India regulates the banking sector through a cap on voting rights (defined in the Banking Regulation Act), and via ownership caps (through RBI’s administrative circulars).
The Swadeshi Jagran Manch (SJM), the economic wing of Rashtriya Sawyamsevak Sangh (RSS), wants newly-appointed Reserve Bank of India (RBI) Governor Shaktikanta Das to overhaul the country's private bank ownership norms to foster the growth of large home-grown banks.
"There is a need for the new RBI Governor to rethink the regulatory framework for private bank ownership," the SJM said in a note of an internal meeting on "Future of Banks in India".
The meeting was held in New Delhi on December 13, a day ahead of RBI's central board meet in Mumbai.
The central board will meet amid festering tensions between the Finance Ministry and RBI, which will be chaired by Das.
Das, a former Economic Affairs Secretary in the finance ministry, took charge as the 25th RBI governor on December 12, replacing Urjit Patel who resigned on December 10.
Patel resigned nine months before his tenure were to end in September 2019, ending a testy relationship with the finance ministry.
"None of us want Indian home-grown banks be allowed into the hands of foreign players. SJM is also of the view that promoters' ownership cap should be reexamined," the SJM note said.
Changes in private banking industry rules are unlikely to be taken up when the RBI central board meets, which has S Gurumurthy, a former co-convener of SJM, as one of the many members.
India regulates the banking sector through a cap on voting rights (defined in the Banking Regulation Act), and through ownership caps (through RBI's administrative circulars).
RBI's universal banking guidelines state that promoters' holding in banks should progressively come down to 15 percent within 15 years of starting operations. The rationale for such an approach is that a widely held/diverse ownership would lead to better governance through lack of concentration of power in the bank.
Promoters' voting rights are capped, implying that promoter group cannot "control" the board or push through decisions even if it enjoys greater shareholding.
"The new RBI governor must review this ownership and control policy for banks and create an environment, which motivates high quality Indian entrepreneurs to come forward and build great banks," the SJM note said.
In September, Bandhan Bank, one of India's newest full-fledged private commercial bank, informed stock exchanges that RBI had 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.
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 to 15 percent within 15 years.
In August, Kotak Mahindra Bank informed stock exchanges about RBI's rejection of its proposal to issue perpetual non-cumulative preference shares (PNCPS) to cut promoter holding.
RBI has asked the bank to trim promoter shareholding to 20 percent of paid up capital by December 31 and 15 percent by March 31, 2020.
Vice Chairman and Managing Director of Kotak Mahindra Bank, Uday Kotak, currently holds a 30.03 percent stake in the bank. The PNPCS issue was part of Kotak's plan to pare his holding and meet the December 2018 deadline.
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 instances of Kotak Mahindra Bank and Bandhan Bank show that RBI will not show any leniency in diluting rules on the concentrated ownership.
SJM, however, called for a change in RBI's diversified ownership norms, arguing that on most occasions private bank promoters end diluting their shareholding in favour of foreign investors who now are majority owners of many Indian private banks.
The foreign ownership in HDFC bank is 72 percent, ICICI Bank is 60 percent, Aixs Bank is 52 percent, IndusInd Bank is 73 percent and Kotak Bank is 47 percent, it said.
Some speakers in the SJM meeting, attended by several independent directors of public sector banks, pointed out that such shareholding dilution primarily ends up with foreign investors who are now the majority owners of the Indian private sector banks.
The SJM note said that with the widespread acceptance of proxy advisers by foreign institutional investors, they operate in tandem, creating further challenges.
"Is diversified ownership really diversified? Effectively, decisions of foreign investors is influenced and controlled by proxy foreign advisors," the note said."It is important for an alignment of a bank with its country's objectives- such alignment starts from a deep-rooted passion for nation building and which has a long -term vision. Such passion and dedication are typical of entrepreneurs who are domestic," the note added.