RBI
releases Framework for setting up of Wholly Owned Subsidiaries by Foreign Banks
in India
dear
students: note the news about this WOS will be updated in news and papers too
have a note of it question area for prelims and mains...........if u didn’t
understand anything or doubts mail us :rds_ias.study@yahoo.com
The
Reserve Bank of India (RBI) today released on its website, the framework for
setting up of Wholly Owned Subsidiaries (WOS) by foreign banks in India . The
policy is released in pursuance of the announcement made in the Second Quarter
Review of Monetary Policy 2013-14 ( para 26 ). The policy is guided by the two
cardinal principles of (i) reciprocity and (ii) single mode of presence. As a
locally incorporated bank, the WOSs 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 Reserve Bank’s prior
approval would be required). They would also be able to participate fully in
the development of the Indian financial sector. The policy incentivises the
existing foreign bank branches which operate within the framework of India’s
commitment to the World Trade organisation (WTO) to convert into WOS due to the
attractiveness of near national treatment. Such conversion is also desirable
from the financial stability perspective. To provide safeguards against the
possibility of the Indian banking system being dominated by foreign banks, the
framework has certain measures to contain their expansion if the share of
foreign banks exceeds a critical size. Certain measures from corporate governance
perspective have also been built in so as to ensure that the public interest is
safeguarded.
Background In 2004,of WOS:-
Government of India with a view to
liberalising foreign direct investments (FDI) in private sector banks raised
the FDI limit to 74 per cent in the private sector banks under the automatic
route and also permitted foreign banks, regulated by a banking supervisory
authority in the home country and meeting the Reserve Bank’s licensing criteria
to hold 100 per cent paid up capital, to set up a WOS in India. To
operationalise the FDI guidelines, the Reserve Bank released the roadmap for
presence of foreign banks in India in consultation with the Government of India
on February 28, 2005. The roadmap was divided into two phases – the first phase
spanning the period March 2005 to March 2009 and the second phase beginning
after a review of experience gained in the first phase. In the first phase,
foreign banks already operating in India were allowed to convert their existing
branches to WOS while following the ‘one-mode presence’ criterion and the WOS
was to be treated at par with the existing branches of foreign banks for branch
expansion in India. The second phase of the roadmap which was to commence in
April 2009 envisaged removal of limitations on the operations of WOS and
treating them on par with the domestic banks to the extent appropriate. During
the first phase no foreign bank came forward to set up or convert their
branches into WOS in the absence of adequate incentives. As a sequel to the roadmap
of 2005 and pursuant to the announcements made in the Annual Policy Statement
for 2010-11, the Reserve Bank issued a Discussion Paper in January 2011 on the
mode of presence of foreign banks in India. The framework for setting up of WOS
by foreign banks in India has now been finalised taking into account the
feedback received on the Discussion Paper and factoring in the lessons from the
crisis which favours a subsidiary mode of presence from financial stability
perspective.
Key features of the Framework :-
Banks
with complex structures, banks which do not provide adequate disclosure in
their home jurisdiction, banks which are not widely held, banks from
jurisdictions having legislation giving a preferential claim to depositors of
home country in a winding up proceedings, etc., would be mandated entry into
India only in the WOS mode.
Foreign
banks in whose case the above conditions do not apply can opt for a branch or
WOS form of presence. A foreign bank opting for branch form of presence shall
convert into a WOS as and when the above conditions become applicable to it or
it becomes systemically important on account of its balance sheet size in
India. Foreign banks which commenced banking business in India before August
2010 shall have the option to continue their banking business through the
branch mode. However, they will be incentivised to convert into WOS
because of the attractiveness of the near national treatment afforded to WOS.
To prevent domination by foreign banks, restrictions would be placed on further
entry of new WOSs of foreign banks/ capital infusion, when the capital and
reserves of the WOSs and foreign bank branches in India exceed 20 per cent of
the capital and reserves of the banking system. The initial minimum paid-up
voting equity capital for a WOS shall be ` 5 billion for new entrants. Existing
branches of foreign banks desiring to convert into WOS shall have a minimum net
worth of ` 5 billion. The parent of the WOS would be required to issue a letter
of comfort to the RBI for meeting the liabilities of the WOS.
Corporate
Governance – (i) not less than two-third of the directors should be
non-executive directors; (ii) a minimum of one-third of the directors should be
independent of the management of the subsidiary in India, its parent or associates;
(iii) not less than fifty per cent of the directors should be Indian nationals
/NRIs/PIOs subject to the condition that not less than 1/3rd of the directors
are Indian nationals resident in India.
The
branch expansion guidelines as applicable to domestic scheduled commercial
banks would generally be applicable to WOSs of foreign banks except that they
will require prior approval of RBI for opening branches at certain locations
that are sensitive from the perspective of national security. Priority Sector
lending requirement would be 40 per cent for WOS like domestic scheduled
commercial banks with adequate transition period for existing foreign bank
branches converting into WOS. On arm’s length basis, WOS 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,
WOS should not provide counter guarantee to its parent for such support. WOSs
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 will have to list
themselves. The issue of permitting WOS to enter into M&A transactions with
any private sector bank in India subject to the overall investment limit of 74
per cent would be considered after a review is made with regard to the extent
of penetration of foreign investment in Indian banks and functioning of foreign
banks (branch mode and WOS).
Priority Sector Lending is an important
role given by the Reserve Bank of India (RBI) to the banks for providing a specified portion of the
bank lending to few specific sectors like agriculture or small scale
industries. This is essentially meant for an all round development of the
economy as opposed to focusing only on the financial sector.[
Capital
adequacy:the
statutory minimum reserves of capital which a bank or other financial
institution must have available.
