RBI sets norms for local incorporation of foreign banks

The Reserve Bank of India (RBI) today announced the framework for setting up of wholly-owned subsidiaries by foreign banks in India, under which such banks would be given near national treatment, enabling them to open branches anywhere in the country at par with Indian banks.

RBI also opened the route for foreign banks to expand through acquisition of private domestic lenders, subject to the overall investment limit of 74 per cent and after a review of the extent of penetration of foreign investment in Indian banks and functioning of foreign banks.

The policy, which is in line with the announcement made in the Reserve Bank's second quarter monetary policy review, is based on the cardinal principles of reciprocity and single mode of presence, RBI said today.

Foreign banks, which commenced banking business in India before August 2010, will have the option to continue their banking business through as branches of foreign banks.

However, they will be incentivised to convert into wholly-owned subsidiaries because of the attractiveness of the almost national treatment afforded to wholly-owned subsidiaries.

Locally incorporated wholly-owned subsidiaries of foreign banks will be given "near national" treatment, which will enable them to open branches anywhere in the country at par with Indian banks, except in certain sensitive areas where the RBI's prior approval would be required.

They would also be able to participate fully in the development of the Indian financial sector.

However, to prevent domination by foreign banks, restrictions would be placed on further entry of new wholly-owned subsidiaries of foreign banks and capital infusion, when the capital and reserves of the wholly-owned subsidiaries and foreign bank branches in India exceed 20 per cent of the capital and reserves of the banking system.

RBI has prescribed an initial minimum paid-up voting equity capital of Rs500 crore for new wholly-owned subsidiaries of a foreign bank and a minimum net worth of Rs500 crore for existing branches of foreign banks desiring to convert into wholly-owned subsidiaries.

The parent of the wholly-owned subsidiaries would be required to issue a letter of comfort to the RBI for meeting the liabilities of the wholly-owned subsidiaries.

Under the corporate governance norms prescribed by the RBI, at least two-third of the directors of a wholly-owned subsidiaries should be non-executive directors and a minimum of one-third of the directors should be independent of the management of the subsidiary in India, its parent or associates.

Also, not less than 50 per cent of the directors should be Indian nationals / NRIs / PIOs, subject to the condition that not less than one-third of the directors are Indian nationals resident in India.

Priority sector lending requirement would be 40 per cent for wholly-owned subsidiaries as in the case of domestic scheduled commercial banks with adequate transition period for existing foreign bank branches converting into wholly-owned subsidiaries.

On arm's length basis, wholly-owned subsidiaries would be permitted to use parental guarantee / credit rating only for the purpose of providing custodial services in India and for their international operations.

However, wholly-owned subsidiaries should not provide counter guarantee to their parent banks for such support.

Wholly-owned subsidiaries may, at their option, dilute their stake to 74 per cent or less in accordance with the existing FDI policy. In the event of dilution, they would have to get themselves listed on a stock exchange.

The issue of permitting wholly-owned subsidiaries to acquire private sector banks in India subject to the overall investment limit of 74 per cent would be considered after a review of the extent of penetration of foreign investment in Indian banks and functioning of foreign banks (branch mode and wholly-owned subsidiaries), RBI said.

RBI said foreign banks that want to enter the country but have complex structures or lack adequate disclosure, or which are not widely held, will be allowed in only as wholly-owned subsidiaries.