Govt tables Bill to lift cap on stakeholders' voting power in private banks

In a major boost to financial sector reforms, the government today introduced a Bill in Parliament to lift a cap on the voting rights of stakeholders in private sector banks and align them in proportion of their stakes. The move came a few days ahead of the Reserve Bank of India’s (RBI’s) plans to come out with draft guidelines on the entry of new players in the banking space.

The Banking Laws (Amendment) Bill of 2011 also proposed to increase the cap on the voting power of a stakeholder in nationalised banks from the current one per cent to 10 per cent. Currently, voting power of stakeholders in private sector banks is capped at 10 per cent, which makes many investors wary of investment in these lenders.

It is proposed to “remove the existing restriction on voting rights limited to 10 per cent of the total voting rights of all the shareholders of the banking company,” said the statement of objects and reasons of the Bill. The Bill also proposed to empower RBI to grant approval of five per cent or more share capital of a banking company and impose conditions thereon. Many banks and investors have been demanding these changes for quite some time. However, RBI was of the view that an entity or an individual could corner a major chunk of shares in a bank without regulatory approval.

At present, RBI restricts bulk purchases, but that is only in the form of a directive. As such, the Bill has proposed that an individual or entity can hold five per cent or more stake in a bank only after receiving approval from RBI, which can impose conditions on the acquirer.

The Bill also proposed to keep mergers and acquisitions in banking outside the purview of the Competition Commission of India. In fact, the proposed amendment seeks to allow RBI to approve mergers of banking companies in public or depositor interests. The Bill also proposes to lift the ceiling of Rs 3,000 crore for authorised capital of nationalised banks.