Paving way for new licences

The Banking Laws Amendment Bill, 2011 was passed by both Houses this week, setting the ball rolling for the much-awaited issue of new banking licences. In its entirety, the Bill seeks to strengthen the regulatory powers of the Reserve Bank of India and aims to address the issue of capital raising capacity of banks.

The Bill was passed after the Government agreed to drop the controversial clause, which proposed permitting banks to trade in commodity futures. Also, the Bill originally proposed to exempt combinations of banking companies from seeking permission from Competition Commission of India (CCI) for mergers and acquisitions. However, the Competition Commission clause in the Banking Bill has also been modified. This allows the CCI to continue to regulate M&As.

Key changes

The passage of the Bill primarily brings forth three key changes. One, it paves the way for the RBI to issue new banking licences to the private sector. While the final guidelines are yet to take shape and the whole process is bound to take 12-15 months, speculations are already rife as to the likely candidates.

The Bill also seeks to change the voting rights of the shareholders in nationalised and private banks. It raises the cap on voting rights of shareholders in nationalised banks from 1 per cent to 10 per cent. However, as government’s holding in all nationalised banks is more than 51 per cent, the impact will be minimal. For private banks, initially the Bill proposed to remove the existing restrictions on voting rights. However, the government has now capped the voting rights at 26 per cent from the earlier 10 per cent. Also, the RBI will need to approve acquisition of 5 per cent or more of banks’ paid-up capital. This is to ensure that no one entity has excessive influence on the bank. However the increase in voting rights is that it will increase the investors’ say in corporate matters and induce more foreign investment.

Powers for RBI

Finally, the Bill empowers the RBI to supersede the Board of Directors of a banking company (for not more than 12 months). This is to protect the interests of depositors. Banking companies engage in various financial activities through the medium of associates. The Bill also confers powers on the RBI to call for information and returns from such associate enterprises and inspect them.

While most of the initiatives in the Bill may take some time to bear fruit, it has cleared the impasse over the issue of new banking licences and given enough reasons for investors to place their bets on both NBFCs and private banks. NBFCs such as M&M Financial, L&T Finance Holdings, Shriram Transport Finance and Bajaj Finance have seen a frenzy of activity in the markets as likely candidates to bag new banking licences. Similarly, private banks such as Karnataka Bank, Federal Bank and City Union Bank have also seen a lot of interest in the past few days as they appear to be potential consolidation targets.

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