Regulating bank mergers

If the statements made by the Finance Minister, Mr Pranab Mukherjee, are any indication, an important matter relating to financial sector reforms may have been settled. At a recent Confederation of Indian Industry meet, he made it clear that purview of mergers and acquisitions within the banking sector will rest with the Reserve Bank of India and not the competition watchdog, Competition Commission of India. This means that banks will be outside the purview of the Competition Act. While the formal division of powers has yet to be legislated upon, the definitive statements off North Block are suggestive of an effort to resolve an impasse that had stalled an important aspect of mergers and acquisitions in India.

The issue of M&A in any dynamic economy is always complex and it is no less so in India, especially as the next cycle of economic expansion gets under way. The banking sector is also likely to witness a higher level of activity with foreign banks also getting more freedom than they have had so far. With three organisational entities, state-owned, private and foreign banks in the field, the necessity to ensure that mergers do not lead to ‘dominance' or become hostile events had inadvertently created a sort of turf ‘war'. While the Competition Act's provisions on mergers were all-encompassing, the RBI had misgivings and along with the North Block felt that CCI should have no say at all. With such basic differences, it was hardly surprising that the changes both in the Banking Regulation Act 1949 and the Competition Act that were to give more teeth to the CCI were shelved. Now, the impasse has been cleared with the Cabinet recently approving the Banking Amendment Bill that will formalise the powers of the RBI as far as banks are concerned. This also means that the sections dealing with powers for the CCI in the Competition Act that were yet to be notified will have to be modified in view of the Cabinet decision endorsing North Block and the RBI's claim over the banking sector. As is so frequent in policymaking, such legislative changes may not be passed this session that might be curtailed on account of elections in five states.

The amendment Bill however should be taken up as soon as possible for it will allow an expansion of the banking sector through greater presence of foreign banks and fresh licences within the context of more regulatory powers for the RBI. All in all, the financial system is in for exciting times.

COMMENT NOW