OPINION | Vault Matters: The consequences of dichotomy of ownership structure in banks

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Last week, this column dealt with the recent mega billion-dollar fund raise in the banking sector. The column also appreciated the change in mindset of the regulator and foreign investors with respect to capital, especially the foreign banks. But we told you that this could possibly open doors for a debate on a topic extremely sensitive to promoters of Indian banks - their need to dilute stakes over time.

To be sure, foreign banks making in-roads into India through the subsidiary model can hold their stakes in the local outfit for perpetuity.  The need to gradually reduce shareholding to 15% or 26% does not arise. This was exactly the bone of contention between Uday Kotak and the regulator many years ago.

Private bank promoters need to pare stake

Even in case of Bandhan Bank, the promoter entity Bandhan Financial Holding, has to necessarily reduce its stake to 26%. So is the case with any Indian promoter or promoter entities owning banks, including AU's Sanjay Aggarwal. Even Prem Watsa, despite Fairfax, being a foreign financial sponsor, has the necessity to pare stake eventually to 26%.

Then, take the case of state-owned banks. There are those where the government has properly held its stake above 80% for years together. Even the largest Indian bank, State Bank of India, continues to remain majorly held by the Government of India, with no glide path whatsoever to pare its stake eventually. Then how does one promote larger investor interest in banks?

While capping of voting rights at 26% is understandable, and even logical, because no entity should have absolute say in any matters and voting should be a democratic process, different thresholds of shareholding for different categories of investors should be screaming for regulatory attention.

Here's the good part: topic is not being widely discussed just yet. That’s also probably because the deals are still in the works and final outcome is awaited. But maybe a year from today, this discrepancy, which is possibly unintentional, is likely to burst into a hot topic of debate. The regulator needs to harmonise norms and here's why.

If anything, there should be a level playing field for Indian promoters as well. The point is well taken that most of the Indian promoters have their wealth entrenched through their diversified conglomerates, and hence may not be eligible to seek a bank license. But the regulations should be congenial enough for more of Uday Kotak-like financial wizards to conceive, nurture, build and grow financial conglomerates.

Opting for the NBFC route

The lack of it or an eventual glide path is what is possibly nudging many entrepreneurs to opt for the NBFC route rather than solving the banking challenge. Of course, there is no money to be made as an NBFC in terms of valuations, the real fun is playing the big boys' game, which is being in the business of banking.

In fact, many of the license applications, including that of bigwigs such as Sam Ghosh and Sachin Bansal have been rejected by the RBI for not satisfying the fit and proper criteria. This means that the next Uday Kotak is still in the making. To be fair, RBI has cultivated a fresh crop of promoter CEOs through the small finance bank route, the finest examples being Sanjay Agarwal and Equitas' PN Vasudevan. But even they have faced restrictions on their shareholding.

If these barriers are perhaps removed or brought at par with other structures, the big boys league may truly become one where people queue up for membership.