A proposed policy on ownership rules for Indian private banks put out by the Indian central bank on July 2 has left bankers and investors dismayed.
To ensure that ownership and control of private banks is as diverse as possible, the Reserve Bank of India, the central bank, proposes to limit ownership by a single investor or corporate group to 10% of the paid-up capital of the bank.
The 10% cap extends to foreign investment by a single investor or group, either by way of foreign direct, private equity or portfolio investment.
The voting right of a single investor is already capped at 10%. The draft policy says core shareholders may own a higher stake in a new bank but must pare it down to 10% within three years.
Furthermore, it proposes to restrict cross-holdings between private banks to 5%. That means no Indian or foreign bank in India will be allowed to own more than 5% of a private bank.
The central bank move to tighten ownership rules seems prompted by its concern that unscrupulous core shareholders in some private banks, Global Trust, Centurion and Nedungadi to name a few, have brought them into trouble.
Last year, Centurion was rescued by a group of foreign investors led by Rana Talwar, ex-chief of Standard Chartered. ING took over Vysya, a troubled private bank. And Global Trust is scouting for new investors after a share scandal prompted the central bank to step in and remove its managers.
The proposed ownership rules will instead discourage consolidation through such mergers and acquisitions: the only hope of a future for several weak private banks. The government’s move last year to raise foreign investment in private banks to 74% encouraged foreign investors, including Mr Talwar and HSBC, which acquired a stake in UTI Bank.
Shares in several small private banks fell on the news of the proposed policy because the market now sees little chance that investors will step in to rescue them. In fact, banks that own more than 5% in Indian banks, such as ICICI and HSBC, could be looking to sell those shares.
