Financial sector reforms : Progress on FDI, Companies Bill

Arnav Pandya

The financial sector is a critical component of the Indian economy. Effective reforms are required to ensure that this remains competitive and attractive for investors from across the world. There is  also a significant fallout from the steps that are taken in this area so the kind of reforms that are undertaken also remain a significant factor to consider. Here is a look at some of the recent reforms in the area along with the impact that would be seen sometime down the line which in several cases could turn out to be more like years instead of months. 

One measure that has received a lot of attention is the attempt at raising the Foreign Direct Investment (FDI) cap in the insurance and pension sector. This will lead to foreign players being able to acquire a larger share in their joint ventures that are already operating in the country. The biggest impact of this move is that it will open the route for additional capital infusion in the companies that are operating in these sectors which is something that is required as it will ease the financial crunch that they face. The other impact will be seen over the longer term as a higher share by the foreign entity will lead to the introduction of several best practises seen across the world. The investors will also be able to access world class products that will make their way to the country which will enable them to save for their future goals in an effective manner.

The revised Companies Bill is now just a small step away from being law. There is a need for the various conditions that govern action of companies and their mode of operation to remain in tune with the changing environment. The new Companies bill will fill this role effectively because it will enable companies to carry on their processes in a simple and easy manner. This will ensure that their practises are in tune with what is being witnessed across the world. There are already large scale changes in the way in which companies operate and even deal with their investors so the introduction of postal ballot followed by e voting along with the sending of notices and all intimations by email has ensured that these changes are being visible in the day to day dealings. 

The biggest change that will however be seen by individuals in the future is through various changes to the banking sector. One of the initial steps has been taken in the form of allowing new banks to set up shop.  Private corporates, public sector entities and Non Banking Finance Companies with a strong track record can now apply to set up new banks and the Reserve bank of India will consider these applications in the coming months. The addition of new banks will mean more competition for this sector in the country and it will lead to an improvement in services for the end customer. It is expected to increase financial inclusion as more and more people across the country will be able to access banking facilities.

In reforms for the existing banks the public sector banks have been allowed to increase or decrease the authorised capital without the presence of an overall ceiling. This will give greater flexibility to the banks to conduct their fund raising activities as per the requirements. The strict restriction of voting rights in banks will also be relaxed and this will help the banking sector develop as large investors will be able to get a bigger voice in the coming days in the banks and the manner in which they operate.

(The writer is a certified financial planner)