Prashant Kataria
April 5, 2011
To Vote or Not to Vote – That’s not the question…It’s how to Vote
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The archaic restriction with respect to voting rights contained in the Banking Regulation Act, 1949 (“BR Act”), prohibiting a person holding shares in a private bank from exercising voting rights in excess of 10% of the total voting rights of all the shareholders, has been a bane for many a shareholder including foreign investors for a long time now.[1] However, with the approval of the Banking Laws (Amendment) Bill, 2011 (“Bill”) by the Union Cabinet on March 3, 2011, there finally seems to be light at the end of the tunnel for shareholders in such banks as well as prospective investors, both Indian and foreign. It is pertinent to note that this is the second time an amendment in this regard to the BR Act has been proposed by the Reserve Bank of India (“RBI”), the first one being in 2005, which did not reach its logical conclusion the last time around. Now that the Cabinet has approved the Bill, it will be tabled in the Parliament for being passed by it to become part of the BR Act. In fact, the Finance Minister, in his recent budget speech, has mentioned that the Bill shall be moved in the Parliament along with other legislations relating to insurance, pension, etc.

Section 12(2) of the BR Act states that “No person holding shares in a banking company shall, in respect of any shares held by him, exercise voting rights on poll in excess of ten per cent of the total voting rights of all the shareholders of the banking company”. This has resulted in no entity being able to exercise voting right of more than 10% in a private sector bank despite holding a much larger stake in such banking company, which acts as a huge detriment to majority shareholders who may want to have a say in the management of the bank.

Even from the view point of a foreign investor, I see this restriction working heavily against their inclination to invest in private banks in India. The current FDI Policy allows foreign direct investment in private banks through automatic route for up to 49% of the share capital and via the FIPB approval route for investments from 49% to 74% of the share capital of the private banks. However, although foreign investors are permitted to own shares in a private bank up to 74% of its share capital, they are not allowed to exercise voting right in excess of 10% of the total voting rights of all the shareholders in such a bank as the FDI Policy also mentions this and makes reference in this regard to the BR Act, which, in my opinion, has been and continues to be an unfair constraint on such foreign investors.

This restriction has hampered investment by some foreign banks into Indian private banks and in the past, this was one of the main reasons for a proposed investment by a major south-east Asian bank in an Indian private bank not going through. Though it is clear from many instances reported in the media that foreign banks are keen to ride on the India growth bandwagon and access the deep and vast market available here, their plans are nipped in the bud as this voting restriction usually does not bode well with the senior management in such foreign banks which would consider such an impediment a major roadblock in their typical strategy of protecting their investment through pro-active participation in the running and management of their investee banks in other jurisdictions. With the passing of the Bill, the abovementioned restriction under Section 12(2) of the BR Act shall be done away with and voting rights in private banks shall be aligned in proportion with the shareholding.

It is heartening to know that this antiquated provision is finally on the verge of being amended to bring it in line with the current position of law in other developed economic jurisdictions across the globe. This, in my view, would indeed be a shot in the arm for the Indian banking industry, resulting in increased financial activity, both domestic and foreign, in this burgeoning sector.

[1] The situation is bleaker still in public sector banks where a person can have a maximum of 1% voting right. However, it could be said that this does not matter in the public sector banks because the government is a majority shareholder in almost all instance.

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