In the works since around 2005, the amendments proposed in the Banking Laws Amendment Bill, 2011, have been passed in the Lok Sabha. The amendments pave the way for the Reserve Bank of India (RBI) to issue new bank licences, and also opens door for more foreign investment into the sector. Here are five facts about the Bill:
1. Last year, a Parliamentary panel, headed by senior BJP leader Yashwant Sinha, tabled its report proposing amendments to the Banking Bill. Last week, Banking Laws (Amendment) Bill, 2011, was tabled in the Lower House of Parliament. It was widely expected that the amendments would get House nod, but the Opposition staged a walkout saying that some new clauses, which have not been ratified by the Parliamentary panel, have been added to the Bill. Among these, the most contentious clause was allowing banks to invest in commodity futures trading. The Opposition says it will lead to high-risk speculative trading and the investor is at the risk of losing their money, contending that the futures trading watchdog - Forward Markets Commission (FMC) - does not have enough teeth to take action in case there is massive loss of money. It may be noted that in October this year the Cabinet approved the Forward Contract Regulation Act (FCRA) Amendment Bill, which will give more teeth to commodities regulator FMC. The same is yet to get Parliamentary approval. Although there have been no recent public comments from the RBI on the issue of banks getting into futures trading, the bank has in the past objected to the move, saying it could add to the speculative activities of banks. However, Finance Minister P Chidambaram had said the central bank is in concurrence with the government on allowing banks to begin commodities futures trading. The clause was finally dropped.
2. The cornerstone of the amendments to the Banking Bill is a clause which gives powers to the Reserve Bank of India (RBI) to inspect the books of all associates of a banking company. This is a major step as it expedites the process of RBI clearing banking licences to companies who want to foray into the sector. It may be recalled that just some time back, after being prodded by the Finance Ministry, the RBI had put its foot down on the issuance new banking licences, saying it would not approve any licence if it does not get the power to check the books of all the associate firms of a corporate house cutting its teeth on the sector. Now, with the passage of the Bill, the RBI will go ahead with the issuance of new licences.
3. The changes in the Bill also give the RBI the power to supersede the board of a bank for reasons related to fraud or otherwise. It may be noted that in 2004, Global Trust Bank, which was facing severe financial problems, had to be merged with Oriental Bank of Commerce, as the Reserve Bank did not have the rights to take over the bank's board and it had to find a buyer within a day. The changes proposed in the Bill will help RBI avoid such frantic moves.
4. The Bill also enables the government to raise voting rights in state banks such as the State Bank of India to 10 per cent from just 1 per cent now, acceding partially to foreign investors' demands to have more say in Indian banking. The bank employees unions, reluctant that any control is ceded, have strongly opposed this move for years and are set to strike on Thursday in protest. The Bill will allow foreign banks to convert their Indian operations into local subsidiaries or transfer shareholding to a holding company of the bank without paying stamp duty. Foreign banks have long sought these changes to the law which they say would encourage them to expand their operations in India. Under current laws, foreign banks such as Citibank and Standard Chartered have to pay 20-30 per cent tax as capital gains and stamp duty when transferring branches to a new legal entity.
5. The Competition Commission clause in the Banking Bill has been modified. This allows the RBI to remain the banking regulator, while the Competition Commission of India (CCI) will regulate mergers and acquisitions. CCI will have the power to investigate and clear mergers and acquisitions in the banking sector.