Thursday, 03 May 2012
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India: Financial Sector Reform: Union Cabinet Approves Increase in Voting Rights in Private Banks - May 2012
British High Commission New Delhi
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%.
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”.
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.”
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.
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