The Banking Laws (Amendment) Bill, 2011

On 22 March 2011, the government tabled the Banking Laws (Amendment) Bill, 2011 in Lok Sabha. The bill proposes a number of amendments to the existing regulation of banking sector. The overarching theme is to allow banks more flexibility in strengthening their capital base and empower the watchdog role of Reserve Bank of India (RBI).
 
·         SOE banks to have additional tools and flexibility for raising capital: The three key proposals that are directly relevant to SOE banks are: 1) Limit on individual shareholder’s voting right will be increased from 1% to 10%. 2) SOE banks can now raise capital by issuing preference shares following the guidelines of RBI. This will be applicable to other banks as well and help them improve their ROEs. 3) Banks can now use rights issue and bonus share issue, in addition to public issue, for raising capital.
·         Proposal to remove 10% restriction on voting rights: The current provisions of The Banking Regulation Act provide that voting rights of shareholders, holding more than 10% of a private bank’s equity, be restricted to 10%. This provision is proposed to be removed. Hence, voting rights of investors holding more than 10% in a banking company would be made proportional to their shareholding.
·          Proposal to impose restriction on holding 5% or more in a banking company without prior approval of RBI: Even though under the ‘Guidelines on Ownership and Governance in Private Sector Banks’, RBI permission is required at present for acquisition of 5% or more stake in a banking company, the proposed amendments to The Banking Regulation Act would formalise RBI’s policy in this regard.
·          Empowering RBI’s role as regulator: Taking cognizance of global financial crisis of recent years, proposals seek to give far-reaching powers to RBI. Three such key proposed powers are: 1) RBI can ask banks to provide financial and other information of associates companies. 2) In an event of distress at a bank, the RBI can, if it deems fit, supersede the entire board and directors and appoint an administrator and a committee to safeguard the interest of stakeholders. 3) RBI will continue to be a prime body regulating M&A in banking sector. The banking sector will, thus, be outside the purview of Competition Commission of India.
·          In our opinion, the new proposals open up the possibility of foreign players to acquire large shareholding as well as management control in Indian banks as their voting interest would be in proportion to their shareholding. Hence, the proposals, if passed, will remove the disincentive for foreign banks to acquire Indian banks. If RBI permits acquisition of significant stake, it will give additional boost to foreign interest. However, we believe RBI would be selective and allow acquisition of weak Indian banks only to begin with.
 
The proposals will place RBI in a better position to act decisively in an event of financial crisis (broader or company specific). These steps will strengthen the faith in robustness of banking sector regulation in India.
 
 

Key Proposals of the Banking Laws (Amendment) Bill, 2011

 
 
EXISTING GUIDELINES
 
PROPOSED  AMENDMENTS
A - Additional tools for nationalised banks to raise capital The Banking Companies ( Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies ( Acquisition and Transfer of Undertakings) Act, 1980:
 
1. The paid-up capital of the banks may from time to time be increased by public issue
2. No shareholder of the bank, other than the Central Government, shall be entitled to exercise voting rights in respect of any shares held by him in excess of 1% of the total voting rightsof all the shareholders.
 
1. The paid-up capital of the banks from time to time be increased by public issue or by rights issue or by issue of bonus shares
2. No shareholder of the bank, other than the Central Government, shall be entitled to exercise voting rights in respect of any shares held by him in excess of 10% of the total voting rightsof all the shareholders
 
B - Regulations pertaining to banking companies
 
The Banking Regulation Act, 1949
 
Issue of preference shares (Section 12, sub-section (1))
 
The section specifies a condition for all banking companies that the capital of the company consists of ordinary shares only or of ordinary shares or equity shares and such preferential shares as may have been issued prior to the
 
1st day of July, 1944.
The amendment proposes to modify this condition. The capital of all banking company may now consists of — (a) equity shares only, or (b) equity shares and preference shares: Provided that the issue of preference share shall be in accordance with the guidelines framed by the RBI.
Voting rights (Section 12, sub-section (2))
 
No person holding shares in a banking company can exercise voting rights in excess of 10% of the total voting rights.
Existing section to be removed
 
Acquiring stake in banking companies
No existing section
 
Insertion of new ‘section 12B’ to regulate control of banking companies
The persons, looking to acquire a stake of 5% or more in a banking company, will have to obtain prior approval from the RBI.
The RBI may specify the minimum percentage of shares to be acquired in a banking company if it considers that the purpose for acquisition warrants such minimum shareholding.
The RBI may, if it deems fit, impose a ceiling of 5% on the voting rights of an individual person or group:
C - Regulations to empower the RBI
The Banking Regulation Act, 1949
 
Scrutiny of associates
No existing section
 
Insertion of new ‘section 29A’
 
Given that banking companies now provide diverse services through associate companies, the RBI seeks to be aware of financial impact of associates on core banking company. The proposed section allows the RBI to call a banking company for information and returns from its associate companies.
 
Suppression of board and directors of a banking company
The RBI, currently, has power to remove any director or other officers of a
banking company
 
Insertion of new ‘PART IIAB’
 
If the RBI feels that the entire Board of directors of a banking company is functioning in a manner detrimental to the interest of the depositors or the banking company itself, the RBI may supersede the entire Board of directors.
 
The Reserve Bank may supersede the Board of Directors of such banking company for a period not exceeding six months. If the period of supersession of the Board of Directors is extended, the total period shall not exceed twelve months.
The Reserve Bank may appoint an administrator (not being an officer of the Central Government or a State Government). A committee of three or more persons may be constituted to assist the Administrator
On and before the expiration of two months before the expiry of the period of supersession of the Board of Directors, the Administrator of the banking company shall call the general meeting of the company to elect new directors and reconstitute its Board of Directors.
 
Exemption of mergers of banking companies from Competition Commission of India (CCI)
The existing provisions of the Competition Act, 2002, the CCI has power to regulate combination
 
Insertion of new ‘Section 2A’
 
Notwithstanding anything to the contrary contained in section 2, nothing contained in the Competition Act, 2002 shall apply to any banking company, the State Bank of India, any subsidiary bank, any corresponding new bank or any regional rural bank or co-operative bank or multi-state co-operative bank in respect of the matters relating to amalgamation, merger, reconstruction, transfer, reconstitution or acquisition.
 
The RBI will continue to be prime regulatory body for such matters in banking sector.
Source: The government of India, JM Financial
 

Courtesy: JM Financial

 

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