|
Business
FDI in the banking sector
|
With FDI investments of up to 49 per cent of equity and supported by substantial FII investments, foreign banks can control nearly the entire equity of taken over private sector banks, says Abhijit Roy
|
THE LAST few weeks have seen substantial activity in the banking sector. The position is not entirely clear yet, but it is obvious that the Government has decided to encourage foreign banks wishing to enter India in order to strengthen the banking sector.
The Reserve Bank of India announced on February 16 a major policy change with regard to foreign direct investment (FDI) in the Banking Sector. The guidelines are:
Limit for FDI under automatic route in private sector banks:
FDI up to 49 per cent from all sources will be permitted in private sector banks on the automatic route.
(b) For the purpose of determining the ceiling of 49 per cent FDI under the "automatic route'' in respect of private sector banks, the following category of shares will be included IPOs; private placements; ADRs/GDRs; and acquisition of shares from existing shareholders {zcaron}subject to (d) below.
(c) However, as per government guidelines, issue of fresh shares under the automatic route is not available to those foreign investors who have a financial or technical collaboration in the same or allied field. This category of investors requires the Foreign Investment Promotion Board approval.
(d) Further, the automatic route is not applicable to transfer of existing shares in a banking company from residents to non-residents. This category of investors require approval of FIPB, followed by "in principle'' approval by the Exchange Control Department (ECD) of the RBI. The "fair price'' for transfer of existing shares is determined by the RBI, broadly on the basis of SEBI guidelines for listed shares and erstwhile CCI guidelines for unlisted shares.
(e) Under the Insurance Act, the maximum foreign investment in an insurance company has been fixed at 26 per cent. Application for foreign investment in banks which have joint venture/subsidiary in insurance sector should be made to the RBI. Such applications will be considered by the RBI in consultation with the Insurance Regulatory and Development Authority (IRDA).
(f) Foreign banks having branch in India, are eligible for FDI in the private sector banks subject to the overall cap of 49 per cent mentioned above, with the approval of the RBI.
Limit for FDI in public sector banks In the case of nationalised banks as well as SBI and its associate banks, the overall statutory limit of 20 per cent as FDI and portfolio investment will continue.
Voting rights of foreign investors
In the case of private sector banks, no person holding shares, in respect of any share held by him, shall exercise voting rights in excess of 10 per cent of the total voting rights of all shareholders.
Budget announcements
Further, the Finance Minister has made the following announcements in the budget 2002.
* It has been decided to give an option to foreign banks to either operate as branches of their parent banks or to set up subsidiaries. A foreign bank will have to choose one of the two options. It has also been decided to relax the maximum ceiling of voting rights of 10 per cent for such subsidiaries.
* New FII portfolio investments will not be subject to the sectoral limits of FDI except in specific sectors. Guidelines in this regard will be issued separately.
Earlier, it had been interpreted that FII investments in private sector banks could be made up to 49 per cent of equity, at the same level as FDI limit. However, after the Finance Minister's announcement one has to wait and see as to the level that FII investment will be allowed in this sector.
Interesting possibilities
With FDI investments of up to 49 per cent of equity and supported by substantial FII investments, foreign banks can control nearly the entire equity of taken over private sector banks. If this is the intention of the Government/RBI, then what happens to branch restrictions applicable to foreign banks? We may then witness a dual policy of foreign banks with branches not being allowed to open new branches, while foreign banks controlling private sector banks being allowed to operate all over the country.
In case foreign banks convert their branch operations in India into a subsidiary, then in the normal course the new legal entity should be treated as a domestic company and not a foreign company. In addition to the issue of differential taxation, would such a conversion enable more freedom in geographical expansion?
Trends in banking
The scheduled commercial banks operating in India are classified into public sector banks, old private sector banks, new private sector banks and foreign banks. In the last few years, the new private sector banks have outperformed the other three groups. Between 1995-96 and 1999-2000, the share in assets of public sector banks fell from 84.5 to 80.2 per cent, while the share of foreign banks during the same period fell from 7.9 to 7.5 per cent. The share of the old private sector banks rose modestly from 6.2 to 7 per cent during the same period, while the new private sector banks increased their share from 1.4 to 5.3 per cent. The main disadvantage that the foreign banks face is the restriction on branch expansion imposed by the RBI.
Vulnerability of old private banks
The 23 old private sector banks represent a vulnerable section of the commercial banking sector. They have a comparatively high level of non-performing assets. They also have a low capital base, inadequate technology infrastructure and limited branch network. Over a period, they need to be merged with stronger players. Till now the new private sector banks were in the best position to take them over. However, with the new guidelines, the Government/RBI has introduced a new set of players, namely, foreign banks, in this consolidation game. The capital market has already realised this; witness the recent rise in shares of listed private sector banks.
Public sector banks
In the case of public sector banks, the Government had earlier announced that it is planning to reduce its stake in such banks to 33 per cent in a phased manner. This is mainly because the Government does not have enough money to contribute the additional capital that would be required over a period. Private domestic capital may not be enough to fill the gap in capital requirements, which means that foreign capital would have to be accessed. Such foreign capital can be either FII or FDI investments. The moot point is whether sufficient capital from overseas investors would be forthcoming if there were no change in management in the public sector banks. Induction of FDI in public sector banks would probably have to be accompanied by change in management style in public sector banks. Politically such decisions are not easy to take. Therefore, lack of capital in addition to other well known impediments may constrain the growth of public sector banking segment as a whole.
Consolidation
Consolidation of the banking industry is expected to proceed apace. The banking industry in India has witnessed many changes since the early 1990s. Initially the Government contributed substantially to the equity of a large number of public sector banks in order to improve their capital adequacy levels. Then the Government sought to change the structure of the Indian banking industry by granting licences to a new generation of private sector banks. This step has been quite successful, as these banks have introduced the latest technology to differentiate themselves, opened ATMs and branches at a rapid pace and successfully weaned away customers from other banks.
The Government has now taken the next step by allowing foreign banks to take over private sector banks. The next few years will show whether foreign banks are really interested in doing business in India. We have seen that some of them have been quite unpredictable in their business decisions. Foreign banks must have the tenacity to overcome the rigidities of the banking system in India. The road ahead is not clear, but one can be sure that commercial banking in India will continue to witness changes.
Send this article to Friends by
E-Mail
Business
|
