India, perhaps, is the only country that regulates the banking sector through a ceiling on voting rights (defined in the Banking Regulation Act), and also through ownership caps (through RBI’s administrative circulars)
An oft-raised question in India’s corporate regulatory architecture is about ‘control’. The battle over ‘control’ has seen many iconic episodes in modern India’s corporate history. After all, ‘control’ is a key determinant of ‘ownership’.
An assortment of legislations and their respective definitions have, however, queered the pitch. The Companies Act, 2013, the ‘Takeover Code’ of capital markets watchdog Securities Exchange Board of India (SEBI), the government’s Foreign Direct Investment (FDI) Policy, anti-trust body Competition Commission’s stipulations and the banking regulator Reserve Bank of India’s (RBI’s) all have defined ‘control’.
One can dare say that the plethora of definitions, most of these backed by laws, have only resulted in ambiguous interpretations, particularly in the banking sphere.
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 Regulation 2 (1) (e), commonly known as the 'Takeover Code,' defines “control” as: including the right to appoint majority of the directors; or to control the management or policy decisions exercisable by virtue of shareholding or management rights.
De-jargoned, this makes the shareholding proportion, the principal, not the sole, parameter of “controlling interest”.A shareholder who ends up buying a quarter (25 percent) of the company’s stake, has to make a mandatory “open offer” to acquire at least 26 percent additional stakes from the other existing shareholders at a specified price.
The Companies Act 2013, on other hand, gives a wider, and more inclusive, definition of ‘control’. Anyone can have controlling rights either through any or all of the following: majority shareholding; management rights, shareholders’ agreement or a voting agreement.
According to Accounting Standards 21 (AS-21), a contemporary code for presenting financial statements in India, control can come through ownership, directly or indirectly, through subsidiary (ies), of more than one-half of the voting power of an enterprise, or control of the composition of the board of directors.
The Competition Commission of India (CCI) Act, the legislation that created India’s anti-trust body, says that a “group” which, directly or indirectly, have 26 percent or more of the voting rights, can appoint more than 50 percent of the board members or can control the management or affairs, will have ‘control’ of the enterprise.
While Companies Act, 2013 is the overarching legislation governing corporate affairs in India, the CCI Act definitions on ‘control’, one would assume, will largely be applicable to instances of ‘abuse of dominance’ in mergers and acquisitions, where amalgamations of corporations can lead to monopoly-like situations.
But what about banks?The oversight of Indian banks lies with RBI, which is guided by the Banking Regulation Act, 1949. This law has seen many changes over the years to factor in changing conditions in the business and financial sector.
RBI has, over the last 15-20 years, have brought in a plethora of guidelines and rules pertaining to bank ownership. The prime code supporting these guidelines is the belief that diversification of ownership is the primary pillar of bank governance. Implicit in this is the assumption that ownership is synonymous with voting rights, for it is voting rights that are needed to “control” a bank.
India, perhaps, is the only country that regulates the banking sector (the private banking sector because RBI has limited oversight powers over the public sector banks) through a cap on voting rights (defined in the Banking Regulation Act), and also through ownership caps (through RBI’s administrative circulars).
RBIs’ 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, however, capped at 15 percent, implying that a promoter group cannot 'control' the board or push through decisions even if it enjoys greater shareholding.
It is unclear whether ceiling on promoter shareholding were intended by Parliament, considering that voting rights alone have been capped in law.
In the current state of affairs in India, the banking industry has no correlation with ownership patterns. As much as public sector banks have had issues, even so-called banks with well diversified ownership holdings have had issues concerning governance and bad loans.
These multiple prescriptions on ownership and control, at times contradictory and ambiguous, as well as different rule books for banks licenced at different times under different economic conditions have resulted in a peculiar possibility. Some banks — Kotak Mahindra and Bandhan — are now staring at a seemingly insurmountable problem: to dilute owners’ stakes (through fresh issuance of equity) by as much as their entire market capitalisation.
Rules on ‘control’ and ‘ownership’ in banks should apply to all equally. After all, what’s sauce for the goose, is sauce for the gander too.For more Opinion pieces, click here.