Crying wolf with voting cap on bank shares

WITHOUT CONTEMPT

Yet again, the government announced its intent to remove the cap on voting rights on shares held in Indian banking companies.

Market participants were unfailingly euphoric. The Union Cabinet has approved the proposal, which means that the measure ought to take the form of draft legislation to be tabled in Parliament.

To be fair, this time the measure is more than yet another Budget speech announcement, but is far short of anything more material.

In its road map for presence of foreign banks in India, the Reserve Bank of India (RBI) had said, "Appropriate amending legislation will be proposed to the Banking Regulation Act, 1949, in order to provide that the economic ownership of investors is reflected in the voting rights."

The road map also said, "Simultaneous amendments will be proposed to provide for regulatory approvals from the RBI."

Regardless of the size of shareholding, the Banking Regulation Act restricts voting rights at 10 per cent for any shareholder of a banking company.

This has for long been a bugbear for investors in banks, particularly for those interested in bringing in funds to bail out weak banks.

However, despite repeated statements by successive finance ministers, a draft law to amend this legislation has never been tabled in Parliament.

Even at this stage, it is too early to rejoice. The government had issued a press release early last year, to announce the opening up of foreign investment in the banking sector to 74 per cent, but this has not seen the light of day.

A year later, a road map was published, which simply meant that the RBI would have to approve any acquisition of substantial shareholding in any bank.

The government announced a hike in foreign holding limit in telecommunications to 74 per cent, but till date, the RBI has not amended exchange controls to accommodate the same.

If the government tables an amendment to the Banking Regulation Act in Parliament, the removal of the cap on voting rights could well be coupled with greater discretionary control in the hands of the RBI, as promised in the RBI's road map.

Yet, the draft amendment can get referred to the parliamentary standing committee on finance (this is where most of the controversial amendments to financial laws have often been given twists and turns).

It is highly likely that the amendment can confer significant powers on the RBI to take away voting powers in discretionary circumstances.

In any case, the RBI's road map makes it abundantly clear that private investments in banks would be permitted only in the case of banks that the RBI believes need restructuring.

This is a very crucial element of the road map that has to be borne in mind in any expectation of how the law relating to voting rights would evolve.

And, if the fate of the earlier resolutions of the government to enhance foreign direct investment in banking and in telecom, are any indication, perhaps nothing may happen after this resolution of the Cabinet for a few more years.

One also hopes that the RBI and the government consult Securities and Exchange Board of India on how it will treat shareholders whose holdings are in excess of the thresholds at which open offers get triggered under the Takeover Code.

Should such an amendment be carried out, arguably, by operation of law, such shareholders would acquire voting rights.

So far, Sebi's view has been that in a banking company, acquisition of shares beyond the thresholds for open offers will be irrelevant in view of the statutory cap on voting rights.

Unless a clear view is expressed before such amendments are effected, a lot of confusion and unwitting breaches of the Takeover Code can arise.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed are personal)

somasekhar@jsalaw.com