The Hindu Business Line : Ministry told to withdraw note on pvt banks' voting rights cap

IN a setback to banking sector reforms, the Ministry of Finance has been asked to withdraw its Cabinet note seeking lifting of the 10-per cent voting rights cap in Indian private sector banks. The note had proposed that voting rights be made proportionate to the shareholding.

Senior Finance Ministry officials confirmed that there have been instructions from the "highest quarters" to withdraw the note. "The highest political quarters might have felt that the timing is not right to go ahead with the proposal to lift the cap," officials said.

They, however, said there was no immediate change in the Ministry's views on the need to lift the cap on voting rights. "Maybe it is felt that a wider discussion needs to be held on the matter," officials said.

The Finance Ministry had recently moved the note in the agenda of the Cabinet in one of its recent meetings. However, the highest executive body could not arrive at a decision on the proposal.

The cap on voting right is proposed in the Banking Regulation Act, 1949, which states that no person holding shares in a banking company is entitled to exercise voting rights in excess of 10 per cent of the total voting rights of all the shareholders of the banking company.

While officials refused to give any concrete reasons for the instructions to withdraw the note, it is understood that the move was largely due to the Government's fears on the political repercussions, with the Left parties not appearing comfortable with proportionate voting rights in banks.

There have been apprehensions that lifting the voting rights cap could lead to swamping of the Indian banking sector by foreign entities that could effectively control private banks since foreign direct investment up to 74 per cent is currently allowed in the sector.

However, the issue of ownership pattern in private banks is currently being debated, with the Reserve Bank of India preparing a second set of draft norms on the issue. In its first draft, the Central Bank had proposed limiting the holding by a foreign bank operating in the country to a maximum of 5 per cent of the paid-up capital of a private bank.

This restriction proposed by the RBI has been viewed by a section of prospective investors as being incongruous with the existing FDI policy for the sector.

Incidentally, soon after the United Progressive Alliance Government took over, the RBI too expressed its apprehensions on the possible fallout of the move to lift the voting rights cap.

Earlier, the National Democratic Alliance Government had moved a Bill to lift the voting rights cap that was subsequently referred to a Parliamentary Committee. "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. However, it has called for strong regulatory provisions to guard against misuse of the freedom.

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