The Telegraph
Since 1st March, 1999
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Jaswant may lend a smile to private banks

Mumbai, Feb. 22: This budget, the government may do away with a major anomaly by removing the 10 per cent voting right ceiling in private sector banks.

The ceiling was raised in 1994 from 1 per cent to the current level. Since then the government brought about many changes in the banking system, which includes more than doubling the ceiling on foreign direct investment in private banks to 49 per cent from 20 per cent. However the ceiling has stayed on limiting the extent of management control.

Many think this has deterred global banking giants or local majors from making acquisitions in India’s private sector banking arena.

This time, however, hopes are high that Jaswant Singh will do away with the restriction with bankers averring that even the Reserve Bank (RBI) has advocated its removal.

Last year, the central bank had asked the government to amend the Banking Regulations Act to abolish this cap. The RBI had pointed out that since foreign direct investment in the banking sector has been allowed up to 49 per cent, it did not make sense to keep the voting rights at a maximum of 10 per cent.

According to a senior official from a leading private sector bank, “The government is now convinced that to attract investment and upgrade technology, our country needs to attract equity. This equity will not come if this cap persists.”

Bankers aver that come February 28, the finance minister while retaining the 49 per cent investment ceiling in private banks, will enhance the voting right to the same level.

Sources feel removal of this ceiling might spur overseas banks into buying stakes of promoters in non-institutional promoted banks.

The 1994 reforms were brought in at a time when the ceiling of 1 per cent was seen as a negative point for the various new private sector bank promoters.

As far as nationalised banks are concerned, the two entities which hold voting rights in proportion to their stakes in banks are the RBI in State Bank of India and the government of India in other nationalised banks.

Apart from this relaxation, banking circles also expect the finance minister to propose the amendment of the Banking Regulation Act to help banks trading in commodities apart from bullion. Optimism on this front has soared after the recent move to permit futures trading in all major commodities including farm products and minerals.

Singh is also expected to permit banks’ lending to companies where there is a commonality of directors. It is felt that in doing so, banks’ will be told to disclose this in their balancesheets.

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