Voting rights last hurdle for foreign bank investments

The 10 per cent cap on voting rights remains the last stumbling block for foreign banks that are keen to acquire significant stake in domestic private sector banks.

The government has already permitted foreign banks to take up to 74 per cent stake in private sector banks.

The government notification on last Friday cleared the decks for more equity deals such as the HSBC-UTI Bank deal in India.

Apart from HSBC, ING is likely to be among the first to increase stake in private sector banks. ABN Amro has also indicated that it is eyeing opportunities in the domestic market.

However, the 10 per cent cap on voting rights in respect of banking companies continues to be a dampener.

"It makes no sense if after acquiring 74 per cent stake in a domestic private sector bank we do not have control," a spokesperson of Standard Chartered Bank said.

Even as the Reserve Bank of India is liberally giving out branch licences, foreign banks are keen to grow much faster taking the inorganic route.

"As private sector banks have numerous branches in the country, we are keen to acquire significant stake in these banks as this will help us expand our retail presence, as we look at inorganic growth in addition to the current organic growth strategy," said ABN Amro officials.

Consultants have been approached by some of foreign banks having big plans for India to study the subsidiary model.

If a foreign entity is to compete in the Indian market with its domestic peers, they need to have an adequate customer accounts base in order to become bigger, said bank officials.

This is especially so since foreign banks are all vying for a share of the small-and-medium sector and retail accounts as is visible in other global markets.

With some of the leading private sector banks boasting of acquiring over 50,000 accounts monthly, their foreign counterparts see acquisition of private sector banks as a means of achieving similar scale of operations using their IT platform.

Foreign banks are studying the implications of setting up subsidiaries in the country as opposed to the current branch route.

Standard Chartered Bank spokesperson told Business Standard: "Going for the subsidiary route will not help as there is the issue of priority sector lending and a case of double taxation. We are prefer the continue to operate the way we are doing so far."

Meanwhile, other foreign banks are keenly awaiting the Reserve Bank of India (RBI) norms on them being allowed to set up subsidiaries in the country, which they anticipate will enable them to open branches at will, and expand their foot-print in the country.

Norms for foreign banks to set up wholly owned subsidiaries in India would be on lines as that currently pertaining to new generation private sector banks, where the share capital stands at Rs 200 crore.

"Share capital is not an issue considering the huge capital we have brought into the country," said foreign bank officials.

At the same time, some of the foreign banks are also looking at their ability to raise funds locally should they convert themselves into a subsidiary.

However, the overall cost of converting themselves to subsidiaries is a major drawback considering that the differential in tax rates works out to just four to five per cent in the case of having a branch licence or setting up subsidiaries.

"This is not too large an incentive for change. Moreover, as a subsidiary, banks would have to comply with the Company's Act," ABN Amro Bank senior officials added, as it would amount to quarterly publishing of results and cap on remuneration among other regulations.