The Hindu Business Line : Welcome moves on foreign banks

HSBC has acquired around 13 per cent equity stake in UTI Bank. There is a possibility of HSBC acquiring majority stake in UTI Bank as UTI could be selling its stake in UTI Bank.

If that happens, HSBC can run UTI Bank only if it (HSBC) closes down its extant branches and dissolves itself as a foreign bank.

Similarly, ING Bank will have to cease operations as a foreign bank having acquired majority stake in Vysya Bank to operate the bank.

It follows the Government press note on FDI cap, styled revision of existing sectoral guidelines and equity cap on FDI, including investment by NRIs and OCBs/FIIs in the banking sector, dated January 15, 2004.

Perhaps, the critical part of the press note is the para which reads: "a foreign bank may operate in India through only one of the three channels: 1)branch/es; (2) a wholly-owned subsidiary and (3) a subsidiary with aggregate foreign investment up to a maximum of 74 per cent in a private bank. World over, foreign banks are given the option of either opening branches or setting up fully owned subsidiaries.

India has been more liberal extending foreign entities the twin options and the generosity was not necessary, as the country was not violating WTO norms. This had to be corrected and the Finance Ministry has reverted back to offering a single option as in other developing countries.

For instance, HSBC or ING or Citibank can today operate as a foreign bank with branches; or these banks can set up fully owned subsidiaries and shut down their current style of working; a third alternative is for the foreign bank to pick up 74 per cent stake in a private bank (old or new) and again dispense with its present face as a foreign bank.

From the menu, a foreign bank can choose only one item and not help itself to all three. At any point of time, foreign banks can entertain only a single route. Experts believe the government had to take the action to prevent foreign banks from having a killing presence and no foreign country including America encourages the presence of outsiders. The FII route cannot be adapted as their stake is limited to 49 per cent.

To rein in foreign appetite, the (present) government has dropped the earlier idea of lifting the 10 per cent cap on voting rights. Inquiries show that the RBI, under Dr Bimal Jalan, did not object to the scrapping of the ceiling but Dr Y.V. Reddy, as the RBI governor, had disagreed.

Reports are the Banking Bill amending the 10 per cent ceiling was altered before placing it for consideration in the last Parliament session. The Bills are technically dead, but bankers believe neither the RBI nor the new government will scrap the ceiling on voting rights.

As of now the 10 per cent cap is on and bidders are awaiting a change and could be sorely disappointed. It could, in a way, halt any bidding for new or old private banks by foreign players, as sans voting rights HSBC may have no interest in UTI Bank.

In many ways one can appreciate the government move backed by RBI as banking is not the same as any other industry and it cannot or should not fall into foreign hands.

But when the new government comes into power, there will be some frenetic lobbying by foreign banks.

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