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THE RELUCTANCE OF New Delhi to move out of the banking sector is seen in its persistence with opaque laws on bank mergers and acquisitions. The role and powers of the Reserve Bank of India in such issues has been left far too vague. For instance, the RBI's permission is not needed for mergers of non-banking companies with banks, ahead of filing the schemes in the High Courts under Section 391 of the Companies Act, and the RBI is insisting on regulatory approbation. Perhaps, the RBI Governor, Dr Y. V. Reddy, has in mind the cases of private banks, such as Centurion Bank and IndusInd Bank, with rather thin financial records; earlier, there was a debate over the status of ICICI Ltd., before it got reverse-merged with ICICI Bank, with some classifying the former a development financial institution and others an NBFC. Yet, the RBI supervises banks and NBFCs, and should be aware of their health status.

Is RBI approval needed when the merged entity is a bank over which the central bank will anyway have total say? In the absence of legal clarity, is it not possible for the RBI to move the courts, if it is convincedsomething is amiss? Laws are less opaque on bank mergers, but can a public sector bank, on its own, buy up a private bank or merge with another public sector bank? Is it the job of the RBI to okay amalgamations or regulate the new banking entities born? What is the RBI stand on regulatory forbearance, as in the case of IDBI? Under the IDBI (Transfer of Undertaking and Repeal) Bill, 2002, the new company is not required to obtain banking licence; it also enjoys a five-year exemption from the Statutory Liquidity Ratio and Cash Reserve Ratio commitments apart from tax reliefs. This is not on. It was, thus, refreshing to hear from the Finance Secretary, Mr N. S. Sisodia, of a proposal to merge IDBI with a public sector bank to get around regulatory exemptions. The burden of the rather weak IDBI can be borne by the State Bank of India alone, though its board may not exactly relish the idea. That leaves a question on the status of the majority holding of around 57 per cent IDBI has in IDBI Bank. To add to the chaos comes a statement from the Finance Minister, Mr Jaswant Singh, promising more licences for private banks. Contrarily, the RBI would seem to want to put a halt to new licences, as its Web site says, "the number of licences to be issued in the next three years may be restricted to two or three of the best acceptable proposals."

Then, there is the RBI ban on Indian corporates owning banks. This does not apply to foreign banking companies picking up 49 per cent stake through the foreign direct investment route in the old and new private banks. One is not sure of the stake FIIs can hold. Entry to foreign banking companies will only make sense if the cap on 10 per cent voting rights goes. In the process, the Government (with the consent of the RBI?) can be accused of being unfair to domestic ambitions. As an add on, will the Government, then, bring down its stake in public sector banks to 33 per cent and allow Indian and foreign players to bid for majority stake? It may be best to lay down simple laws for mergers and acquisitions with the RBI kept out of the action. The Securities and Exchange Board of India does not okay amalgamations of companies, but merely insists that every player sticks to the rules.

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