Banking Laws Amendment Bill 2011

Posted in Finance Articles, Total Reads: 1831 , Published on June 26, 2013

Indian Banking Sector has been flourishing post independence of India. A numerous changes in the regulations and functioning of the banks have been brought over the years in order to adapt to the changing needs of the growing Indian Economy. Still the sector is plagued with its own set of problems. The Banking Laws Amendment Bill 2011 which was passed by both the Houses of the Parliament during its Winter Session of the year 2012 seek to address these problems. The amendments were made in the Banking Regulation Act, 1949 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980.

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The major areas where the Bill focusses on are:

• RBI Gets More Powers

The ammendment has accorded far reaching powers to the regulator. The Banker’s Bank (RBI) now has the power to supersede the boards of banks. The RBI can now overtake the entire board which is a major change when compared to the past. Earlier, the RBI had power to remove only a director or officers of a Banking Company and not the entire board.

Now the RBI also has the power to inspect the books of accounts of associates including the holding company, joint venture, subsidiary company, an enterprise that controls the composition of the board of directors or other bodies governing the banking company and entities that would be benifited from the banking company.

There has been a considerable increase in terms of monetary penalties that RBI can impose on banks for violation of RBI rules and directives. A stricter approach has been adopted because the issue of new banking liscences necessitates the need of greater regulatory control.


• Raise in the Voting Rights in Banks

The Bill has raised the voting rights of the shareholders from 1% to 10% for public sector bankers and from 10% to 26% for private banks.The bill has also increased the authorized capital of the banks from Rs 1500 crore to Rs 3000 crore. All this has paved way for investors to invest more in both public sector and private sector banks. At the same time it has increased the say of promoters who now will have greater influence on the decision of the management. This may be harmful in certain situations where the promoters only seek the welfare of the banking company and may forget about the economic welfare of the country. This is where a stricter regulatory norms will come to force.


• Issue of Bonus Shares

The Bill provides provisions for public sector banks to issue rights shares and bonus shares. They can even split the shares into lower denomination which facilitates the trading of their shares. This is a good news for public sector banks and their shareholders as till now only private sector banks have been giving away free shares to their shareholders as bonus shares. Public sector banks, inspite of holding huge reserves, could not issue bonus shares so far because the enactments through which they were nationalized provided no provisions to issue bonus shares.

State Bank of India (SBI), which is the biggest bank in the country, has the largest free reserves which is nearly 125 times its paid up capital. The free reserves of SBI is Rs.83,280 crore against its paid up capital of Rs.671 crore. If SBI issues bonus shares, the stock market will be bullish, which has till now given a low valuation for all public sector banks as the public sector banks have been unfriendly to the investors till now. Now the bill hascleared the way for them to issue bonus shares, the government should promote banks with substantial reserves to issue bonus shares. The government will also be benefited immensely from such a move as it has a majority holding in all the public sector banks. It will also help banks to raise fresh capital easily from the market and will therefore help them in meeting their capital adequacy requirements prescribed under Basel III norms.


• Foreign Banks

Earlier the foreign banks had to pay 20-30% tax as capital gains and stamp duty when they transferred their branches to a new legal entity.

But the Bill allows foreign banks to transfer shareholding to a holding company or to convert their Indian operations into a wholly owned subsidiaries without the need to pay the stamp duty. This move will be helpful for the foreign banks who are seeking a larger role have a freedom to expand their branches and operations.



The Finance Minister of India Mr. P Chidambaram said, “We need 2-3 world-sized banks. China has three among the world's top 20. We have none. We need more banks". He was quoting the need of a growing economy like India. India is seen as the next superpower along with China. But for that we need a sound and robust finance sector that can provide a conducive environment for growth.

The Banking Laws Amendment Bill 2011 is seen as a major step in that direction. It paves the way for banks to grow into large organizations and increase capitalization. The major impact that the Bill has been successful in bringing is in terms of the power granted to RBI. By giving RBI the power to supersede the boards of banks and inspect the books of all the related entities, it has cleared the way for RBI to issue new licenses. Till now RBI has been apprehensive in issuance of new licenses fearing a misuse of it by the new banks.

We will now see more banks competing in the banking space. This will bring new financial products and advanced technology. All this will lead to a healthy competition. Retail customer will benefit to a great extent because of the deeper penetration of banking services. They will have a variety of options both for deposit and credit products. Financial Inclusion, which has been the focus area of the RBI as well as the government, is certainly going to gather pace with new entrants in the banking space.

Overall the Bill provides a strong platform using which the Indian Banking Sector can reach new heights and compete with the big names at the global level. It provides an enabling environment for the banking sector to grow and also the Indian Economy to flourish.

This article is authored by Akshay Goyal And Soumyajit Datta from NMIMS Mumbai

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