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Sarbajeet K. Sen

New Delhi , Oct. 25

THE Ministry of Finance wants the Reserve Bank of India to hop back one step in clearing big-time share transactions in private sector banks.

The Ministry has asked the RBI to explore the possibility of according prior approval to share deals that result in breaching the threshold shareholding limits, instead of granting acknowledgment after the transaction has actually taken place.

"We have asked the RBI to see whether it is possible to alter the procedures to bring in a system of prior approval by the central bank instead of post-acknowledgement. The RBI can evaluate the proposed investment according to its "fit and proper" norms before the actual transaction takes place," a senior Finance Ministry official said.

Under the present system, investors whose share purchases touch or go above 5 per cent of paid-up capital of a bank are required to get acknowledgement from the RBI after entering into the deals. The bank in question is allowed to proceed with the allotment and transfer of shares only after receiving the central bank's go-ahead.

The onus on providing the details of the deals to the RBI lies with the bank's board whose shares are being acquired. The central bank had said that such a procedure for vetting high-value share transaction is necessary "to protect depositors' interest and the integrity of the financial system."

The RBI had announced the existing guidelines for acknowledgement of transfer and allotment of shares in private sector banks in February 2004. The guidelines have been put up for review along with the draft norms on ownership in private banks announced by the RBI in July.

It is felt that the requirement of post-facto acknowledgment has at times resulted in investment deals in private banks getting stuck with the RBI for unduly long periods causing unease among investors.

However, despite the Finance Ministry's intent to help ease the share transfer norms, it remains to be seen whether investors intending to enter into such large share deals would want to disclose their intents upfront.

While considering granting its acknowledgement for the share transfers, the RBI takes into account among other things the investors' "integrity, reputation, and track record in financial matters and compliance with tax laws".

It also looks at the applicants record in complying with other laws, including criminal breach, and whether there has been any previous record of causing loss to the public due to "dishonesty, incompetence or malpractice."

There are stricter checks such as tracking the source and stability of funds of the investor in instances where the share purchases breach higher thresholds of 10 per cent or 30 per cent of paid-up capital of a bank.

More Stories on : RBI & Other Central Banks | Private Banks

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