Overseas Feature
India's Finance Ministryto abolish FDI voting cap in banks
By Indrajit Basu,UPI Business Correspondent
CALCUTTA, India, (UPI) -- India's centralbank has asked the country's Finance Ministry to lift a bankingregulation that allowed foreign investors only limited votingrights no matter what their stake was.
The move could have far-reaching implicationson the India banking industry.
Until now, even if a foreign bank buys a49-percent stake in another bank, it can exercise its voting rightsonly to the extent of 10 percent of its holdings.
"The government permitted the entryof new banks in the private sector earlier, and now the foreignparticipation has also gone up. But although the foreign directinvestment limit in private sector banks has been raised, thecap on voting rights has proved a dampener in attracting foreigninvestments," G.P. Muniappan, the deputy governor of theReserve Bank of India, said on Wednesday, 11 September.
He said the new move would help attractmore foreign investment. The cap has been seen as a major impedimentto the plans of foreign and private sector banks.
"Some banks have successfully managedto attract foreign capital and this is a route which other bankscould explore," he said. "We are encouraging such foreigncapital participation and have written to the government to relaxthe ceiling on voting rights in view of the importance of thissource of capital."
Muniappan said a standing committee attachedto the ministry was likely to discuss the RBI recommendation bythe end of next week.
The RBI proposal to relax voting rightscame days after the path-breaking list of recommendations submittedlast week, which called for 100-percent foreign direct investmentin private banking, up from 49 percent.
Muniappan said this recommendation was alsounder consideration.
Banking industry sources said the RBI proposition,if accepted, could lead to foreign banks showing an active interestin growing through acquisition.
"The news could encourage foreign banksto participate in the consolidation of the Indian banking sector,"said Kalpana Morparia, director of ICICI Bank.
Others said the ceiling regulation had severalloopholes.
"The ceiling makes little sense anywaybecause a willing bank can get around the ceiling by investingunder five different names," said Bank of Rajasthan ChairmanPravin Kumar Tayal.
The RBI move should come as a welcome surpriseto ING Group, the Dutch financial conglomerate, which recentlyincreased its stake in Vysya Bank to 44 percent. Sources saidremoving the ceiling could also push foreign banks into pursuingtakeover targets in other banks.
For Indian private banks there could besome consolidation, too.
Some analysts said ICICI Bank could finallyacquire Federal Bank and South Indian Bank, in which it holds24 percent and 11 percent, respectively.
The global ratings agency Fitch Ratingssaid Thursday the Indian banking industry was directing its focusto return on equity-driven banking, and enhancing shareholdervalue, which makes the industry ripe for consolidation.
"The weaker banks would need to mergeentirely or sell some of their network to stronger banks,"the agency said through a special report called "With a littlehelp from my friends," which analyzed the performance ofIndian banks in fiscal 2002.
"The process has already begun amongthe new and old privately owned banks, and state-owned banks couldbe expected to be the next key players in the consolidation exercise,"the report said.
According to the report, the Indian bankingsector had improved its performance in fiscal 2002 (ending March31) primarily through record gains from trading in governmentsecurities in a softer interest rate regime.
"Growing focus on competitiveness sawgovernment-owned banks (accounting for 79 percent of the totalbanking assets) improve their cost structure through a voluntaryreduction in manpower," the report said.
It added the reported capital adequacy ratioswere above 10 percent in most cases -- against the RBI stipulated9 percent. However, it added the provisioning requirement forlosses arising out of bad loans could remain high in the mediumterm, given the tightening prudential norms followed by the country'sbanking sector.