New Banking Bill: What changes have been proposed?

The Banking Amendment Bill is likely to be tabled in the Lok Sabah today. The bill entails removing 10 percent voting ceiling in private sector banks. Three legislations are going to be possibly amended; the Banking Regulation Act of 1949, the Banking Companies Act of 1970 and the Banking companies Act of 1980.

What would these amendments result in? The consequent changes would lead to the issue of new banking licenses. Why is this important? Once the Banking Amendment Bill comes through the Reserve Bank of India (RBI) will have more purviews over new banks, which will be formed. So, the banking amendment bill or the regulation needs to be made for RBI to issue the licenses. What happens after the amendments happen? One is raising capital for expansion of banking businesses, for example nationalized banks will be able to use two additional instruments in order to raise capital, which will be the bonus issue as well as the rights issue also proposal in terms of changing of voting rights of shareholders. Voting rights of shareholders of nationalized banks would be increased from 1 percent to 10 percent. It will entail removing the 10 percent voting ceiling in private sector banks. That is quite important in terms of a couple of key triggers with regards to stocks such as Kotak Mahindra Bank etc going up. They will also to ensure there is proper control is issued by the Reserve Bank of India (RBI) going forward once the regulations are made. For example, the RBI will have power to impose conditions while granting approval for acquisition of share capital. Secondly, they will possibly regulate M&A vis-à-vis Competition Commission of India (CCI) going forward. Also, they will be able supersede the board of directors for not more than 12 months etc. This is a precursor to new banking licenses and once this comes through the RBI will issue the new banking licenses. There is risk on whether or not it is going to be taken up in the Parliament or not. L&T Finance Holdings went up quite significantly in the past week or even on a year to date (YTD) basis because it most likely in terms of getting a new bank license.