The Hindu Business Line : Expert group likely on bank voting cap issue

THE Ministry of Finance is set to shoulder arms to the Reserve Bank of India's late swinging delivery proposing to retain the 10-per cent voting right cap on for foreign shareholding in Indian private sector banks.

Fearing that the proposal might send wrong signals to foreign investors on the reforms process at a time of political flux, the Ministry is considering buying time by setting up an expert committee that would look into the merits of RBI suggestion.

"RBI's proposal has come at a very tricky moment for the Government. With uncertainly prevailing on the political front a proposal like this could send wrong signals to foreign investors on the directions of future reforms. We may set up an expert group or some committee to look into the suggestion," a top official of the Finance Ministry said.

The Government has recently allowed foreign banks to enter the Indian banking sector through either a 100 per cent subsidiary, a branch or by holding up to 74 per cent stake in an existing Indian private bank. The RBI's proposal on capping the voting rights would impact the decision of only those investors hoping to adopt the last of the three routes mentioned. However, the impact of the scrapping of the provision would be restricted to private sector banks since voting rights in public sector banks are governed by provisions in other banking legislations.

RBI's recent suggestion is seen as a rather late reaction to a long-standing proposal to lift all restrictions on voting rights in Indian private sector banks. The Government has already introduced a bill in Parliament to scrap the voting cap provision by deleting Section 12(2) of the Banking Regulation Act. Removal of the provision would result in voting rights proportionate to the shareholding in banks.

The Bill had been subsequently discussed threadbare by a Parliamentary standing committee. Giving its go-ahead for making the amendment in the Banking Regulation Act, the committee had said that "the removal of restriction on voting rights is a step in the right direction and it will facilitate the inflow of foreign capital and expertise," the Parliamentary panel had said.

It had said that the regulatory mechanism should be made "foolproof and strong enough" to ensure against any misuse of the provision.

The committee had said the RBI should ensure that the existing provision requiring the Central Bank's prior approval for any transfer of shares by individuals or group of individuals of five per cent or more in a bank should be strictly complied with.

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