RBI roadmap: Foreign banks get to eye private banks

FOR FOREIGN BANKS

In the first phase (up to 2009), foreign banks already operating in India will be allowed to convert their existing branches to wholly-owned subsidiaries.

To allow Indian banks sufficient time to prepare themselves for global competition, entry of foreign banks will initially be permitted only in private sector banks that are identified by RBI for restructuring.

“In such banks, foreign banks would be allowed to acquire a controlling stake in a phased manner,” the RBI said.

In considering an application made by a foreign bank for acquisition of 5 per cent or more in the private bank, RBI will take into account the standing and reputation of the foreign bank, globally as well as in India, and the desired level and nature of presence of the foreign bank in India.

The RBI may also specify, if necessary, that the investor bank should make a minimum acquisition of 15 per cent or more and may also specify the period of time for such acquisition. “The overall limit of 74 per cent will be applicable,” it said.

In the second phase (after 2009), the subsidiary of foreign banks, on completion of a minimum prescribed period of operation, will be allowed to list and dilute their stake so that at least 26 per cent of the paid up capital of the subsidiary is held by resident Indians at all times consistent with para 1(b) of the Press Note 2 of March 5, 2004. The dilution may be either by way of initial public offer or as an offer for sale.

After a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks, the RBI said, foreign banks may be permitted—subject to regulatory approvals and such conditions as may be prescribed—to enter into merger and acquisition transactions with any private sector bank in India subject to the overall investment limit of 74 per cent.

FOR PRIVATE BANKS

As a prescribed limit, foreign banks and financial institutions’ (FIs) stakeholding in private banks remain capped at 5 per cent while large industrial houses will be allowed to acquire, by way of strategic investment, shares not exceeding 10 per cent of the paid-up capital of the bank—subject to RBI’s prior approval.

The RBI has also said that all private sector banks—old or new—have to maintain a minimum net worth of Rs 300 crore. The central bank also made it mandatory for the banks to provide all information to RBI for approval of appointment of chairman or CEO.

However, the RBI allowed a transition arrangement and asked the banks or FIs to submit a time-bound plan for abiding to the final guidelines on ownership and governance in private banks.

For maintaining the minimum level of capital, the RBI has asked the banks, which are yet to achieve the norm, to adopt and submit a time-bound plan. “Where the net worth declines to a level below Rs 300 crore, it should be restored within a reasonable time,” added RBI. The old private banks had earlier been given a three-year time period to increase their capital from Rs 200 crore to the prescribed level.

The guidelines are to ensure a diversified ownership and control in private sector banks so as to minimise the risk of misuse of leveraged funds. The RBI has also said that foreign banks, with presence in the country, or FIs should not acquire any fresh stake in a bank’s equity shares, if by such acquisition, the holding exceeds 5 per cent of the investee bank’s equity capital.