The Hindu : National : Left against amendment to banking Act

Online edition of India's National Newspaper
Wednesday, Feb 16, 2005

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National

Left against amendment to banking Act

By Our Special Correspondent

NEW DELHI, FEB. 15. The Left parties today conveyed to the Government that they did not favour any amendment to the Banking Regulation Act, enabling a hike in the foreign direct investment (FDI) cap. "The Left parties are not in favour of any amendment which would do away with the existing cap on the exercise of voting rights by shareholders of a bank and make it proportional to equity holding, which in turn would be allowed to a maximum of 74 per cent for FDI through the automatic route. Therefore, the Government should refrain from adopting the notification route to allow acquisition of shares by foreign investors above the existing guidelines and subsequently presenting the Amendment in Parliament as a fait accompli," they said in formal note sent to the Government and all constituents of the United Progressive Alliance.

The Left parties said that removal of the cap on voting rights would require an amendment to Section 12 (2) of the Act. In a nine-page note, they detailed the reasons as to why they were against moves to further deregulate the banking sector.

Speculative activities

The note was prepared on the basis of a background paper prepared by economists Amiya Bagchi and Jayati Ghosh, and finalised by the Communist Party of India (Marxist), the Communist Party of India, the All-India Forward Bloc and the Revolutionary Socialist Party.

While recounting the developments since bank deregulation began, the parties said that a tendency was observed among some promoters or boards of banks to divert a substantial share of deposits into speculative activities or into investments that were risky but promised quick returns. Such moves increased financial fragility and lead to bank failures.

"Unnecessary move"

The parties said the Government was continuing with the previous Government's policies with regard to financial opening. The move to further deregulate the financial sector and raise the FDI cap in banking was "unnecessary from the point of view of economic and industrial growth."

The diversification of ownership was desirable as also ensuring the fit and proper status of owners and directors. This was necessary as concentrated shareholding in banks controlling huge public funds posed issues related to risk of concentration of ownership. Similarly, the proposal to dilute stakes of public sector banks up to 33 per cent, which was recommended by second report of the Narasimham Committee, had failed to gain Parliament approval.

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