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P. Devarajan

Mumbai , Aug. 16

IF the Reserve Bank of India wants to take over a badly-run bank or exempt a cooperative bank from statutory liquidity ratio requirement, it does so by issuing a notification. The orders can take immediate effect.

Not so, once Parliament passes the Banking Regulation (Amendment) and Miscellaneous Provisions Bill, 2003, recently introduced in the Lok Sabha. According to the Bill, such proposals from the RBI will have to be put up to Parliament "in draft form".

The amendment proposed to Section 53 of the Banking Regulation Act, 1949 says: "A copy of every notification proposed to be issued shall be laid in draft before each House of Parliament, while it is in session, for a total period of 30 days which may be comprised in one session or in two or more successive sessions, and if before the expiry of the session immediately following the session or the successive sessions aforesaid both Houses agree in disapproving the issue of the notification or both Houses agree in making any modification in the notification, the notification shall not be issued or, as the case may be, shall be issued only in such modified form as may be agreed upon by both the Houses."

Senior bankers feel this procedure would reduce operational flexibility of the RBI in a crisis. "It could affect secrecy of operation in cases where quick action has to be taken against bank boards as in the recent case of the takeover of Nedungadi Bank by PNB," said one of them.

Apparently, the RBI was not in favour of the amendment but got swamped by the Law Ministry. Bankers hope for a change when the Bill is referred to a select committee.

If the amendment is passed, one of the first test cases could be that of Global Trust Bank. The RBI has told the GTB management to own up and make public all the financial deficiencies when it finalises its balance sheet by September 30, 2003. The apex bank will find little space to take quick action if it thinks the GTB management and its board need a change.

In the original BR Act, Section 52 dealing with the power of the Central Government to make rules provides for every rule to be placed in Parliament with the important rider: "However, that any such modification or annulment (by Parliament) shall be without prejudice to the validity of anything previously done under that rule." More, it does not cover notifications (in draft form) made in the Official Gazette.

Otherwise, say bankers, most of the amendments do make sense with the RBI having a hard look into any takeover of banks. RBI nod is a must for a raider to acquire five per cent of the equity in a bank.

Sub section (1) of the new section 12B provides "that no individual, firm, group, constituent of a group, body corporate or bodies corporate, except with the previous approval of the RBI, shall jointly acquire or agree to acquire, whether in his or its own name or in the name of any other person, any shares in a banking company, if the total nominal value of the shares intended to be so acquired exceeds, or would, together with the total nominal value of any shares already held in the banking company exceed five per cent of the paid up share capital of such company."

Banking sources add the provision that lets foreign investors hold up to 49 per cent in an Indian private bank or 74 per cent as proposed in the recent Budget will be covered by the fresh restriction. In fact, the RBI press note of February 16, 2002 on FDI in the Banking Sector, says, " under extant instructions, transfer of shares of 5 per cent or more of the paid-up capital of a private sector banking company, requires acknowledgement of RBI."

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