Financial Daily from THE HINDU group of publications
Tuesday, Jan 18, 2005
Money & Banking - Foreign Direct Investment
Roadmap for FDI in private banks Doubts over annual creeping acquisition proposal
Sarbajeet K. Sen
New Delhi , Jan. 17
WITH the Finance Ministry-RBI combine busy drawing the final lines on the FDI roadmap that is to be dovetailed with the ownership guidelines in private banks, here is a sneak preview of what the cartographers might have in store for the investing community.
According to official sources, the proposal to allow staggered annual creeping acquisition of 10 per cent of the paid-up capital of a private bank by foreign banks is unlikely to go through as there are fears that it might lead to manipulation of shares of the investee bank.
The mandatory divestment clause proposed by the RBI in its draft ownership norms is likely to be dropped. Officials said that promoters who hold shares in excess of the threshold limits proposed in the norms have to bring their holding down to those levels within a given time-frame would not be in sync with the new regime and would have lead to unnecessary upheaval in share patterns in existing banks.
Officials also said that the central bank has not agreed to dilute the Rs 300-crore minimum paid-up capital norm for start-ups private sector banks.
The Finance Ministry had earlier suggested to the RBI that the limit would be lowered to facilitate entry of more players and ensuring greater competition.
On the voting rights front, the Government would be expressing its intent to move legislative amendments to remove the 10 per cent, thereby, making voting right proportionate to the holding. However, the exercise of higher voting rights would have to have the express permission of the RBI. Higher voting rights may also be restricted to a class of investors who are regulated in their parent country.
The Finance Minister, Mr P. Chidamabaram, has said that he would announce the much-awaited FDI roadmap within this week. The Finance Ministry top brass had held detailed meetings with the RBI Governor, Dr Y. V. Reddy, on Saturday to finalise the roadmap and the ownership guidelines.
While the Government's present policy is to allow up to 74 per cent FDI in private banks, the issue had got a bit muddled after the RBI announced its draft guidelines on ownership and governance in private banks last July.
The guidelines had proposed stiff shareholding limits and had suggested that no single entity or group of related entities would be allowed to hold 10 per cent or more of the paid-up capital of the investee bank.
For foreign banks, the proposed cap was set lower at 5 per cent.
However, the Government has remained firm that the RBI would have to synchronise its approach on ownership with the broader FDI policy of the Government.
The Finance Ministry has stood firm that while the threshold limits could be retained, they should not become permanent barriers for investors.
Thus, the RBI would come out with fixed set of norms against which higher holdings would be permitted.
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