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Fears of investigation -- Banks become wary of insurance tie-ups

Sarbajeet K. Sen

NEW DELHI, June 4

FEARS over the likelihood of the central investigative agencies peeping into the functioning of the insurance sector are understood to be forcing the reworking of several joint ventures planned in this sector, involving public sector banks.

Banking industry sources said that banks, which were earlier planning to float subsidiaires with majority stake, in tie-ups with foreign partner are developing cold feet, since it would be an invitation for the Central Vigilance Commission (CVC) and the Central Bureau of Investigation (CBI) to keep a watch on the affairs of the new outfit.

``As soon as a public sector bank's holding reaches 51 per cent or above, the new company would become a subsidiary of the parent bank, thereby opening the gates for the investigative agencies,'' top-ranking banking industry officials said.

They said the foreign partners seeking tie-ups with PSU banks have also become aware of the possibility and were having a rethink on the equity holding pattern in the new subsidiary.

``The foreign partners would not be comfortable with the idea of allowing their working to become a subject to scrutiny of the investigative agencies at any point,'' sources said.

Though the Reserve Bank of India has allowed banks to hold a maximum of 50 per cent stake in an insurance joint venture, it has said that it was prepared to make exception in a few cases where a single bank would be allowed to hold higher stake in the co mpany.

Banks have, however, been permitted to tie up with other banks to float insurance ventures, with each having a maximum of 50 per cent stake.

It is understood that some stronger banks, which were earlier planning to hold above 51 per cent stake in the joint venture, are now planning to rope in a third partner into the venture.

However, taking advantage of the exemption clause inserted by the RBI, State Bank of India (SBI) has sought permission to hold 74 cent stake in the proposed insurance outfit.

The problem of intervention by the investigative agencies, which has at times been dubbed as `excessive', has plagued the banking industry for several years now.

There has been persistent complaints arising out of the PSU banks that fears of the possibility of being later indicted by the investigative authorities have had a severe impact on the decision-making process in the banks, leading to an adverse impact on their functioning.

``It is quite understandable that there are fears among the banks that some of the problems plaguing that industry does not spill over to their new venture planned in a wholly new business,'' a top official said.