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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 amendments of The Banking Laws (Amendment) Bill, 2011 are listed in
Exhibit 1.
Exhibit 1. 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
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 1% of the total voting rights of all the shareholders.
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 rights of 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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
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 amendments of The Banking Laws (Amendment) Bill, 2011 are listed in
Exhibit 1.
Exhibit 1. 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
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 1% of the total voting rights of all the shareholders.
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 rights of 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.
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