Graded tightening of bank stake norms

Finance ministry, RBI to jointly look at high-stake bids.

The finance ministry and the Reserve Bank of India (RBI) are heading for an amicable settlement on the vexed issue of the Banking Regulation Amendment Bill.

The regulator has agreed to lift the 10 per cent cap on voting rights in private banks. But as a precondition, it has extracted a promise from the ministry that the norms for hiking the foreign stake in private banks will be stringent.

The RBI is in favour of graded tightening of the norms for acquisition. For instance, any entity""foreign or domestic""which wants to cross the threshold of 5 per cent stake acquisition will be required to seek the regulator's clearance well in advance before making the move.

When an entity proposes to hike it beyond 10 per cent, the regulator will handle the case with greater care and with more stringent due diligence. At a later stage when the limit crosses 20 per cent, the finance ministry will also be involved in clearing the acquisition.

In other words, both the ministry and the RBI will jointly scrutinise the credentials of the prospective buyer before clearing the proposal.

"Once the amendment goes through, stake holders' voting rights will be in accordance with the actual stake and the cap on 10 per cent will be removed. However, the hike in stake beyond a particular level will goo through only after the regulator and the government are satisfied with the acquirer's credentials," said a source.

North Block is not against RBI clearance for foreign banks increasing their stakes in a local bank. However, the threshold limits should be slightly higher since the government wants foreign banks with diversified holdings in the parent company to enter the market.

"Till about 10 or 15 per cent stake acquisition, the RBI should be the competent authority to clear the deal. The cut-off for the finance ministry stepping in should be higher, in the range of 20 per cent," sources said.

In fact, even in the case of the HSBC-UTI Bank deal, the matter had been referred to the finance ministry and, officials claimed, the RBI wanted the government to clear the deal.

RBI governor YV Reddy had a meeting with Finance Minister P Chidambaram and Prime Minister Manmohan Singh. It is believed this issue came up for discussion at the meeting.

"The ministry and RBI have been fighting over control of the policy in regard to foreign banks' stake in domestic banks. The issue seems to have been resolved. The government will lay down the policy guidelines and the RBI will stick to regulation and ensure that the norms are not flouted," said sources.