Financial Daily from THE HINDU group of publications
Monday, Aug 09, 2004
Money & Banking - Private Banks
Govt studying options on pvt bank voting rights
Sarbajeet K. Sen
New Delhi , Aug. 8
THE Finance Minister, Mr P. Chidambaram's casting vote could finally decide the fate of the voting rights in private sector banks.
The NDA Government's Bill had aimed at removing the voting right cap by deleting the section restricting such rights to 10 per cent in the Banking Regulation Act. Reworking the Bill, officials have forwarded a fresh set of options to the Finance Minister .
The options include the two extremes ones of either going ahead with the earlier proposal of lifting the cap altogether or not to proceed with any amendment at all.
The other choices are to allow a higher voting cap limit of around 20 per cent or to remove the cap only for foreign banks having a holding in Indian private sector bank and which are regulated by the banking regulator in country of origin.
Officials said that with the Reserve Bank of India recently proposing severe restrictions on holding in private banks by domestic entities including Indian promoters, a higher cap on voting rights would be of interest only to foreign investors in the banking sector.
"The voting right cap is not in conformity with the FDI policy," senior Finance Ministry officials said.
Under the FDI policy that was notified during the NDA Government, FDI in banks has been allowed to go up to 74 per cent from the earlier cap of 49 per cent.
However, the recent draft policy framework for ownership and governance in private sector banks, RBI has proposed that no single entity or group of related entities has shareholding in excess of 10 per cent of paid up capital of the bank and any higher acquisition has to be with the central bank's prior approval.
The proposed framework, which has been resented by the banking industry for the severe restrictions, also stipulates that promoters of existing private sector banks would have to prune their holding to 10 per cent in a time-bound period, with the indicative outer limit being 3 years.
In contrast, the previous Government had considered allowing Indian promoters of private banks to have a level playing field.
Foreign investors were to be allowed to raise their holding to 74 per cent from the maximum permissible 49 per cent.
The NDA Government while defending its proposal to remove the voting right cap altogether had argued that the move would prompt greater interest among foreign investor to explore investment opportunities in the Indian banking sector since they could exercise control in exact proportion of their holding in the entity.
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