The Telegraph
Since 1st March, 1999
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Cap on inter-bank voting rights to go

Mumbai, Sept. 11: In a crucial move that could have far-reaching implications on the banking industry, the Reserve Bank (RBI) has asked the ministry of finance to remove 10 per cent cap on voting rights for a bank with stakes in other banks.

The limit has always been seen as a major impediment to the plans of foreign and aggressive private sector banks to grow inorganically even after the government enhanced the sectoral cap to 49 per cent. Put simply, if a bank acquires a 49 per cent stake in another bank, it has a voting right of only 10 per cent.

This was divulged by RBI deputy governor G. P. Muniappan while delivering a special address on “Governance and Regulation of Financial Services” at a seminar organised by the Federation of Indian Chambers of Commerce and Industry (Ficci). He said a standing committee attached to the ministry is likely to discuss the RBI recommendation by the end of this week.

Bank watchers said the RBI proposition, if accepted, could lead to foreign banks showing an active interest in growing inorganically. “The news could encourage foreign banks to participate in the consolidation of the Indian banking sector,” said Kalpana Morparia, director of ICICI Bank.

Bank of Rajasthan chairman Pravin Kumar Tayal said the RBI move is yet another attempt to open up the banking sector, which first saw voting rights being raised from 1 per cent to 5 per cent and later to 10 per cent.

“The ceiling did not make any sense as the government permitted promoter and FDI holding in private banks to go up to 49 per cent. Despite this, the voting right was limited to 10 per cent and banks had to invest in another bank under five different names,” a banker said.

The RBI move should, therefore, come as a welcome surprise to ING group, the Dutch financial conglomerate that recently hiked its stake in Vysya bank to 44 per cent. Observers point out that removing the 10 per cent ceiling could push foreign banks into pursuing takeover targets like Centurion Bank and others.

In case of private banks too, there could be some consolidation. Some analysts feel Federal Bank and South Indian Bank may be swallowed by ICICI Bank, which holds 24 per cent and 11 per cent in the two south banks.

The RBI suggestion to relax voting rights comes days after path-breaking list of recommendations submitted by the N. K. Singh committee, which called for 100 per cent foreign direct investment (FDI) in private banking from 49 per cent.

Pointing out that gradualism has been the hallmark of the country’s financial sector policy, Muniappan said it allows for participants to absorb major changes incrementally without any major turbulence.

The government permitted the entry of new banks in the private sector, and now the foreign participation has also gone up. “Some banks have successfully managed to attract foreign capital and this is a route which other banks could explore. We are encouraging such foreign capital participation and have written to the government to relax the ceiling on voting rights in view of the importance of this source of capital,” he said.

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