ONLY
FOREIGN BANK ARMS ALLOWED 100% IN LOCAL UNITS
The government has incorporated a clause in the recent policy
changes on FDI in banking, under which the acquisition of
100% equity in a local bank will be open only to a wholly-owned
subsidiary of a foreign banking company.
The Cabinet had cleared
the proposal to allow fully-owned subsidiaries of banking
companies regulated by a financial regulator in the host country
to hold 100% equity in a banking company in India. However,
this route to acquire a local bank and control 100% of the
equity can be adopted only by the subsidiary of foreign banks
which do not have branches in the country, according to officials.
In other words, foreign
banks operating in India will have to either convert the existing
branches into a wholly-owned subsidiary of their parent banking
company if they wish to acquire or control 100% of the equity
in an Indian banking company or operate on a standalone basis
with branches. In the latter case, their equity holding must
be capped at 74% if they acquire a private sector bank in
India .
The government and the
RBI will shortly announce the capital norm for setting up
such a subsidiary. Indications are that it will be a minimum
of $50m. This move is expected to help attract more FDI flows.
Some of the smaller listed private sector banks may now be
acquisition targets for foreign bank subsidiaries as they
would have access to a wider branch network.
The policy on opening
up the subsidiary route is in line with the WTO commitments
on setting up of subsidiaries by foreign banks. In his '03
budget, Jaswant Singh had said that foreign banks would be
allowed to set up subsidiaries in India . The subsidiary route
is expected to help banks expand faster without the restrictions
imposed on them if they operate with a branch network. Foreign
banks operating in India have to adhere to capital norms for
each branch it sets up. Currently it is pegged at $10m for
each branch. Opening up of fresh branches is linked to the
size of capital.
By incorporating a company
locally, a foreign bank can hope to expand faster. However,
it will still be bound to follow priority sector lending norms
and other regulatory prescriptions. For the government and
the banking regulator, the new norms will mean that foreign
banks setting up subsidiaries in India will also be bound
to adhere to the rules and regulations of the banking regulator
of its country of origin.
