The Hindu Business Line : Banking on foreign funds

BY GOING FOR a sponsored ADR (American Depository Receipt) issue, which will lift foreign shareholding in ICICI Bank from 70 per cent to 74 per cent, the Chief Executive, Mr Kundapur Vaman Kamath, has invalidated most ideological positions on foreign shareholding in Indian banks. The decision of the bank's board turns India's largest private sector bank into the largest foreign bank without compromising on the social and other obligations laid down by the Reserve Bank of India. As the outfit is professionally managed, foreign investors, institutional and direct, are sticking on with ICICI Bank despite the 10 per cent limit on voting rights and the confusion over the equity stake foreign investors can hold in private banks.

The Finance Ministry is trying to do away with the iniquitous legal clamp on voting rights and help foreign investors pick majority equity in private banks though the RBI does not favour such an arrangement. After ICICI Bank and ING Vysya, it will be hard for the RBI to peg down foreign investment in private banks or hold voting rights at 10 per cent. Under Dr Yaga Venugopal Reddy the central bank has gone back on the earlier stand (taken under Dr Bimal Jalan) to do away with the 10 per cent cap on voting rights. The central bank is averse to foreign banks crowding Mint Street as laws in their parent countries do not permit Indian banks to pick up critical stakes in outfits there. There may be takers for the logic but none for the move to hold down local buying in Indian private banks to 10 per cent and also getting extant promoters to scale down any majority equity. The RBI is working on the questionable premise that diversification of equity holding is the optimal way of getting professionals on bank boards. With no identifiable group holding a majority stake, board decisions will be hard to come by. There will also be no incentive for the consolidation of small private banks. Some time ago top RBI officials failed to sell the idea of voluntary merger to tiny banks in the South and the proposed stake limits will make the idea that much harder to work.

There is nothing official about the RBI's discomfort with private banks after Nedungadi Bank and GTB, though it is there for all to see. But are government banks run professionally with New Delhi holding 51 per cent stake? The RBI has little say in the selection of the boards and chief executives of nationalised banks which were helped out by a Rs 30,000-crore fund infusion. The Finance Ministry and the RBI have promised discussion papers on the contentious issue. With government banks not a hit with the people and private banks at least more customer friendly, it is not the nameplate on the stake held but the quality of RBI supervision which will count. Instead of trying to trace family lineage in bank shareholdings, the RBI could improve on supervision norms to crack down on shadowy deals.

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