Level field for foreign banks

FM's assurance on M&A freedom, voting rights, 10% creeping acquisition.

Finance Minister P Chidambaram said foreign banks would be allowed to take over domestic private banks.

"Foreign banks can acquire up to a 10 per cent stake in a private bank every year and take control of private banks in three or four years," he said on the sidelines of a function to inaugurate Dena Bank's new corporate office at the Bandra Kurla Complex in Mumbai.

"The Reserve Bank of India (RBI) will put in place guidelines to develop a level playing field," Chidambaram added.

In June, the Indian central bank had prevented Hongkong and Shanghai Banking Corporation (HSBC) from buying over a 20 per cent stake in the private UTI Bank.

It permitted HSBC to purchase just over 14 per cent of the bank's equity, with riders. Following Chidambaram's statements today, it appears that HSBC will be in a position to take over UTI Bank if it wishes to.

Chidambaram sent out clear signals to Indian banks to go in for mega-mergers, saying they should "think big and act globally".

Expressing happiness that banks had begun talking with one another for mergers and acquisitions, he said the government would not force any bank to go in for mergers or alliances but "will bless the marriage if it comes through".

The government also intends to lift the 10 per cent cap on voting rights in private banks, Chidambaram said.

"We will reintroduce a Bill to remove the voting rights cap after holding consultations with all (coalition) partners. The standing committee had already recommended that the 10 per cent cap be removed. Economic ownership should be reflected in voting powers," the finance minister pointed out.

The finance minister also said public sector banks could take over private banks. "We need to keep public sector banks as public sector banks, encourage private banks and more foreign players. Only when all players are present in full force will there be true competition," he said.

The RBI, in its first draft guidelines on private bank ownership, said a foreign bank with a presence in India should not hold more than 5 per cent of a private bank's equity. The draft guidelines were issued in July. The RBI is expected to come out with the second draft guidelines soon.

"The finance minister's statement will encourage consolidation in the private banking sector and I am hopeful that the RBI's revised draft guidelines will reflect this direction," said A Chris Low, CEO (India) Standard by the public sector banks. The government will not lean in favour of, or against, any particular segment in the banking industry," he stated.

Earlier, Chidambaram said the Securities and Exchange Board of India (Sebi) would soon take action against those who were responsible for the market crash of May 17, 2004, when the Bombay Stock Exchange (BSE) Sensex fell by 565 points.

"Sebi will take action against a few people in the next few days," Chidambaram told reporters after an interaction with market participants to mark the National Stock Exchange's 10th anniversary. He added, "I think the Sebi report is nearly complete."

The ruling coalition had attributed the stock market crash to manipulative activity by market operators and had warned of stern action.

Chidambaram also asked financial players to become global players, reiterated pension reforms were a priority and that a separate regulator for the pension sector would be set up soon. The finance minister stressed the need for the convergence of the commodities and equities markets and suggested a common regulator for both markets.

Chidambaram said there was a need for fair, open and transparent markets, with high levels of efficiency. "This will enthuse savers to become investors," he said, adding that the government was committed to demutualisation and corporatisation of the stock exchanges.

Indian companies must tap the international markets and extend the basket of services being offered such as software, back offices, call centres and research, which were being outsourced to India. He said the entire securities operations of global corporations could be outsourced to India.