The Telegraph
Since 1st March, 1999
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Delhi budget, Mumbai reform
Banks open to foreign takeover

Mumbai, Feb. 28: The Reserve Bank today announced that foreign banks would be initially permitted to acquire a controlling stake in private sector banks picked by it for restructuring.

The central bank also indicated that it would propose appropriate changes in the banking regulation act to lift the voting rights cap of 10 per cent on foreign banks.

After four years, they would be allowed to acquire any private sector bank.

These guidelines formed part of a road map unveiled by the RBI after the budget and could get the Left, happy with finance minister P. Chidambaram's exercise, shouting again.

The banking reforms have two phases. In the first phase ' March 2005-09 ' foreign banks would be allowed to acquire controlling stake gradually in select private banks.

In the second, commencing April 2009, wholly-owned subsidiaries of foreign banks will be allowed to list in the Indian market and dilute their stake so that at least 26 per cent of the paid-up capital of the subsidiary is held by resident Indians. In this period, foreign banks will be permitted to merge with and acquire any private sector bank.

But the RBI did not specify the private sector banks that can be taken over by foreign banks in the first phase.

'In order to allow Indian banks sufficient time to prepare themselves for global competition, initially entry of foreign banks will be permitted only in private sector banks that are identified by RBI for restructuring. In such banks, foreign banks would be allowed to acquire a controlling stake in a phased manner,' it said.

The RBI added that in considering an application made by a foreign bank, for acquisition of 5 per cent or more in the private bank, it will take into account the standing and reputation of the foreign bank, globally as well as in India, and its desired level and nature of presence in India.

'(The) RBI may, if it is satisfied that such investment by the foreign bank concerned will be in the long-term interest of all the stakeholders in the investee bank, permit acquisition of such percentage as it may deem fit.'

If necessary, the RBI may also specify that the investor bank shall make a minimum acquisition of 15 per cent or more and the period of such acquisition. However, the overall limit of 74 per cent will be applicable.

The RBI indicated that it would moot changes in the law to lift the cap on voting rights, now at 10 per cent. 'Appropriate amending legislation will be proposed to the Banking Regulation Act, 1949, in order to provide that the economic ownership of investors is reflected in the voting rights.'

In the first phase, foreign banks will be permitted to establish presence by way of setting up a wholly-owned subsidiary or convert the existing branches into one.

The minimum start-up capital for such a subsidiary will be Rs 300 crore. The subsidiary will be required to maintain a capital adequacy ratio of 10 per cent. Further, the parent foreign bank will continue to hold 100 per cent in the subsidiary for a minimum prescribed period of operation.

In the board of directors, not less than 50 per cent should be Indian nationals resident in the country.

These rules will also apply to banks that want to convert a branch set-up into a subsidiary.

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