Opinion| It’s time to review ownership rules to make banking attractive again

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Indian banking is going through a peculiar flux, particularly with respect to ownership concerns. The Reserve Bank of India (RBI) had come out with “On Tap Licensing Guidelines” in August 2016, defining the set of rules for new organisations to enter India’s banking space.

The objective was simple: to increase competition, and usher in new technology, best practices and fresh ideas into the industry. As a corollary, it was believed that a new class of banking entrepreneurs will soon emerge in the country. More than two years later, these objectives remain far from being achieved. More than thirty months after the guidelines were issued not a single organisation has responded.

One would not be surprised if many interested parties privately admit that complex ownership structures are a challenging entry barrier and create strong disincentives for anyone to launch a new bank.

The RBI’s bank licensing rules mandate that a private bank’s promoter will need to pare its holding to 40 percent within three years, 20 percent within 10 years and 15 percent within 15 years.

There is, however, a growing chorus favouring a change in RBI’s diversified ownership norms,  arguing that on most occasions private bank promoters end up diluting their shareholding in favour of foreign investors who now are majority owners of many Indian private banks.

Majority foreign ownership has its own attendant risks. Widespread acceptance of proxy advisers by foreign institutional investors, who operate in tandem, can create further challenges.

The foreign ownership in HDFC bank is 72 percent, 60 percent in ICICI Bank, 52 percent in Axis Bank, 73 percent in IndusInd Bank and 47 percent in Kotak Bank.

Two recent developments—related to Kotak Mahindra Bank and Bandhan Bank—are symptomatic of the rough edges in ownership rules that need ironing out.

In the case of Kotak Mahindra Bank, RBI had asked the bank to trim promoter shareholding to 20 percent of paid up capital by December 31, 2018 and 15 percent by March 31, 2020.

As on December 31, 2018, Uday Kotak, the bank’s vice chairman and managing director, held 29.72 per cent stake in the bank.

The bank in August 2018 had proposed perpetual non-cumulative preference shares (PNCPS) to cut promoter holding to 19.70 percent, which the RBI rejected.

The bank has challenged the RBI’s contention in the Bombay High Court, which is hearing the matter.

In September, Bandhan Bank, one of India’s newest full-fledged private commercial bank, informed stock exchanges that RBI has ordered the freezing of its CEO Chandra Shekhar Ghosh’s salary and barred it from opening new branches without the central bank’s approval.

The bank failed to bring down the promoter’s shareholding to 40 percent by August 23, the day it completed three years of operation. Eventually, Bandhan Bank merged with Gruh Finance, prompting the question to what extent the was merger driven by RBI’s command asking Bandhan Bank to bring down promoter shareholding.

The RBI’s rules on cutting promoter holding in private banks is predicated upon the principle that concentrated ownership can lead to greater governance risks.

The RBI has a two-pronged approach to contain systemic risks in Indian private banks if a single shareholder can wields too much control and authority.

There are ownership caps that have been imposed, as shown by the Bandhan Bank and Kotak Mahindra Bank instances. There are also voting rights ceiling specified under the rules of the Banking Regulation Act. The voting rights cap, fixed at 26 percent, is aimed at adding an extra layer of safety net to ensure that promoters with large shareholding do not enjoy brazen power to ride roughshod over boards.

A question that is sometimes asked is: why aren’t voting rights and promoter shareholding capped at the same level?

It may be just the right time to throw open the issue of ownership guidelines for wider consultation. Indian banking needs more competition. There is also a need to ensure that foreign institutions don’t end up controlling Indian private banks through proxies.

A committee of experts to review the ownership guidelines may be an appropriate idea, given that no one has so far come ahead to set up new banks even nearly three years after the “On Tap Licence Guidelines” were issued.

[“source=moneycontrol”]