New banking laws to make it easier for PSU banks to raise capital

The Banking Laws (Amendment) Bill, 2011 passed by both houses of Parliament would enable public sector banks to raise capital by issue of preference shares or rights issue or issue of bonus shares. It would also enable them to increase or decrease authorised capital with approval from the government and RBI, without being limited by the ceiling of a maximum of Rs3,000 crore.

The amended Act would also strengthen the regulatory powers of the Reserve Bank of India (RBI) to further develop the banking sector in India, the government said today.

Besides, the amendments would pave the way for issue of new bank licences by RBI, which in turn would help achieve the goal of financial inclusion by providing more banking facilities and also create more employment opportunities to the people at large in the banking sector.

The salient features of the bill are:

  • Enable banking companies to issue preference shares subject to regulatory guidelines by the RBI;
  • Increase the cap on restrictions on voting rights;
  • Create a Depositor Education and Awareness Fund by utilising the inoperative deposit accounts;
  • Provide prior approval of RBI for acquisition of 5 per cent or more of shares or voting rights in a banking company by any person and empowering RBI to impose such conditions as it deems fit in this regard;
  • Empower RBI to collect information and inspect associate enterprises of banking companies;
  • RBI also gets powers to supersede board of directors of a banking company;
  • Provides for primary cooperative societies to secure RBI licence to carry on the business of banking;
  • Provides for special audit of cooperative banks at instance of RBI by extending applicability of section 30 to them; and
  • Enables nationalised banks to raise capital up to Rs3,000 crore through `bonus' and `rights' issue and also enable them to increase or decrease the authorised capital with approval from the government and RBI.

The Standing Committee of Finance, which gave its report on the bill on 13 December 2011, has recommended enactment of the bill subject to the following modifications:

  1. Voting rights in banks may be restricted up to 26 per cent, and
  2. The Depositors' Education and Awareness Fund may be used for the purpose of promoting depositors' interests.

Further, the Indian Banks' Association (IBA), RBI and industry associations have proposed the following additional amendments:

  1. Exempt guarantee agreements of banks from the purview of the section 28 of the Indian Contract Act, 1872 to bring finality to redemption of such guarantees;
  2. Allow select directors on the board of RBI a fixed maximum tenure of eight years with terms of not more than two terms of four years each either continuously or intermittently in consonance with the directions of the ACC;
  3. Exempt conversion of branches of foreign banks to wholly owned subsidiary entities of foreign banks and transfer shareholding of banks to the holding company structure (pursuant to guidelines of RBI) from payment of stamp duty; and
  4. Ensure inspection of the associate enterprise of a banking company by RBI jointly with the sector regulator and avoid unnecessary inspections so as to encourage regulatory coordination.