Mumbai: In a bid to regulate and avoid 2008- type crisis, RBI on
Wednesday said foreign banks with complex structures and which do not
provide adequate disclosure would have to operate in India only through
wholly-owned subsidiaries (WOS).
However, it permitted WOS of overseas banks to acquire private sector banks.
The
framework for setting up of WOS by foreign banks in India, released by
the Reserve Bank Wednesday night, also allowed foreign banks'
subsidiaries to list on local stock exchanges. The initial minimum
paid-up equity capital or net worth for a WOS would be Rs 500 crore.
"Banks
with complex structures, banks which do not provide adequate disclosure
in their home jurisdiction, banks which are not widely held, banks from
jurisdictions having legislation giving a preferential claim to
depositors of home country in a winding up proceedings, etc, would be
mandated entry into India only in the WOS mode," it said.
Foreign banks operating in India before August 2010 have the option to continue their operations in branch model.
The
RBI further said foreign bank subsidiary will not be allowed to hold
more than 74 percent, the sectoral cap for overall foreign investment,
in private banks they may acquire.
"As a locally incorporated
bank, the WOSs will be given near national treatment which will enable
them to open branches anywhere in the country at par with Indian banks,"
the RBI guidelines said.
There were 43 foreign banks in India
with a network of 333 branches as of March 2013. At present, foreign
banks have presence in India only through branches.
The
guidelines come against the backdrop of the 2008 global financial
crisis, which the RBI said has shown that growing complexity and
inter-connectedness of financial institutions have compromised the
ability of home and host authorities to cope with the failure of big
banks.
"The lessons learn during the crisis lean in favour of domestic incorporation of foreign banks," it said.
Spelling
out reasons for subsidiarisation, it said this will create separete
legal entities having their own capital base and local board of
directors, which will help in better regulatory control.
Also, it
would ensure that there is a clear delineation between the assets and
liabilities of the domestic bank and those of its foreign parent and
clearly provides for ring fenced capital and assets within the host
country, RBI said.
Standard Chartered, the largest foreign bank
by branch presence in India, has its depository shares trading on the
domestic bourses, although it hasn't adopted a subsidiary route here.
Only
multinational banks Standard Chartered, HSBC and Citi have more than 30
branches in the country. Although the Royal Bank of Scotland has 31
branches, it is winding down local retail operations.
The RBI's
framework, aimed at safe guarding the Indian banking system, comes in
the backdrop of collapse of several banks in advanced countries during
2008 global financial crisis.
"The issue of permitting WOS to
enter into merger and acquisition transactions with any private sector
bank in India subject to the overall investment limit of 74 percent
would be considered after a review is made with regard to the extent of
penetration of foreign investment in Indian banks and functioning of
foreign banks (branch mode and WOS)," it said.
To provide
safeguards against the possibility of the Indian banking system being
dominated by foreign banks, it said, the framework has certain measures
to contain their expansion if the share of foreign banks exceeds a
critical size.
RBI will put a stop on further entry of new WOSs
of foreign banks or capital infusion, when the capital and reserves of
all foreign banks in India exceed 20 percent of the capital and reserves
of the entire banking system.
