RBI move aimed at enhancing financial stability

Foreign banks entering India are reportedly being asked by the banking regulator to agree to a clause requiring them to convert their branch operations into a wholly-owned subsidiary once domestic incorporation for these banks is made compulsory.

The Reserve Bank of India is believed to incorporating the condition of conversion of branch operations into a wholly-owned subsidiary (WOS) at the time of giving permission for the entry of a new foreign bank, said a foreign bank representative. In its discussion paper on the presence of foreign banks in India, the RBI has underscored that from the financial stability perspective there would be a need to mandate at the entry level itself a subsidiary form of presence. Similarly, it would be mandatory for those fresh entrants who establish branches to convert to WOS when they become systemically important over a period by virtue of their balance-sheet size.

A number of jurisdictions impose a local incorporation requirement for foreign banks mainly to protect retail depositors and limit operations of systemically important banks.

Branches are not separate legal entities whereas subsidiaries are locally incorporated separate legal entities.

Subsidiaries being locally incorporated have their own capital base and their own local board of directors. In the case of branches, parent banks are, in principle, responsible for their liabilities. As at end-March 2012, there were 41 foreign banks operating in India with 323 branches. Another 46 foreign banks had their representative offices in India.

(This article was published on February 27, 2013)
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