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Saturday, 28 April 2012 11:16
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26% voting cap curious if local firms can own only 10%
Given that the finance minister had first announced RBI would be giving out new bank licences more than two years ago, the Cabinet clearance of the Banking Laws (Amendment) Bill is a welcome step forward as it means RBI can now start moving ahead in issuing licences. While the Cabinet has raised the voting cap on shareholdings in private banks to 26% from 10% at the moment, the fact that the limit is a mere 10% for public sector banks (it was 1% earlier) is curious—perhaps that’s because the government wants to make sure that while investors invest in PSU banks, no one can possibly question its suzerainty at the board level. More than the voting rights, what’s important is the Cabinet has cleared RBI’s powers to supersede the board of a banking company. Right now, RBI does not have these powers and, while talking of issuing new licences, RBI had said this was a vital pre-condition—after all, if a new bank licensee was doing something illegal and RBI couldn’t remove him, it would be a problem. In the case of Global Trust Bank, for instance, had RBI been in a position to take action against the entire board and put in place an administrator to run the bank (it can only remove a director at the moment or any officer), it would have handled things differently and Oriental Bank of Commerce may not had have to take it over in a bid to protect depositors’ money.
If RBI is now able to move to issue new bank licences, it won’t be a moment too soon—India needs credit outstanding to rise from around $900bn right now to around thrice this level in 5 years and that requires significant increases in capital that will need new promoters to come in. Since the Cabinet has taken on board the BJP’s desire to have a cap on voting rights, the chances of the Bill getting passed in Parliament are bright.
What’s not clear, however, is why the government should have a voting cap of 26% in the case of private banks if RBI wants promoters to dilute their equity to 15% eventually—right now, RBI’s limit is 10% (but it can relax it, and has done this in many cases), but RBI draft guidelines for new banks issued last year had specified that while promoters had to own at least 40% of the paid-up capital of a bank for at least 5 years, this would have to be brought down to 20% within a period of 10 years and to 15% within 12 years of the bank getting its licence. One argument is that the voting cap of 26% could apply to the period in which the promoter has over 26% shareholding and that it becomes redundant once the shareholding has been brought down to 15%. Presumably such sources of conflict will be ironed out when final guidelines are issued after the Bill becomes law—RBI will also want to ensure the Financial Holding Company structure is made mandatory to ringfence the banking business.

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