The passage of the Banking Laws (Amendment) Bill by both houses of Parliament has been welcomed by some, while others, including some bank trade unions, have opposed it vociferously. There is a strong case for evaluating the key provisions of the new legislation, both by themselves and perhaps more meaningfully in the context in which they have been enacted. At one level, there are a number of non-controversial features which were waiting to be given legal status for a long time. These include raising the voting rights of retail and minority investors in private sector banks to 26 per cent from 10 per cent. Prospective investors have for long asked for voting rights in proportion to their investments. The government has now met their demands at least half way. A 26 per cent shareholding is sufficient to block any special resolutions that might be detrimental to non-promoter shareholders. It is thus a blow for corporate governance. Foreign banks will now be allowed to convert their Indian operations into local subsidiaries or transfer shareholding to a separate holding company without paying stamp duty. That should facilitate their expansion in India. The new business organisation model they adopt would be easier to supervise by the Reserve Bank of India.
Even the much more widely discussed provisions that seek to give the RBI greater regulatory oversight over banks to overrule their boards under certain conditions and the ability to inspect the books of associate companies of promoter companies are not controversial. In fact, these are the powers that the RBI had sought before it could notify final guidelines for the issuance of new bank licences. Critics of the bank licensing policy, who fear that it is designed to favour a few corporates, say that with parliamentary approval, the RBI will have fewer grounds to resist government pressure. The Finance Minister’s clarification that many categories — public sector companies, leading non-banking finance companies, besides corporates — would be eligible and that the government will have very little say in the final selection is unlikely to silence critics. The track record of banks controlled by big business has been patchy and it is the cosy relationship between banks and their owners that was one of the main reasons cited for bank nationalisation in 1969. As in many countries, the regulation of financial conglomerates is becoming a big problem in India. It would be prudent for the RBI to frame the rules as tightly as it can to weed out undesirable applicants .Thereafter, it is a question of exercising its regulatory powers judiciously without fear or favour.