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The government is pushing ahead with the promised financial reforms. The Cabinet today cleared the Banking Laws Amendment Bill, 2011 which gives RBI the power to supersede the entire board of a bank.
The government had proposed to make voting rights proportionate to shareholding, while a parliamentary panel had recommended capping such rights at 26%.
"The cabinet has cleared banking laws (Amendment Bill 2011). It also approved increase of voting rights from 10 percent to 26 percent for private-sector banks," Information and Broadcasting Minister Ambika Soni told reporters after a cabinet meeting.
With the government staring at a slowing economy, triggered by a lack of reforms, the announcement could bring some cheer to investors, but needs to be cleared by parliament.
The key features and impact of this Amendment Bill
In the first place this shareholder cap increase probably is not much of a reform at all. What happens now is that in a private sector bank, like for instance Kotak Bank, Uday Kotak and his associates hold 45%. Now according to the law, they can have only 10% shareholder rights. So what do they do? They hold it in the form of five companies each one gets 10%. So what the Reserve Bank and others asking for the reform of the act have been saying is that you are actually making us accomplice to a lie, instead why don’t you say that the shareholder and the voting rights should be equal.
Now you are going to have 26% block of rights. So, basically a group like Kotak will have two blocks of votes, anyway Kotak's voting rights will be equal to his shareholding, only he will do it through different companies. So this is not reform, it could have been made clean, but for some reason this is seen as a private sector control that is not the way to look at it. When the private sector bank licenses were given, they were allowed to hold that much of shareholder rights. This is really trying to bring some realism into the voting rights.
With the public sector case perhaps there is more genuine shareholder democracy because say for instance a mutual fund or a FII held 5% shares, it still would not get voting rights beyond 1%, which means it never entered the board. Now there is at least a chance that you could have one of them appointing a director to the board or something like that. Even then it’s only going to be 10%, perhaps they will not make it to the board, but maybe there will be a stray case of an independent director on the board and maybe you will have some kind of healthy shareholder democracy over there.
The right of the RBI to completely supersede the bank board, at the moment that is not there. You can change one or two directors. You cannot supersede the board and that is why if you remember even when Global Trust Bank had to be handed over, almost in a day RBI had to find a buyer because they knew that the board was not functioning or not conducting the bank according to public interest, but they could not supersede, they had to forcibly get it bought over by Oriental Bank of Commerce in a day.
So that allows the regulator or the government as the case maybe to find another buyer, set matters right, gives the regulator right to supersede the board that’s an important reform, but the more important one, which is not being mentioned, we do not know whether it's dropped or whether it has been lost in oversight was a provision, which allows the Reserve Bank to inspect the books of all associates of a banking company.
The Reserve Bank had made it compulsory that unless this right is given it will not pass any banking license. Their fear being that when a private industrial unit, say like the group of Tatas, Birlas or Ambanis, are given a banking license, they should have the right to examine the books of all Reliance companies or all Tata companies in case there is some favoritism shown.
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