RBI permits foreign banks' subsidiary to acquire private banks

The Reserve Bank said foreign bank subsidiary will not be allowed to hold more than 74 per cent in private banks they may acquire.

Published: 07th November 2013 12:49 AM  |   Last Updated: 07th November 2013 12:50 AM   |  A+A-


In a bid to regulate and avoid 2008- type crisis, Reserve Bank of India (RBI) Wednesday said foreign banks with complex structures and which do not provide adequate disclosure would have to operate in India only through wholly-owned subsidiaries (WOS).

However, it permitted WOS of overseas banks to acquire private sector banks.

The framework for setting up of WOS by foreign banks in India, released by the Reserve Bank Wednesday night, also allowed foreign banks' subsidiaries to list on local stock exchanges. The initial minimum paid-up equity capital or net worth for a WOS would be Rs 500 crore.

"Banks with complex structures, banks which do not provide adequate disclosure in their home jurisdiction, banks which are not widely held, banks from jurisdictions having legislation giving a preferential claim to depositors of home country in a winding up proceedings, etc, would be mandated entry into India only in the WOS mode," it said.

Foreign banks operating in India before August 2010 have the option to continue their operations in branch model.

The RBI further said foreign bank subsidiary will not be allowed to hold more than 74 per cent, the sectoral cap for overall foreign investment, in private banks they may acquire.

"As a locally incorporated bank, the WOSs will be given near national treatment which will enable them to open branches anywhere in the country at par with Indian banks," the RBI guidelines said.

There were 43 foreign banks in India with a network of 333 branches as of March 2013. At present, foreign banks have presence in India only through branches.

The guidelines come against the backdrop of the 2008 global financial crisis, which the RBI said has shown that growing complexity and inter-connectedness of financial institutions have compromised the ability of home and host authorities to cope with the failure of big banks.

"The lessons learnt during the crisis lean in favour of domestic incorporation of foreign banks," it said.

Spelling out reasons for subsidiarisation, it said this will create separate legal entities having their own capital base and local board of directors, which will help in better regulatory control.

Also, it would ensure that there is a clear delineation between the assets and liabilities of the domestic bank and those of its foreign parent and clearly provides for ring fenced capital and assets within the host country, RBI said.

Standard Chartered, the largest foreign bank by branch presence in India, has its depository shares trading on the domestic bourses, although it hasn't adopted a subsidiary route here.

Only multinational banks Standard Chartered, HSBC and Citi have more than 30 branches in the country. Although the Royal Bank of Scotland has 31 branches, it is winding down local retail operations.

The RBI's framework, aimed at safe guarding the Indian banking system, comes in the backdrop of collapse of several banks in advanced countries during 2008 global financial crisis.

"The issue of permitting WOS to enter into merger and acquisition transactions with any private sector bank in India subject to the overall investment limit of 74 per cent would be considered after a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks (branch mode and WOS)," it said.

To provide safeguards against the possibility of the Indian banking system being dominated by foreign banks, it said, the framework has certain measures to contain their expansion if the share of foreign banks exceeds a critical size.

RBI will put a stop on further entry of new WOSs of foreign banks or capital infusion, when the capital and reserves of all foreign banks in India exceed 20 per cent of the capital and reserves of the entire banking system.

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