• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources

Group Sites

• The Hindu
• Business Line
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

P. Devarajan

VOTING rights became a contentious issue at the recent annual general meeting of Federal Bank.

ICICI Bank holds 20.45 per cent stake in Federal Bank and the presiding officer at the AGM allowed voting rights for only 26 lakh shares (11.76 per cent) which ICICI had bought in 1993 and for which it had sought and obtained voting rights from the Government.

But can ICICI Bank exercise voting rights equal to 11.76 per cent when voting rights for all are capped at 10 per cent (irrespective of the equity stake) by the Banking Regulation Act, 1949? Voting rights in private sector banks are governed by Section 12(2) of the Banking Regulation Act, 1949 which states: "No person holding shares, in respect of any share held by him, shall exercise voting rights on poll in excess of ten per cent of the total voting rights of all the shareholders." Going by reports in this paper, the RBI exemption was sent to New Delhi which brought out a Gazette notification in 1994 providing for a waiver.

In 1993, ICICI as an FI took stakes in Federal Bank and South Indian Bank to protect it from raiders but now it seems to have a say in the running of the bank. In fact, voting rights in banks, as provided by the Banking Regulation Act, seem unfair as in the case of every other corporate body voting right are equal to the shares held. The Narasimham Committee has favoured scrapping the rule and Mr Jaswant Singh as the Finance Minister, had moved a Bill in Parliament to knock off the rule. But RBI intervened to get the rule reinstated.

If the proposal of the central bank to cap equity stakes in private banks at 5 per cent (individual) and 10 per cent (corporate entities) become operative, voting rights will have no meaning.

Perhaps, it has become so going by the RBI circular dated July 6, 2004.

The circular applies a ceiling of 10 per cent "on banks'/FI' investments in all types of instruments which are issued by other banks/FIs and are eligible for capital status for the investee bank/FI."

The instruments are: a) equity shares; b) preference shares eligible for capital status; c) subordinated debt instruments; d) hybrid debt capital instruments; and e) any other instrument approved as in the nature of capital.

The 10 per cent limit for a bank or an FI is linked to Tier 1 plus Tier 11 capital.

The circular adds: "Banks/FIs should not acquire any fresh stake in a bank's equity shares, if by such acquisition, the investing bank's/FI's holding exceeds 5 per cent of the investee bank's equity capital." Banks/FIs, which currently exceed the limits, will have to apply to the RBI within 45 days from the date of this circular along with a definite roadmap for reduction of the exposure within prudential limits, says the RBI.

Bankers believe this rule could imply HSBC dropping its stake in UTI Bank to 5 per cent within a time frame, the Tayals owning Bank of Rajasthan coming down and Puris holding some 65 per cent stake in Lord Krishna Bank turning a minority stakeholder.

One can appreciate RBI's fears over corporates holding majority equity in banks. But can private bank boards function with the directors holding just 5 per cent stake as none will have any interest in running the entity?

Or is it RBI's contention that State-run banks alone are the best for India?

More Stories on : Insight | Private Banks | On Mint Street

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Voting rights: What's best for banks?

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line