RBI may curb foreign banks' acquisitions

10% cap likely on holdings in another Indian bank.

The Reserve Bank of India (RBI) may place restrictions on the acquisition plans of foreign banks already operating in India through a branch or a subsidiary.

According to a proposal, which is being discussed with the finance ministry, foreign banks operating in India cannot hold over 10 per cent equity in another Indian bank.

The present RBI rules allow banks to hold up to a 30 per cent stake in another bank. If the proposal goes through, foreign banks, that already have a subsidiary or a branch in India will have to go in for a phased reduction of their stakes in other Indian banks to 10 per cent within a fixed timeframe.

The move could affect banks like HSBC, which plans to acquire a 20.8 per cent stake in UTI Bank. The bank has already bought a 14.7 per cent stake from CDC Financial Services and the South Asean Regional Fund.

The RBI has not yet formally cleared the HSBC proposal.

However, banks like ING, which had picked up a 44 per cent stake in ING Vysya, will not be affected. This is because ING had surrendered its licence to operate two branches. The same is true for Bank of Muscat, which recently picked up a 33.04 per cent stake in Centurion Bank.

Foreign banks with branches in India or operating through a wholly owned subsidiaries or with a 74 per cent stake in a private Indian bank might be unable to hold over 10 per cent in another bank in the country, ministry officials said.

The proposal further envisages that the 10 per cent stake will be treated as FII (foreign institutional investor) holding.

The officials said the move was aimed at encouraging diversified holdings in private and foreign banks. Besides, the effort was to prevent the concentration of a handful foreign banks in a large number of ventures.

The proposal will be part of the guidelines being formulated by the RBI for foreign banks setting up subsidiaries in the country. The guidelines will also propose a minimum initial capital requirement of Rs 300 crore. Private Indian banks are given a three-year timeframe with the initial equity requirement of Rs 200 crore.

According to the proposed guidelines, the other requirements on opening of new branches and lending to priority sectors will be the same as those applicable to private banks.

Under the existing rules, RBI permission is required to open new branches. In its commitments to the World Trade Organisation, India is committed to allow opening of at least 12 new foreign bank branches a year.

In March, the government permitted foreign banks to set up 100 per cent subsidiaries in India with the rider that they can acquire a maximum 74 per cent in existing private banks.

As a result, foreign banks, which intended to subscribe to the entire paid-up capital, will now have to either convert their existing branch into a wholly-owned subsidiary or seek a licence to set up a new bank in India.

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A spanner in the works

• Foreign banks already having a presence in India will not be allowed to pick more than 10% in an Indian bank.
• Proposal closes the doors for foreign banks expanding in India through acquisitions.
• HSBC's plan to pick up a 20.8% stake in UTI Bank will be hit by the new proposal.
• But ING's deal with erstwhile Vysya Bank will not be affected as ING has surrendered its licence.
• Bank Muscat's deal will Centurion Bank too outside purview of the proposals as former has merged operations with the latter.