Cap on voting rights in pvt banks to go

Reserve Bank of India (RBI) today made it clear that domestic private banks can be foreign owned up to 74% and voting rights in private banks will be reflective of ownership of banks. In other words, the 10% cap on voting rights will be removed.

Unveiling the roadmap of foreign banks' presence in India and guidelines on ownership and governance in private banks, RBI said foreign banks will be allowed increse presence in India in two stages. The first phase starts in March 2005 and ends in March 2009. The second phase starts from April 2009. They can operate in India either through branches, a wholly-owned subsidiary or a subsidiary with a 74% holding.

"Appropriate amending legislation will be proposed to the Banking Regulation Act, 1949,  to provide that the economic ownership of investors is reflected in the voting rights," an RBI release said. Simultaneous amendments will be proposed to provide for regulatory approvals from the RBI.

Initially, entry of foreign banks will be permitted only in private sector banks that are identified by RBI for restructuring. In such banks, foreign banks would be allowed to acquire a controlling stake in a phased manner.
Existing foreign banks will need to give up their branch licence should they opt for the subsidiary route.  Foreign banks setting up wholly owned subsidiaries will need to have a minimum capital requirement of Rs 300 crore, which is also the requirement for private banks.

The wholly-owned subsidiaries will be treated on a par with the existing branches of foreign banks for branch expansion with the flexibility to go beyond the existing World Trade Organisation (WTO) commitments of 12 branches in a year and preference for branch expansion in under-banked areas.

Where foreign banks apply to acquire 5% and more in a private sector bank, RBI will take into account the standing and reputation of the foreign bank while giving its nod. The Indian central bank may also specify that the investor bank makes a minimum acquisition of 15% or more and the time for such acquisition.

In the second phase commencing April 2009, foreign banks may be permitted to acquire any private sector bank. During this phase, wholly-owned subsidiaries can go for listing and foreign banks may dilute their holding to the extent that at least 26% of the paid-up capital is held by resident Indians at all times, in keeping with Press Note 2. The dilution may by either by way of initial public offering or an offer for sale.

Any bank including foreign banks having shareholding in excess of 5% in any other bank in India will be required to indicate a time bound plan for reduction in such investments to the permissible limit. This means HSBC Bank will be required to bring down its stake in UTI Bank. At present it holds around 14% stake in UTI Bank.

The RBI has also capped corporate and other important shareholders with commercial affiliations holding in private sector banks at 10%. Any move to acquire more than 10% will need prior approval of the RBI. In the case of a financial entity's holding in a private bank, the objective will be to ensure that it is a well established regulated entity, widely held, publicly listed and enjoys good standing in the financial community. ICICI Bank may not be forced to dilute its over 20 % holding in Federal Bank.

However, in the case of restructuring of weak banks or in the interest of consolidation, RBI may permit a higher level of shareholding both by a corporate or by a bank.