Big Bank Reforms: Government Mulls Major Changes In PSU Bank Ownership Rules

The central government is currently mulling major reforms in bank ownership, opening up the space for foreign investors and a higher threshold for rights. Proposals have been circulated in the higher offices of the government, discussing a new foreign direct investment limit for public sector lenders and reviewing the voting rights cap for owners, two people with knowledge of the matter told NDTV Profit on the condition of anonymity.

No firm decision has been made on the direction in which the government will take these proposals, the people said.

According to the people quoted above, the proposals discuss a 49% foreign direct investment limit in public sector banks, compared with the current 20%. They also discuss a potential review of the 26% cap on voting rights, which has been in place for over a decade.

The FDI limit review is aimed at regulatory and legal parity between public and private sector banks. Private banks can have up to 74% of their equity capital from foreign investors. The proposal was created after keen investor interest from North America, Japan, and the Middle East to buy stakes in state-owned lenders. As part of the proposal, the government will continue to retain at least 51% stake in these banks, to keep their public sector identity.

While the new foreign capital will help in providing the fuel to build large and globally competitive lenders. To be sure, none of the state-owned banks in India are hitting the 20% FDI limit, which is currently in effect.

According to the first person quoted above, any indication that the government might raise the FDI cap will cause serious investment interest. This could prove to be a doorway for international investors to participate in the Indian retail growth story.

According to the second person quoted above, the banking regulator, however, may not be fully in favour of backing such a proposal. The Reserve Bank of India is likely reviewing this proposal through a lens.

On voting rights, the last review was undertaken in 2011 as part of the government's amendments to the Banking Regulation Act. At that time, the cap was raised from 10% to 26% of the share capital. According to the first person quoted above, there is an ongoing conversation about reviewing this limit further.

Reuters was the first to report on Monday that India is considering allowing foreign direct investment of up to 49% in state-run banks.

Presently, the RBI is not allowed to provide higher voting rights even in cases where a foreign investor buys a controlling stake in a private bank.

Earlier this month, Emirates NBD and RBL Bank announced that the Dubai-based lender will acquire a 60% stake in the domestic bank for $3 billion. Despite the higher shareholding, the foreign lender's voting rights are capped at 26% only.

Japan's Sumitomo Mitsui Banking Corporation has also purchased a 24.99% stake in Yes Bank through secondary market transactions. This is just shy of the 25% mark after which the investor must initiate an open offer for existing shareholders. While it is widely expected that SMBC will acquire a controlling interest in Yes Bank, public statements by the foreign bank's  leadership have not made that clear yet.