestic entities.

"The RBI guideline now means we will not be free to pick up healthy banks, but be restricted to purchase only those which are considered to be 'stressed'," said the CEO of a foreign bank.

Foreign banks however, might look at the wholly owned subsidiary route, wherein they would need to bring in Rs 300 crore capital.

The tax treatment merits attention today especially in light of the fact that the finance minister has reduced corporate tax on domestically set up entities from 35 per cent to 30 per cent. Currently foreign branches are paying tax at the rate of 40 per cent.

At the same time, the RBI has also stated that the branch licensing of wholly owned subsidiaries would be in line with foreign branches. This means wholly owned subsidiaries would not have that much flexibility in terms of expanding their presence.

While the RBI has opened the doors for foreign banks to go the subsidiary route, it has not identified whether they would need to meet the norms pertaining to domestic banks on priority sector lending.

However, it stated in its guidelines that foreign banks would need to establish branches in 'under-banked' areas. This means they would need to open up rural branches.