Lok Sabha passes Banking Bill, clears way for new banking licenses

New Delhi:  The Lok Sabha yesterday passed the Banking (Amendment) Bill, aimed at attracting more foreign investment into the banking industry in yet another move by Prime Minister Manmohan Singh to open up Asia's third-largest economy.

The Bill was passed after the government earlier yesterday agreed to drop the contentious Forwards Markets Contract Clause, which proposed permitting banks to enter commodity futures trading.

The passage of the Bill was critical to the government as it paves the way for the Reserve Bank of India (RBI) to issue new banking licenses to the private sector. Late November, Finance Minister P. Chidambaram had said the central bank should begin issuing new bank licences, and that amendments to the Bill were simply to formalise the powers that the central bank was seeking. However, RBI Governor D Subbarao had said it would be not possible without fulfilling the enabling conditions.

"In response to the suggestions made during the consultations, I have already given notice that the new clause (Forwards Contract Market) will not be pressed. In a Parliamentary democracy, there has to be a give and take and we have accepted withdrawing the clause," Mr Chidambaram said after the Bill was tabled in the Lok Sabha yesterday.

BJP leader and former finance minister Yashwant Sinha, who heads the Parliamentary Standing Committee on Finance, had demanded that the Bill be referred back to the Standing Committee as the futures trading clause was introduced after the committee had submitted its report on the Bill.

Mr. Chidambaram had ruled out sending the Bill for reconsideration.

The Opposition had claimed that allowing banks to trade in commodity futures would lead to high-risk speculative trading, adding that the futures trading watchdog — Forward Markets Commission (FMC) — lacks teeth to take action on a potential substantial loss for investors.

In October this year, the Cabinet approved the Forward Contract Regulation Act (FCRA) Amendment Bill to give more powers to the FMC, but the Bill is yet to get Parliamentary approval.

Although there have been no recent public comments from the RBI on this issue, it had earlier objected to futures trading, saying the step could add to the speculative activities of banks.

The Competition Commission clause in the Banking Bill has also been modified. This allows the RBI to remain the banking regulator, while the Competition Commission of India (CCI) will regulate mergers and acquisitions. CCI will have the power to investigate and clear mergers and acquisitions in the banking sector, the Finance Minister said.

Introduced in the Lok Sabha in March 2011, the Bill also gives the RBI the power to supersede bank boards as well as to inspect the books of associates of banking company.

It also provides for voting rights to investors in private sector banks commensurate with their shareholding. The cap on voting rights for investors in private sector lenders, such as HDFC Bank and ICICI Bank, will now rise to 26 per cent from 10 per cent, and to 10 per cent for government banks, such as State Bank of India, from just 1 per cent.

The Bill allows foreign banks to convert their Indian operations into local subsidiaries or transfer shareholding to a holding company of the bank without paying stamp duty. Foreign banks have long sought these changes which they say will encourage them to expand their operations in India. Under the current laws, overseas lenders, such as Citibank and Standard Chartered, have to pay 20-30 per cent tax as capital gains and stamp duty when transferring branches to a new legal entity.

Mr. Chidambaram also said there are no plans to retrench staff and also no proposal to merge any small bank with bigger state-run banks.

Plans are also afoot to hire more in public sector banks; about 84,500 people will be hired by public sector banks this year. "Also, 6,000 branches will be opened each year," Mr. Chidambaram added.

The government will infuse another Rs 15,000 crore into public sector banks by the end of this financial year.

"We have to infuse capital in the banks so that they can lend. The passage of the Bill allows public sector banks to look at the option of raising funds through bonus shares and rights issues, but this is not the route that the government is going to follow for this year’s capital infusion. The funds will be infused by bonus shares and rights issue.

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