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Ms Usha Thorat

Mumbai , Sept.10

Following are the observations made by Ms Usha Thorat, Executive Director, Reserve Bank of India, on the proposed guidelines regarding the ownership and governance in private sector banks.

What are the objectives of the proposed policy?

The objectives are to ensure that the banking system is operated in a manner that protects the depositors' and the public interest, while being consistent with the state of the national economy broadly defined. This requires banks to follow sound governance policies, ensure that they are owned and managed by `fit and proper' owners, they are well capitalised and the processes are transparent and fair.

The policy provides a desirable framework that can be debated, and a non-disruptive timetable that can be negotiated, provided it is in the larger interest. Several countries, both developed and developing, have regulatory stipulations and clearance for significant shareholding and control.

The threshold level may vary from country to country, and can also involve more stringent conditions for higher thresholds. Requiring prior approval for holding in excess of 10 per cent ensures that governance and other objectives of the policy are served.

Diversified ownership need not ensure sound governance. In fact, concentrated shareholding may ensure timely capital infusion and facilitate growth. What are your views on this?

While it may be true that diversified ownership is neither a necessary nor a sufficient condition for sound governance, it is usually considered that any investment over 10 per cent represents a strategic investment and the regulator has to be satisfied about the `fit and proper' status of such investors.

This is why, in many countries, the threshold level beyond which specific clearance for acquisition has to be taken from regulators is 10 per cent. Beyond this level, due diligence is intensified and, at higher levels public interest and public policy considerations dominate.

Why is the new policy being made applicable to those who have already acquired higher shareholding?

From the point of view of the safety of depositors' funds, the `fit and proper' criteria for owners and directors need to be continually complied with, and hence, the issue of prospective and retrospective has to be considered in the broader interest.

In case any change in the status quo of the amount of ownership is considered to be in public interest, the effort will be to bring about changes in a fair and relatively non-disruptive way.

In this background, the guidelines are applied continuously to the existing owners and directors to ensure satisfaction of the criteria and tests for higher levels of shareholding as given in the February 3 guidelines.

The banking sector needs more capital. The guidelines appear to impede the raising of capital. Is this true?

At a macro level, the country has surplus savings. The stock markets are well developed. Several large non-financial enterprises are raising capital in adequate measure. The banking stocks have been doing well. Hence, it should be surprising if banks with good standing, especially on the `fit and proper' as well as good governance grounds are not able to raise resources in such an environment.

What about investment by foreign equity funds?

Within the limits specified, subject to due diligence and fulfilment of `fit and proper' criteria as outlined in the draft, there should be no problem. It may be added that in the case of foreign funds, the identity and source of funds become particularly important to ensure that faceless and nameless investors do not own our banks.

What is the impact of the policy on investments by foreign banks through FDI or FII?

The guidelines do not cover foreign banks' investments as FII or FDI. There is, however, a reference to restricting acquisition of shares by any foreign bank having presence in India in any other bank to 5 per cent of the investee bank - which is already applicable to banks incorporated in India (public and private) in the interest of restricting cross holding on a symmetric basis.

Will the guidelines not inhibit mergers and takeovers?

While mergers and takeovers are not the end in themselves, consolidation in the banking sector is important and this should be naturally include both public and private sector banks. Currently the legal, policy and regulatory framework is under consideration in IBA. So, the issue has to be viewed in a broader perspective.

On the limited issue of current draft guidelines and its possible impact on M & A, it can be argued that it will have a possible impact. With the raising of the minimum net worth to Rs 300 crore, there will, in fact, be encouragement of mergers on a voluntary basis. The stipulation of reduction in shareholding by any single entity (individually and as a group) to 10 per cent is also expected to encourage consolidation as, through merger, such shareholding can inorganically be brought down while leading to a bigger, stronger bank with more diversified ownership.

While it would seem that the restriction of 5 per cent on cross holding will inhibit mergers and takeovers, what is in fact being suggested is that such acquisition i.e. more than 5 per cent leading to consolidation of the system, will have to be achieved in a transparent manner with the regulator being fully aware of the intentions of existing and potential shareholders.

Where M&A involves higher shareholding, it will have to be with RBI prior approval and be demonstrably in depositor and public interest. It provides for orderly consolidation with the approval of the regulator.

Why should promoters continue to have a stake if the shareholding has to be reduced to 10 per cent? The guidelines do not seem to recognise the important role of good promoters for banking system. Comment.

For new licences, it has been indicated that a time-frame of three years will be given for bringing down the promoter's stake. Suggestions have been made that a promoter, if he has to take interest, should retain stake of at least 26 per cent and that 10 per cent does not ensure such interest and commitment.

With regard to banks that have been permitted recently on the basis of specific approvals, the pattern of ownership already approved will be one of the considerations while the `fit and proper' criteria for higher shareholding as appropriate and sound governance principles are paramount. The transition in respect of existing banks is sought to be managed in a non-disruptive way without compromising on the basic objectives.

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