Foreign lenders said to prefer branches to subsidiaries

Flash points: Stake dilution by foreign parent, voting rights, stamp duty, etc.

Foreign banks are giving a thumbs down to a proposal to operate in India as wholly owned subsidiaries, instead of the present dispensation that allows them to operate as branches.

“If the present rules are to continue, there is no advantage in converting into a wholly owned subsidiary. There are only disadvantages,” said a senior executive of a foreign bank.

“It cannot be one-way traffic. You expect us to do everything that an Indian bank is doing without giving us the same treatment. It is unfair,” said another executive.

In the first phase of the Reserve Bank of India’s (RBI’s) road map for entry of foreign banks into India, the overseas players were given the option to operate either as a branch or as a subsidiary. All players chose the first, as priority sector targets under this were easier to meet and they did not have to comply with stipulations on the composition of boards.

In the second phase, for which a review was to be initiated in April 2009, RBI had indicated that national treatment would be accorded to those setting up wholly owned subsidiaries in India. However, the review was deferred last year in view of the global financial crisis. A national treatment means that foreign banks will get the same treatment on opening branches in India, as is the case with Indian banks.

While RBI yesterday said a review would be undertaken, Governor D Subbarao told Business Standard that it was not a full-fledged review aimed at further opening up.

The executive of a foreign bank pointed out that in the absence of relaxations such as on branch opening, it did not make sense to convert into a subsidiary.

In addition, the foreign parent will have to dilute their holding in line with the RBI guidelines. “There is a possibility that the parent holds 74 per cent, but the voting right is capped at 10 per cent. This requires a legal amendment, which the government is not willing to undertake,” said an executive of a British bank operating in India.

Another banker said according to the current guidelines, 26 per cent of the share capital of a subsidiary will have to be owned by resident Indians. Foreign banks might not want to dilute their share capital.

There are other issues such as stamp duty, which will need to be paid at the time of conversion from a branch to a subsidiary.

“The reality is that there are no clear guidelines on converting to a subsidiary,” said Ravi Trivedi, executive director, KPMG Advisory.

An executive with a foreign bank said it was unlikely that RBI would mandate that all foreign bank branches needed to convert into a subsidiary, as was done in Malaysia a few years ago. “The best way is to incentivise conversion or disincentivise operating as a branch,” said a banker.

The issues related to branch opening are expected to be addressed in the RBI discussion paper, which is due by September. But, the regulator does not want to intrude upon the government’s jurisdiction and discuss tax and voting rights-related matters.