Shift in Regulator’s Mood
The regulator’s mood change is palpable, as evident from recent developments in the banking sector. Just a few months ago, Japan’s Sumitomo Mitsui Banking Corporation was allowed to acquire a 24.99% stake in Yes Bank, which is just shy of the 25% mark that would have required a mandatory open offer for existing shareholders.
Banking Regulations
One of the key contentions for the regulator has been the cap on voting rights for promoters, which is coded into the Banking Regulation Act. This means that whatever the economic interest a promoter may have in a bank, their voting rights are capped at 26%. This rule is unique to banks and does not apply to other listed companies in India.
RBL Bank Deal
The recent deal between RBL Bank and Emirates NBD is a significant development in this regard. Despite acquiring a significant stake, Emirates NBD will keep its voting rights at the 26% limit. As RBL Bank is a 100% publicly held entity, the Dubai buyer does not expect any material challenges in pushing through resolutions.
Access to Capital
The current deal, as well as the Yes Bank-SMBC one, is also a key development in the way Indian banks access capital. Due to onerous regulations over bank ownership, domestic lenders have been largely limited to narrow fund-raising options. India does not allow corporates to acquire banks, and investments by a single investor are limited to 4.99% under the automatic route.
Investment Restrictions
Any investment above 4.99% requires special clearance from the RBI, and even with that clearance, the regulator only allows a 9.99% stake to be sold to an investor. For anyone to buy a larger stake, the regulator must conduct its fit and proper checks and formally approve the transaction before it is closed.
Calls for Reform
There is a strategic lobby asking the RBI to ease up on investments and look at fund infusion separately from voting rights. This could allow domestic lenders to tap into global investment pools without giving up too much control to the buyer. Corporate governance standards are crucial to the RBI, and some argue that linking shareholding to voting rights in banks has not necessarily given the best results.
Governance Concerns
Governance structures have been compromised in the past, swaying to promoter and/or management interests in domestic private banks. A change in thinking is afoot, and this could lead to large foreign capital entering Indian banks. This would also aid the government’s goal to develop large domestic lenders who can compete among the global big banks, pushing up India’s stature as a financial powerhouse.
Conclusion
In conclusion, the regulator’s shift in mood and recent developments in the banking sector are significant steps towards reforming the regulatory framework. By easing investment restrictions and separating fund infusion from voting rights, Indian banks may be able to access global capital and compete with the world’s top banks. While the regulator may still prefer strategic investments over short-term funds, this change in thinking could lead to a more robust and competitive banking sector in India.
