After various delays and much deliberation, the Banking Laws
(Amendment) Bill was finally passed in December 2012 during the Winter Session
of the Parliament. The Bill sought to amend the Banking Regulation Act of 1949
and the Banking Companies (Acquisition and Transfer of Undertaking) Act of 1970
and 1980. It was approved by Parliament after the government dropped the
controversial clause that proposed allowing banks to trade in commodity
futures. The Lok Sabha (Lower House) passed the bill on December 18 2012 and
the Rajya Sabha (Upper House) approved on December 20 2012. Enabling the
Bill to become law, President Pranab Mukherjee gave his assent to the Bill on
January 10 January 2013, along with his assent to the Prevention of Money
Laundering (Amendment) Bill and the Enforcement of Security Interest and
Recovery of Debts Laws (Amendment) Bill.
The salient features of the Banking Laws (Amendment) Act are as follows:
MORE POWER TO THE RBI
1. New bank licenses and greater supervisory
oversight
The Act will enable the
RBI to issue new bank licenses to corporate houses and strengthen the RBI’s
hand with powers to supersede entire boards of recalcitrant banks that fail to
comply with its directions. Before the amendment, the RBI only had powers to
remove a director or officers of a banking company and not the full
board. But with this amendment, the RBI will now have the power to supersede
the entire board, in public interest, and appoint an administrator to run the
bank for a period not exceeding 12 months. To limit arbitrary exercise of power by the RBI, the Bill provides
for consultation with the Indian Government.
In terms of the Nationalisation Laws of 1970/1980, the Central
Government has similar powers in respect of public sector banks. The amendment
will also increase the rates of existing monetary penalties that RBI can impose
on a bank if it disobeys its rules and directives or gives false information.
The Act provides for primary cooperative societies to carry on
the business of banking only after obtaining a license from RBI;
2. Power to Inspect
The amendment also
gives powers to the RBI to call for information and returns from the associate[1] and group companies of
the banking companies and to inspect them, if necessary. These powers
will give greater supervisory oversight when the RBI proposes to grant licenses
to industrial houses for setting up new banks, which is currently under
consideration. The bill also substantially increases the penalties
and fines for some of the violations of the Banking Regulation Act and the
rules framed under it. The Act also empowers the RBI to demand penalty
interest from the bank if the bank fails to maintain the prescribed minimum
amount of Cash Reserve Ratio (CRR) on any given day.
3. Acquisition of Shares and Voting Rights
An acquisition of 5
percent or more shares or voting rights will now require the RBI’s prior
approval. The RBI shall be empowered to impose such conditions as it deems fit
in this regard.
4. Depositor Education and Awareness Fund
RBI will have the power
to transfer the money lying in the bank account, which is not operated by the
account holder for more than 10 years, to the “Depositor Education and
Awareness Fund”. The fund will be managed by a committee appointed by the RBI
and will be utilized to create awareness among the customers. In case the account
holder returns, the money shall be returned to the account holder by the bank,
with interest.
AMENDMENTS RELATED TO
PRIVATE AND PUBLIC SECTOR BANKS
Revised voting rights
Private Sector Banks: The cap on voting rights in private banks has
been raised to 26 percent from the earlier 10 percent. This means that the
promoters and their group will now have voting powers up to 26 percent.
Public Sector Banks: This amended law also enables the government
to raise voting rights in state banks, such as the State Bank of India, to 10
percent from the existing 1 percent. This amendment will make the voting rights
proportional to the number of shares held by shareholders and will attract
foreign institutional investors, who have been sitting on the sidelines as far
as investing in these banks is concerned.
The amendment
enables nationalized banks to raise capital through “bonus” and “rights” issue
and also enables public sector banks to increase or decrease the authorized
capital with approval from the
Government of India and
RBI without being limited by the ceiling of a maximum of Rs. 30 billion
(approximately US $600 million,) under the Banking Companies (Acquisitions and
Transfer of Undertakings) Act of 1970 and 1980.
Mergers &
Acquisitions
The Competition
Commission of India (CCI) will approve all Mergers and Acquisitions (M&A)
in banks except for the case of banks in trouble. In such cases, the RBI will
have the final authority.
Stamp duty for foreign
banks
The Act 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. This move will be helpful for the foreign banks to expand their business
operations into India.
Further, pursuant to the
discussion with Indian Banks’ Association (IBA), RBI and Industry Associations,
the following additional amendments are made
a) to exempt guarantee
agreements of banks from the purview of the section 28 of the Indian Contract
Act, 1872 to bring finality to redemption of such guarantees;
b)to allow select
Directors on the Board of RBI a fixed maximum tenure of eight years with terms
of not more than two terms of four years each either continuously or
intermittently in consonance with the directions of the ACC;
c)to exempt conversion
of branches of foreign banks to wholly owned subsidiary entities of foreign
banks and transfer of shareholding of banks to the Holding Company structure
pursuant to guidelines of RBI from payment of stamp duty; and
d)to ensure that
unnecessary inspections are avoided and to encourage regulatory coordination, a
condition has been added such that the inspection of the associate enterprise
of a banking company would be conducted by RBI jointly with the sector
regulator.
Concluding comments
These amendments would
be beneficial for various stakeholders in the banking sector. While the banking
regulator gets enhanced powers that will result in effective compliance of
regulations, banks will be able to attract more investments to raise funds for
business expansion and to meet capital norms.
