RBI releases guidelines for foreign bank subsidiarisation

RBI today released the framework for setting up of 100 percent subsidiaries by foreign banks in India, reports CNBC-TV18’s Gopika Gopukumar.

The new framework requires foreign banks to create separate legal entities, having their own capital base and local board of directors.  It also requires foreign banks to clearly delineate between the assets and liabilities of the domestic bank and those of its foreign parent. It also provides effective control to RBI over these subsidiaries. 
The final guidelines allow foreign banks to buy local private sector banks subject to the overall investment limit of 74 percent. RBI says these acquisitions will be permitted after a review is made of the extent of penetration of foreign investment in Indian banks and functioning of foreign banks.
The new rules also allow foreign banks to dilute stake to 74 percent or less on the condition that they will list upon dilution.
The final guidelines have also laid down stringent corporate governance norms for wholly owned subsidiaries. RBI has mandated that atleast two-third of directors should be non-executive directors and one-third should be independent directors. Not less than 50 percent of directors should be Indian nationals /non-resident Indian /person of Indian origin subject to the condition that not less than one-third of the directors are Indian nationals resident in India. How to go about it
New entrants who want to set up wholly owned subsidiaries (WOS) will have to bring in an initial minimum capital Rs 500 crore and existing branches of foreign banks which want to convert into subsidiaries should have a minimum net worth of Rs 500 crore. These banks will be required to bring in the entire amount of initial capital upfront. The near-national treatment
With these rules, RBI has allowed a near national treatment for foreign banks on par with domestic banks. Foreign banks which convert to WOS can now open branches anywhere in the country except in except in certain sensitive areas where RBI’s prior approval would be required. 
But the near national treatment will require WOS’  to comply with 40 percent priority sector sector lending requirement. RBI adds that adequate transition period will be given to existing foreign banks which convert into WOS.
However, not all foreign banks are required to opt for local incorporation. Those banks which commenced operations before August 2010 will be allowed to continue their banking operations through the branch mode. But those foreign banks which have complex structures and inadequate disclosures requirements in their home jurisdiction will be allowed entry into India only through the subsidiary route.  Banks which give preferential claim to depositors of home country will also be mandated to convert into 100 percent subsidiaries. So, what about existing banks?
 
Experts say banks like ICBC, ANZ, Woori Bank, First Rand were given licences to operate as branches in India after August 2010. However, these licences were given on the condition that they will convert into subsidiaries once the guidelines are out.