Banking bill passed, India clears way for bigger foreign investment in banks

Dec 18 2012, 21:14 IST
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The controversial clause allowed futures trading for banks from a bill which seeks to amend banking laws. (Reuters) The controversial clause allowed futures trading for banks from a bill which seeks to amend banking laws. (Reuters)
SummaryThis happened only after a controversial clause was dropped.

The Indian Parliament cleared a path for more foreign investment in the banking sector by approving a bill to increase shareholders' voting rights, after dropping a controversial clause allowing banks to trade in commodity futures.

Prime Minister Manmohan Singh's government is racing against the clock to pass reforms economists say are needed to breathe life into Asia's third-largest economy, which is headed for the worst year of growth in a decade.

Progress so far has been slow.

The banking bill is the only piece of major reform legislation to be passed in a parliament session again disrupted by protests and shouting matches.

The session ends on Thursday.

Finance Minister P. Chidambaram told parliament the government was abandoning efforts to pass a bill this session to open India's cash-strapped insurance sector to foreign investment - a move eagerly watched by investors.

Another bill aimed at easing land acquisition for infrastructure and mining projects was also deferred to next year.

The banking bill will increase shareholders' voting rights to 26 percent from 10 percent in private sector banks, making investment more attractive to foreign players.

The bill will now move to the upper house of parliament for voting on Thursday, where it is also likely to be passed as it is backed by India's two biggest parties.

The legislation clears the way for more corporate houses to run banks by enabling the Reserve Bank of India (RBI) to issue new bank licences.

That will boost the government's drive to expand access to financial services in a country where more than half the 1.2 billion population is without a bank account.

"The raising of voting cap will have a positive impact in attracting funds as it will help foreign investors to have more say in banks," said Jagannadham Thunguntla, head of research at brokerage firm SMC Global Securities.

The main opposition party Bharatiya Janata Party (BJP) threw its weight behind the bill after the government dropped a clause allowing banks to trade commodities futures amid fears it could lead to risky, speculative trading.

"It will lead to better investor interest in the smaller private sector banks.

It is also a sentiment booster, and it will pave the way for the Reserve Bank of India to issue new banking licences," said Sujan Hajra, chief economist at Anand Rathi Securities in Mumbai.


India has struggled for years to reform and liberalise state-dominated sectors such as banking, insurance and pensions due to political opposition, including from within the ruling Congress party.

The banking bill will give the RBI greater regulatory oversight over local banks and the ability to overrule boards when the banks are facing financial difficulties.

The RBI had demanded more oversight as a precondition to issuing new banking licences.

The bill also enables the government to raise voting rights in state banks such as the State Bank of India to 10 percent from just 1 percent now, acceding partially to foreign investors' demands to have more say in Indian banking.

The bank employees unions, reluctant that any control is ceded, have strongly opposed this move for years and are set to strike on Thursday in protest.

The bill will allow foreign banks to convert their Indian operations into local subsidiaries or transfer shareholding to a holding company of the bank without paying stamp duty.

Foreign banks have long sought these changes to the law which they say would encourage them to expand their operations in India.

Under current laws, foreign banks such as Citibank and Standard Chartered Plc have to pay 20-30 percent tax as capital gains and stamp duty when transferring branches to a new legal entity.

Lok Sabha clears banking bill after govt drops controversial clauses

(PTI) In a major step to reform India's banking sector, the Lok Sabha today passed a bill paving way for foreign investments in the sector and establishment of new private banks.

The Banking Laws (Amendment) Bill, 2011 was passed by the Lower House after two short adjournments and withdrawal of clauses allowing banks to trade in futures and keeping the sector outside the purview of Competition Commission.

"Since the bill is too important for me to pass, therefore I am bringing the Bill dropping the controversial clauses," Finance Minister P Chidambaram said, winding up the discussion on the Banking Laws (Amendment) Bill, 2011.

The Bill, which seeks to strengthen banking regulation, was passed by the voice vote after amendments proposed by the Left Parties were rejected by the House.

"The Banking Bill aims to raise the voting rights of investors in private sector banks to 26 per cent, from 10 per cent and will encourage foreign is a game changer to achieve financial inclusion by opening new banks," said Jagannadham Thunuguntla, head of research at brokerage firm SMC Global Securities.

The Bill will allows RBI to supersede boards of private sector banks and increase the cap on voting rights of private investors in PSBs to 10 per cent, from 1 per cent.

RBI wanted the government to amend the banking laws before starting the process towards issuance of new banking licences.

The Bill, along with proposed legislations on pension and insurance, was one of the five key reforms measures on the government's agenda during the current session of Parliament.

The passage of the Bill, Shinjini Kumar, Director PWC India said, "Creates necessary condition for some of the important steps forward, the sufficient conditions will be known after RBI issues final guidelines".

The government dropped the controversial changes in the Bill in deference to the wishes of Opposition, Chidambaram said, adding it has accepted all major recommendations of the Standing Committee on Finance.

On the proposal to allow banks to participate in the commodity futures trading, he said, it was based on the recommendations of the Standing Committee on Food and Consumer Affairs and report of the Reserve Bank's working group.

As regards other issues, he said, while RBI would regulate the banking sector, the Competition Commission of India (CCI) would look into competition practices in the banking sector.

Reacting to the passage of the Bill by Lok Sabha, FICCI President Naina Lal Kidwai said it is an important piece of legislation that will the foundation for many reforms in the banking sector.

"This will help expand the reach of banking services to the financially excluded," she said.

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