In a push to financial sector reforms, the Cabinet on Thursday cleared the much awaited Banking Law (Amendment) Bill. It approved a proposal to cap shareholders’ voting rights in private banks at 26 per cent irrespective of their total holding. To find common ground with the Opposition, the Cabinet diluted the provisions of an earlier legislation to increase entities’ voting rights in proportion to their shareholding.
“The Cabinet has cleared the Banking Laws (Amendment) Bill, 2011. It also approved an increase in voting rights from 10 to 26 per cent for private sector banks,” Information and Broadcasting Minister Ambika Soni told reporters after a Cabinet meeting.
Since the Cabinet cleared the Bill with just one change, it meant all other provisions in the legislation introduced in the Lok Sabha in 2011 would stay, officials said.
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HIGH STAKES | |||
| 19.20% DCB Bank | 19.46% IndusInd Bank | 26.13% YES Bank | 45.32% Kotak Mahindra Bank |
| Note: Single entity, other than promoters, can hold more than five per cent in private sector banks with the RBI’s approval. In most private sector banks, a single non-promoter entity does not hold more than five per cent | |||
| KEY PROVISIONS What the Banking Law (Amendment) Bill says |
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These provisions are raising the cap on voting rights of an entity in nationalised banks to 10 per cent from the existing one per cent, empowering the Reserve Bank of India (RBI) to supersede the board of a bank for up to a year if it is not working in depositors’ interests, vesting the central bank with the power to ask for information from banks’ associate companies, and taking mergers and acquisitions in banks outside the purview of the Competition Commission of India (CCI).
Interestingly, the Cabinet approval came on a day when the CCI gave the green signal to HSBC to acquire the retail and commercial banking business of Royal Bank of Scotland (RBS) in India.
The Bill, with the change, will now go to Parliament for clearance.
Voting rights in private sector banks were a bone of contention between the government and the Opposition in the Bill. According to some ministers, however, the voting rights of shareholders will be progressively increased to 26 per cent and not in one go.
Earlier, BJP leaders had said they did not have any objection if the voting rights were raised but capped at 26 per cent. But, they had said, they would oppose any Bill to increase them in proportion to shareholding. When contacted, BJP leaders on Thursday said they would have to see the Bill fine print to take a call on supporting it.
“The amendment opens interesting possibilities for bank ownership and governance, especially in relation to small private sector banks. It is also likely to attract the attention of global investors in Indian banks. However, given the requirement of the RBI’s approval for any share acquisition of five per cent and above, any meaningful change will happen only with the central bank’s concurrence and any change will be calibrated and controlled,” said Shinjini Kumar, director for banking regulations at PricewaterhouseCoopers in India.
A senior executive of a Mumbai-based bank said he did not think it was party time yet. “The RBI’s directive is very clear. Promoters should not hold more than 10 per cent stake in the bank. In case the promoters have more than 10 per cent stake, it should be reduced over a period of time. Hence, having voting rights of 26 per cent does not really give any material benefit to existing private sector banks,” said a senior executive of a Mumbai-based private bank.
A chief executive of a private sector bank in south India said it was a step in the right direction in terms of aligning the Act with regulations. “This will allow promoters in some private sector banks to have a higher voting right,” he said.
The chief financial officer of a Mumbai-based private bank said the move would benefit the new players who would enter the market once the RBI started issuing new licences.
“In the initial years, their shareholding will be high and this will give them a voting right of 26 per cent instead of 10 per cent. As far as the existing banks are concerned, except a few, it does not have any material impact on most,” he said.
Since there were several amendments to be done in the banking sector, the government had earlier clubbed them in one Bill. So, amendments to the Banking Regulation Act (BRA) also formed part of the Bill.
Admitting there had been delays in the passing of certain financial sector reforms Bills, the finance minister had said yesterday, “We'll try to get these pieces of legislation enacted with a broad consensus. I hope some may be enacted during the latter part of the session or surely in the Monsoon session.”
