Need some change?

New Delhi, Dec. 13: The government?s initiative to reform the banking sector today received a shot in the arm from the parliamentary standing committee on finance.

The committee has approved the proposed move to remove the 10 per cent cap on voting rights, enable banks to issue preference shares and empower the Reserve Bank to revise the statutory liquidity ratio.

The committee has said the enactment of the Banking Regulation (Amendment) Bill, 2005 ?will bring forth far-reaching changes in the functioning of the banking sector in the country and will also significantly impact the regulatory purview of the Reserve Bank of India (RBI)?.

Once the bill is made into a law, it is expected to pave the way for banks to issue preference shares to raise additional capital as mandated by the Basel II norms.

Banks may favour preference shares and hybrid debt instruments for raising funds while they prepare for a seamless migration to the new capital adequacy regime under the stringent Basel II norms.

But the Reserve Bank is unlikely to allow easy conversion of these shares into equities to prevent any takeover bid.

The panel has said conversion of such shares into equity would require specific approvals from the RBI in exceptional situations to protect the interest of the company and the depositors.

According to clause 3 of the bill, the terms and conditions under which a banking company might raise capital by issuing preference shares would also be specified by the RBI along with the extent to which it can raise the funds through this route.

The bill proposes removal of the 10 per cent cap on voting rights and makes it proportionate to the shareholding of the promoters, which is in line with the voting-right norms in the companies act.

The section 12b of the bill has made it mandatory for investors buying 5 per cent or more in a bank to get prior permission from the RBI.

?The committee trusted and hoped that the RBI would ensure that the legal and regulatory mechanism was adequate and complied with strictly,? the panel said.