The Hindu Business Line : Unreasoned hostility

FOR ANY ANGLER, the bait should be worth the catch. That simple condition seems to have been missed by the Finance Ministry and the Reserve Bank of India in the formulation they have devised to wheedle foreign banks to buy into select Indian private banks. The 10 per cent cap on voting rights will give way to reflect "the economic ownership of investors" to help foreign banks buy up to a 74 per cent stake in Indian private banks picked by the RBI for restructuring. Initially, foreign banks will be allowed to take up 15 per cent of the equity and if the RBI is "satisfied" with the credentials of the bidders the stake build-up could touch 74 per cent. Existing foreign banks have been given six months to conform to the "one-form-of-presence" concept— they need to wind down their independent operations to be eligible to run the private bank. This condition does not apply to those foreign banks that do not have operations in this country. Foreign banks can opt for only one of three "channels" — foreign branches, 100 per cent wholly-owned subsidiary or a subsidiary with 74 per cent stake in a private bank.

The slew of press releases from the RBI on Budget Day drummed the message of the "one mode presence criterion". Foreign banks may just stay away from India not being keen on running some of the sick private sector banks. Anyway, the RBI has not set down the rules for lining up the weak Indian entities. Existing foreign banks can turn themselves into wholly-owned subsidiaries with a base minimum capital of Rs 300 crore in the first phase (March 2005 to March 2009) of the programme drawn up by the RBI with a condition to dilute their stake to 74 per cent in the second phase with Indians holding 26 per cent; and all this while sticking to the `one-mode norm'. Foreign bankers are not amused over the stalling tactics of the RBI denying foreign investors any say. Then there are the Guidelines on Ownership and Governance in Private Sector Banks (the healthier entities) which grant the RBI the discretion to vet any equity purchase in a private bank of 5 per cent and above; none can go beyond 10 per cent in "the interest of diversified ownership" with corporates allowed a 10 per cent stake. But a clever operator can thumb his nose at the rule by owning parcels of 4 per cent stake under various names.

There is the caveat that the RBI will agree to a breach of these limits if it deems fit. The central bank, as the regulator of the banking system, will now have a critical say on the ownership of private banks — a power not given to it by the RBI Act. Nationalised banks are out of this play as the RBI probably believes that government ownership does not affect the "special" status of banks and that after a Rs 30,000-crore capital infusion. The Indian banking system as a whole needs foreign cash to grow with the best example being ICICI Bank with a 74 per cent foreign shareholding. Those against freeing the game for foreign banks argue that Indian banks have no say in the West, which has tough rules on ownership. Even if they were easy, no Indian bank has deep enough pockets to buy a sizeable stake in Western banks. But that is not sufficient reason for the RBI to be either unreasonably scared of or hostile to foreign banks when it should be honing its supervisory skills to match the best in the world.

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Stories in this Section
Unreasoned hostility

Some bold innovations

Budget: The playmaker's play

One for the consumer

Towards political expediency and economic compulsions

Re-starting reforms

Abetting greater investment

Step towards tax neutrality

A straight bat approach

Enduring bonds

Income tax issues