India: Financial Sector Reform: Union Cabinet Approves Increase in Voting Rights in Private Banks - May 2012

British High Commission New Delhi

Summary

As a small step towards reform, for a government weighed down by “policy paralysis”, the union cabinet approved the Banking Laws Amendment bill (2011). Under this voting rights in private banks will be increased to 26% from 10% and in public sector banks  to 10% from 1% currently . This is in line with the recommendation of the parliamentary standing committee headed by former finance minister Yashwant Sinha of the BJP;  hence likely to pass muster in parliament with their support. The immediate impact for foreign investors is limited as only few private sector banks permit holding up to 49%.

Detail

The Cabinet has cleared the Banking Laws Amendment Bill (2011), raising the voting cap in private sector banks to 26% . At present the voting  share is  capped at 10%, irrespective of the actual shareholding levels.  However approval from the Central Bank  (RBI) will  continue to be mandatory for buying equity stake above 5%. The Bill also proposes to increase the voting cap in public sector banks – with the exception of State Bank  of India –to 10% from 1% currently . State Bank of India already enjoys a higher voting cap at 10%.

The original Bill approved by the cabinet and  tabled in parliament in March 2011 had proposed voting rights for shareholders in private sector banks ,commensurate with their actual shareholding . However it faced opposition in parliament. The parliamentary standing  committee, headed by Bharatiya Janata Party (BJP) leader and former finance minister Yashwant Sinha, insisted that a ceiling of 26 per cent on the voting rights in private banks should be kept  “in order to keep a balance between conflicting factors underpinning the decision, namely concentration of economic power/control and promotion of corporate democracy”.

Reactions

Although the move in itself is a small step in the right  direction some media reports saw this as a sign of “changing times”  and “a  major reform for a government accused of policy paralysis”.

After S&P announced the cut in India’s rating outlook, Finance Minister  Mukherjee had said the government would try to get key reform laws passed with broad consensus. “I do hope some of the legislations may be enacted during the latter part of the current session and surely in the monsoon session.”

Comment

A small step in the right direction for the first of three financial bills that have long been promised from the UPA government (Pensions and Insurance are the other two). However the immediate impact  for foreign investors is limited  as only few private sector banks permit holding up to 49%, while holding in public sector banks is capped at 20%.   Approval by the cabinet , does not automatically imply that it will be passed in parliament. However it is hoped that since the cabinet has decided to accept the recommendation of the parliamentary standing committee headed by the BJP, it is likely to pass muster in parliament with their support.

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.