Wants RBI to relax the rules on ownership in private sector banks
The RBI has set up a committee under retired bureaucrat P K Mohanty to review the guidelines for private sector banks to bring them on a level with “international practices as well as domestic requirements”. The report is due in a week
The government is veering towards the view that exiting a public sector bank should be total when it is privatised. To make the sale attractive, however, the government wants the Reserve Bank of India (RBI) to relax the rules on ownership in private-sector banks.
A top government source said there had been intense discussion among the Prime Minister’s Office (PMO), the finance ministry, and the RBI on what level of stake should be retained.
There have also been talks with specialists outside the government this financial year, particularly since July, when the PMO had asked the officers concerned for a thorough debate on the subject, spread over two days.
Since then, after several iterations, government officials have come round to the view not to retain any shareholding in a bank which has to be divested. It will be impossible to make a strategic partner believe the government will stay off board decisions “even if it has only 10 per cent shareholding in a bank”, the source said. For instance, under the Indian Companies Act, a shareholder with 10 per cent of the company’s paid-up share capital, by a written notice, may requisition the board to convene an extraordinary general meeting. There are other ways in which the government will assert its presence and this tension with the new management will not help the bank grow.
The RBI in June set up a committee under P K Mohanty, a retired bureaucrat, to review the licensing and ownership guidelines for Indian private-sector banks to bring them on a level with “international practices as well as domestic requirements”. The report is due in a week. Based on it, work on exit from some public-sector banks will begin.
Among the 12 public-sector banks, the government is planning to sell its stake in some of the four smallest ones. These include Bank of Maharashtra, Punjab and Sind Bank, and Indian Overseas Bank. The bigger banks, into which some others have been merged, do not come into the picture, said the source.
In the meeting with stakeholders Prime Minister Narendra Modi is learnt to have advised them that exit from smaller banks to make them “autonomous” should not mean “individual autonomy”.
It is a difficult choice, a source explained. While guidelines from the prime minister do not mean the government needs to keep a shareholding, it has to ensure stiff corporate governance standards in the divested bank. This means the government will have to retain the confidence of the capital market that its exit will not jeopardise the sense of security of the depositors. Ramping up corporate governance standards will hopefully ensure that the bank will not suffer a ratings downgrade once it is off government support. Both S&P and Moody’s have written in their assessment of public-sector banks that their ratings build in sovereign support.
The Centre is reconciled to divestment in banks not happening this financial year. The authorities are keen to figure out how some of the old private-sector banks, including Lakshmi Vilas Bank, shape up.
The RBI sets stiff standards for an investor to join the boards of private-sector banks and that excludes all business groups that have an exposure to other sectors. Given the “fit and proper criteria” for selecting a new owner of these banks, the market appetite to swallow a public-sector bank too will be limited, officials feel. Putting up more than one for sale in a year will be a tough call.