RBI permitted foreign banks subsidiaries to acquire domestic private sector banks

The Reserve Bank of India permitted Wholly Owned Subsidiaries of the foreign banks to acquire the domestic private sector banks.

Created On: Nov 7, 2013 10:50 IST

The Reserve Bank of India (RBI) on 6 November 2013 permitted the Wholly Owned Subsidiaries (WOS) of the foreign banks to acquire the domestic private sector banks. RBI also permitted the banks to set up branches anywhere in the country.

As per the permission given by RBI, the foreign banks will have to seek permission of RBI to open branches in certain sensitive locations. The foreign bank subsidiaries have also been allowed to list on the local stock exchanges. Although, they will not be allowed to hold more than 74 percent in the private banks they may acquire.

The order of the RBI also stated that the foreign banks that commenced banking business in India before August 2010 will be given an opportunity to convert into a wholly owned subsidiary.

Key features of the Framework

• Banks with complex structures, also the banks which do not provide adequate disclosure in their home jurisdiction, as well as the banks which are not widely held and banks from jurisdictions having legislation giving a preferential claim to depositors of home country in a winding up proceedings, would be mandated entry into India only in the WOS mode.
• Foreign banks in whose case the above conditions do not apply can opt for a branch or WOS form of presence.
• A foreign bank opting for branch form of presence shall convert into a WOS as and when the above conditions become applicable to it or it becomes systemically important on account of its balance sheet  size in India.
• Foreign banks, which commenced banking business in India before August 2010 shall have the option to continue their banking business through the branch mode. However, they will be incentivised to convert into WOS because of the attractiveness of the near national treatment afforded to WOS.
• To prevent domination by foreign banks, restrictions would be placed on further entry of new WOSs of foreign banks/ capital infusion, when the capital and reserves of the WOSs and foreign bank branches in India exceed 20 per cent of the capital and reserves of the banking system.
• The initial minimum paid-up voting equity capital for a WOS shall be ` 5 billion for new entrants. Existing branches of foreign banks desiring to convert into WOS shall have a minimum net worth of 5 billion.
• The parent of the WOS would be required to issue a letter of comfort to the RBI for meeting the liabilities of the WOS.
Corporate Governance 
(i)    Not less than two-third of the directors should be non-executive directors;
(ii)   A minimum of one-third of the directors should be independent of the management of the subsidiary in India, its parent or associates
(iii)  Not less than fifty percent of the directors should be Indian nationals /NRIs/PIOs subject to the condition that not less than 1/3rd of the directors are Indian nationals resident in India
• The branch expansion guidelines as applicable to domestic scheduled commercial banks would generally be applicable to WOSs of foreign banks except that they will require prior approval of RBI for opening branches at certain locations that are sensitive from the perspective of national security.
• Priority Sector lending requirement would be 40 per cent for WOS like domestic scheduled commercial banks with adequate transition period for existing foreign bank branches converting into WOS.
• On arm’s length basis, WOS would be permitted to use parental guarantee/ credit rating only for the purpose of providing custodial services and for their international operations. However, WOS should not provide counter guarantee to its parent for such support.
• WOSs may, at their option, dilute their stake to 74 per cent or less in accordance with the existing FDI policy. In the event of dilution, they will have to list themselves.

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