[sbinews] RBI wants to vet bank stake over 5%

  • From: sbistcbangalore@xxxxxxxx
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Sat, 13 Dec 2003 07:47:48 +0500

RBI wants to vet bank stake deals over 5%

MUMBAI: The Reserve Bank of India (RBI) wants acquirers of bank stocks to take 
its approval prior to buying more than 5% of equity capital. The central bank 
has asked the government to amend banking laws to make this mandatory. 

It has also called for new laws which will treat merger of a finance company 
with a bank on par with the merger between two banks. “RBI is not very 
comfortable with the lack of a clear statutory provision regarding the takeover 
of management of banks,” RBI governor YV Reddy said, in his inaugural address 
at the 25th Bank Economist’s Conference organised by the Union Bank of India . 
He added that to plug the regulatory gaps, a bill has been introduced in 
Parliament and that the RBI’s proposals should take care to ensure that it 
would have enough powers to satisfy itself that persons proposing to acquire 
such shareholding are “fit and proper”. 

Mr Reddy said the legal amendments were necessary since the seeking of RBI 
permission after the purchase of shares, “creates a somewhat piquant position”. 

Under the rules, a bank cannot effect the transfer of shares (of 5% or above) 
bought without the RBI’s approval. But there are no norms that specify RBI 
clearance is required before the purchase of shares. 

Incidentally, the central bank is facing such a situation in the case of the 
Tamilnad Mercantile Bank, where the Nadar community has bought a controlling 
stake from Sivasankaran of Sterling Computers. The RBI is yet to approve the 
 Mr Reddy also expressed concern over another area where the RBI was helpless 
due to the absence of regulation — situations where finance companies are 
amalgamated with banks. 

The governor’s comments come at a time when talks of consolidation and 
strategic investments in private banks have fuelled share prices. Talk of 
foreign strategic investments in Indian banks has gained ground due to two 
reasons: HSBC’s acquisition of CDC’s 20% stake in UTI Bank and word of the 
government increasing the foreign direct investment limit in banks from 49% to 

The central bank’s concerns over amalgamations of finance companies with banks 
appear to originate from the disastrous amalgamation of 20th Century Finance 
with Centurion Bank. More recently, IndusInd Bank had announced the 
amalgamation of Ashok Leyland Finance with itself. 

Although banks and finance companies are both regulated by the RBI, the central 
bank does not have much of a say in vetoing such arrangements. “The law does 
not impose any obligation on the part of such non-banking companies, for that 
matter even the concerned bank, to seek the RBI’s regulatory approval before 
filing the scheme of amalgamation in the High Courts under Sections 391 of the 
Companies Act, 1956,” said Mr Reddy. 

The governor said while there has been impressive stability and considerable 
competition in India , consolidation in the banking industry has just begun. 
“The issue of consolidation has been addressed by the Narasimham Committee 
Report (1998) but the issue in regard to policy is yet to be pursued 
vigorously,” he said. He added that there are three aspects to consolidation: a 
clear-cut legal and regulatory regime, an enabling policy framework, especially 
where several banks are government-owned, and market conditions that favour 

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