Date:31/10/2004 URL: http://www.thehindubusinessline.com/2004/10/31/stories/2004103101650300.htm

Back Unequal advantage for foreign banks

P. Devarajan

QUOTE the Finance Minister, Mr P. Chidambaram in Mumbai: Government is open to foreign banks acquiring 10 per cent stake per year in Indian private banks to enable a buy-out in 3 to 4 years. Can the foreign bank effecting the buy-out continue with its foreign operations?

Some time ago, Mauritius Holdings and BBL Mauritius Investments (of Bank Brussels Lamberts Group) acquired 43.99 per cent in ING Vysya Bank Ltd while winding up its foreign branches.

Or is the Finance Minister keen on granting unequal advantage to foreign banks by allowing them to operate their foreign branches and own an Indian private bank?

Favoured (or is it flavoured) charity of this kind is not on from the Fed in the US or Bank of England in the UK when Indian banks try to open branches.

In the recent BS Banking Annual, Mr Aditya Puri, Managing Director, HDFC Bank, has this to say: "Should foreign banks be allowed? Yes, they should but within a clearly defined framework. Try and open a branch in the US and you will see that the open economy is actually the most shut economy on earth."

Going by March 5 press note issued by the Department of Industrial Policy& Promotion, Ministry of Commerce & Industry, (not by the RBI) "a foreign bank may operate in India through only one of the three channels: a) branch/es; b) a wholly-owned subsidiary; and c) a subsidiary with aggregate foreign investment up to a maximum of 74 per cent in a private bank."

Is Mr P. Chidambaram altering the rules to offer more space to foreign banks? If so, it is grossly unfair.

Again why should foreign banks be favoured with a 10 per cent creeping buy every year in an Indian private bank and is the extant 5 per cent (non-creeping) not enough?

On February 16, 2002, an RBI circular on FDI investment in the banking sector said: "Under extant instructions, transfer of shares of 5 per cent and more of the paid-up capital of a private banking company requires prior acknowledgement of RBI. For FDI of 5 per cent and more of the paid-up capital, the private sector banking company has to apply to the RBI."

On January 29, 2004, the RBI Guidelines for acknowledgement of transfer/allotment of shares in private banks, stuck to the 5 per cent norm and added, "where acquisition or investment takes the shareholding of the applicant to a level of 10 per cent or more and up to 30 per cent," a second okay from RBI is a must.

Then on July 2, the central bank came out with "a comprehensive policy framework for ownership and governance in private sector banks."

This said, any private sector bank would be allowed to hold shares in any other private sector bank only up to 5 per cent of the paid up capital of the investee bank.

On the same analogy, any foreign bank with presence in India will be allowed to hold shares in any other private bank only up to 5 per cent of the paid up capital of the investee bank.

It went on to stipulate that in the interest of diversified ownership, the percentage of FDI by a single entity or group of related entities might not exceed 10 per cent.

It follows that RBI does not think it necessary to lift the 10 per cent cap on voting rights as no shareholder will hold anything more than 10 per cent in a bank; the Finance Minister seemingly disagrees.

The Finance Minister, Mr P. Chidambaram and the RBI Governor, Dr Yaga Venugopal Reddy, strongly differ on foreign investment in banking though much it is on Government files. Dummy fights do no good. Banking sector deserves a less muddled writ of governance.