House panel okays lifting of voting right cap in banks

NEW DELHI: The Standing Committee of Parliament on Finance headed by N Janardhana Reddy today gave its approval to the Banking Regulations (Amendment) bill thus lifting the 10% ceiling on voting rights for shareholders in foreign and private banks, allowing voting rights to be in proportion to shareholding. The report was tabled in Parliament today.
At present, whatever the level of shareholding, voting rights are limited to 10%, under section 12(2) of the Banking Regulation Act. The bill under consideration drops this particular section. With this, the road has been set for consolidation in the private banks in the country. This year’s budget has already proposed raising the sectoral cap for foreign investment in banks to 74%.
The voting rights of shareholders of public sector banks will not be affected by this bill. They will continue to be governed by Banking Companies (Acquisition and Transfer of Undertakings) Act 1970, Banking Companies (Acquisition and Transfer of Undertakings Act, 1980, State Bank of India Act 1955 and State Bank of India (Subsidiary Banks) Act 1959. This will be 10% in the case of State Bank of India and 1% in the case of other nationalised banks and associate banks of SBI.
With this amendment, all the 36 foreign banks operating in the country have the prospects of opening a subsidiary and expanding through this route, apart from opening more branches of banks incorporated abroad. The committee notes that the amendment would facilitate consolidation in the private banks as well.
Foreign banks have been lobbying for increased voting rights for a long time.
Of the business done by foreign banks in the country, Standard chartered Bank has the highest share of total assets at 23.62%, Citibank at 21.92%, HSBC 18.18% and ABN Amro 9.09%. No legroom has been allowed in the case of public sector banks that continue to be governed by the Bank Nationalisation Act or the State Bank of India Act in the case of SBI..
Referring to Sub-section (2) of Section 12 of Banking Regulation Act, the committee said once it is removed, opportunities will be available to all investors and the investments will not remain confined to foreign banks only.
But the priority sector lending targets that is currently at 32% inclusive of the export credit will be changed as per RBI regulations for other private banks. (Priority sector target for private and public sector banks is 40% currently).
The Committee has asked for a strong regulatory mechanism to check misuse of the provisions on voting rights by unscrupulous Indian and foreign investors.
The panel asked RBI to ensure strict compliance of acquisition beyond 5.0 %, in which case RBI permission has to be sought.
The restriction on large industrial houses to be promoter of the bank continues. But individual companies directly or indirectly connected with large industrial house are permitted to participate in the equity of a new private sector bank up to a maximum of 10% without having controlling interest in the bank.