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RBI to redefine bank merger rules

Mumbai, Dec. 11: The Reserve Bank of India (RBI) is keen on plugging some regulatory and statutory gaps to smoothen mergers and acquisitions in the banking sector.

The central bank “is not very comfortable with the lack of clear statutory provisions regarding takeover of management of banks in terms of the legal framework”, RBI governor Y. V. Reddy said today.

To plug the statutory gap, a bill has now been introduced in Parliament relating to banking regulations, Reddy said.

“RBI’s proposals in this regard should reasonably take care of takeover of the management and RBI would have appropriate regulatory powers to satisfy itself that persons proposing to acquire such shares are fit and proper persons,” he added.

A similar procedure for the amalgamation of non-banking companies with banking companies is also likely to be introduced following a representation from the central bank, Reddy said.

He was speaking at the twenty-fifth Bank Economists' Conference-2003 (Becon) here today.

The lack of a clear statutory provision relates to a direction issued in 1970 by the RBI. According to this direction, banks were required to seek RBI’s permission before effecting any transfer of shares in favour of any person which would take the holding of shares to over 1 per cent. This was subsequently raised to 5 per cent of the total paid-up capital of a banking company.

However, since shares are first acquired and then lodged for registration, the RBI's directions have created a piquant situation. Reddy said the experience of the central bank in approving amalgamations in the recent past has been by and large satisfactory.

He said one area of concern for the apex bank is the merger of non-banking companies with banks as the law does not impose any obligation on the part of the latter to seek RBI's approval before filing the scheme in high courts.

To take care of these regulatory gaps, RBI has proposed some amendments to the legislation of banking regulations act so that merger of a non-banking company with a bank would be made by following a similar procedure currently applicable for merger of two banking entities.

Reddy also said the country's inflation rate is not high and there is no cause for concern. He expected the inflation rate to be within the targeted 4-4.5 per cent. A decision on the RBI's recent report on sterilisation will be taken only after due consultation, he said.

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