Will Citi find it less taxing? PDF Print E-mail
Wednesday, 09 May 2012 16:54
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FM's tax cuts are just one part of the story
Given that it even a mid-sized foreign bank in India would have to pay around R500 crore of capital gains tax while converting from a branch structure to a wholly-owned subsidiary (WOS) structure that the RBI prefers, finance minister Pranab Mukherjee has done well to abolish the capital gains tax on such transactions—after all, if this is a regulatory requirement, why should banks have to pay capital gains tax on it? Whether foreign banks now opt for converting their branch networks into wholly-owned subsidiaries, however, remains an open question. That RBI should now be in favour of the WOS route, of course, shows just how completely the pendulum has swung after the 2008 financial crisis. Before this, having a foreign bank as a branch was considered a good thing since, in case of a problem, the parent bank was there to pump in more cash. After 2008, however, RBI wants to ringfence Indian operations from the parent bank—since a WOS will have to be fully-capitalised, RBI’s view is this will insulate it from what’s happening in the parent bank.
Apart from the fact that foreign banks will have to comply with what RBI wants, the WOS route offers obvious advantages. WOS-banks will be on a par with local Indian banks when it comes to branch expansion, giving them opportunities available to only Indian banks so far. While the higher priority sector lending targets applicable to Indian banks (40%) will now be applicable to WOS-banks (right now, foreign banks have a 32% target, and can lend to exports instead of to agriculture as part of this), the other area of concern will be the new governance structure. WOS-banks must have local boards with independent directors as well as non-executive directors instead of just one level of supervision by their parent at the moment. Though RBI has said the issue will be deferred for the time being, the real big concern will be about the listing requirements—FDI in banks is restricted to 74%, making it mandatory that the WOS, at some point, will have to divest shares. So the jury is still out on whether foreign banks will rush to the WOS-queue now that the FM has removed the capital gains tax disadvantages. A lot will now depend on RBI guidelines and what they say, for instance, about giving WOS-banks time to meet rural-branch obligations and higher priority sector lending targets or about whether WOS-banks will have to comply with the 74% FDI cap.

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