Red alert stalls bank voting cap

The Left parties seem to have influenced the United Progressive Alliance government's decision to tone down its intention to lift the cap on voting rights of foreign shareholders in private banks.

Sources in the government told Business Standard a proposal to lift the 10 per cent cap through amendments to the Banking Regulation Act had been deliberated upon in a recent Cabinet meeting after the finance ministry and Reserve Bank of India (RBI) had ironed out their differences on the issue.

The Cabinet, however, deferred a decision on the matter after discussing it. "The Cabinet was of the opinion that there was no need to decide on the matter immediately since the next session of Parliament was still some time away. It is a decision that can have political implications," said a source.

A decision on the issue has been pending for the last 18 months, since the government has not been able to amend the law despite stating its intent last February.

A Bill to amend the provisions of the Banking Regulation Act was introduced in Parliament last year and had also been cleared by the standing committee on finance.

The RBI, however, opposed the move after YV Reddy took over as governor. The finance ministry finally prevailed upon the central bank arguing that policy formulation was its domain, while regulation of banks was RBI's responsibility.

Prime Minister Manmohan Singh also discussed the matter with Finance Minister P Chidambaram and Reddy before his US visit and the proposal was put up before the Cabinet.

A number of banks like ABN Amro, HSBC, Citibank and Standard Chartered, which operate through branches in the country, are watching the move closely before deciding on setting up subsidiaries. Some have also kept their expansion plans on hold.

"Unless the cap on voting rights is lifted, even 100 per cent FDI is rendered meaningless," said the head of a foreign bank. There are fears that lifting the cap on voting rights will result in foreign players controlling the Indian financial sector.