The Reserve Bank of India, on Wednesday, permitted wholly-owned subsidiary (WOS) of foreign banks to acquire domestic private sector banks as well as set up branches anywhere in the country. It also allowed foreign bank subsidiary to list on local stock exchanges.

However, foreign bank subsidiary will not be allowed to hold more than 74 per cent, the sectoral cap for overall foreign investment, in the private banks they may acquire.

“As a locally incorporated bank, the WOSs will be given near national treatment, which will enable them to open branches anywhere in the country on a par with Indian banks (except in certain sensitive areas where the Reserve Bank’s prior approval would be required),” according to the RBI guidelines.

Such conversion is also desirable from the financial stability perspective, the framework for setting up of WOS by foreign banks in India says. “The issue of permitting WOS to enter into merger and acquisition transactions with any private sector bank in India subject to the overall investment limit of 74 per cent would be considered after a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks (branch mode and WOS),” the guidelines say. To provide safeguards against the possibility of the Indian banking system being dominated by foreign banks, it said, the framework has certain measures to contain their expansion if the share of foreign banks exceeds a critical size.

The RBI will put a stop on further entry of new WOSs of foreign banks or capital infusion, when the capital and reserves of all foreign banks in India exceed 20 per cent of the capital and reserves of the entire banking system.

Rs.500 cr base capital

Mumbai Special Correspondent adds:

The RBI framework stipulates that the initial minimum paid-up voting equity capital for a WOS would be Rs.500 crore for the new entrants.

“Foreign banks, which commenced banking business in India before August, 2010, have the option to continue their banking business through the branch mode. However, “they will be incentivised to convert into WOS because of the attractiveness of the near national treatment afforded to WOS,” the guidelines say.

Priority sector lending

Priority sector lending requirement would be 40 per cent for WOS, like domestic scheduled commercial banks, with adequate transition period for existing foreign bank branches converting into WOS.

On arm’s length basis, WOS would be permitted to use parental guarantee/credit rating only for the purpose of providing custodial services in India and for their international operations. However, “WOS should not provide counter guarantee to its parent for such support.”

WOSs may, the guidelines say, at their option, dilute their stake to 74 per cent or less in accordance with the existing FDI policy. In the event of dilution, they will have to list themselves.

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