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Banks may get to issue pref shares

BS Economy Bureau in New Delhi | August 14, 2003 08:07 IST

The Banking Regulation (Amendment) and Miscellaneous Provisions Bill, 2003, introduced in the Lok Sabha on Wednesday, seeks to allow banks to issue preference shares for bolstering their tier-I capital.

It provides for more teeth to the Reserve Bank of India, like supersession of bank boards, regulation of co-operative banks and powers to restrict acquisition and transfer of 5 per cent or more stake in banks.

According to the Bill, while banks will be allowed to issue redeemable or irredeemable preference shares, such shares will not carry voting rights.

The RBI may, however, specify the extent to which a bank can issue preference shares of either description.

The acquisition of 5 per cent or more stake in a bank will be subject to RBI approval. Further, any individual, firm, group or body corporate will have to inform the RBI about the transfer of 5 per cent or more stake in a bank with details of the new acquirer.

The transfer of shares will be effective if the RBI does not grant an approval within 60 days from the date of receipt of a request.

The central bank will also have the right to block such stake transfers if they are prejudicial to the interest of the bank or the public.

The Bill proposes to facilitate mergers and amalgamations of banks with other banks, including the State Bank of India and non-banking finance companies.

It proposes to amend the definition of approved securities by restricting them to those guaranteed by the Centre or states.

The deemed status of approved securities extended to shares of the State Bank of India and its subsidiaries, the state financial corporations, the warehousing corporation and regional rural banks will be withdrawn.

The Bill also proposes to empower the RBI to supersede the board of a bank or a banking co-operative society.

While it is now easy for the RBI to supersede the board of a private bank, it faces some difficulty to do so in public sector banks and co-operative societies because of intervention by the Centre and the Registrar of Co-operative Societies, respectively.

While banks are now prohibited from granting loans and advances to their directors or any firm in which they are directors, employees, managers, guarantors or managing agents, the Bill proposes to extend the prohibition to relatives of directors or to connected companies.

Connected firms would mean those under the same management as that of the bank, a joint venture, its associate or its holding company.

The RBI will be allowed to prescribe the statutory liquidity ratio and cash reserve ratio below the set floor of 25 per cent and 3 per cent, respectively.

The Bill has provided for setting up a depositor protection fund by crediting deposits remaining unclaimed for over 10 years. The fund will be used for promotion and protection of depositors' interests.

It is proposed that stockbrokers and sub-brokers be prohibited from being directors in bank boards.

The Bill has also sought to reduce the maximum tenure of directors in banks except chairmen and whole-time directors to six years from eight.

Temporary chairmen in banks and co-operative banks may be appointed for a period of 12 months, against four months now.

The Bill has proposed to set the minimum paid-up capital and reserves for Indian banks at Rs 100 crore (Rs 1 billion), for local area banks at Rs 5 crore (Rs 50 million), foreign banks Rs 100 crore and banking co-operative societies Rs 25 lakh (Rs 2.5 million).

It also proposes to allow banks to undertake derivatives and securitisation businesses and remove the prohibition on trading. For banks to set up subsidiaries for new businesses, a go-ahead from the RBI will be a must.

It further provides for insertion of a new section in the Act to levy a fine or order imprisonment up to five years for those not complying with the provisions.

RBI: More power

  • RBI can restrict acquisition of 5% or more bank shares
  • Approved securities to mean those guaranteed by the Centre or states
  • RBI can supersede bank boards, set SLR, CRR below the floor level
  • Brokers cannot join bank boards, tenure of directors reduced
  • Preference shares not to carry voting rights

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