Banking Laws (Amendment) Bill 2012

Banking Laws (Amendment) Bill 2012

The Banking Laws (Amendment) Bill 2011 was introduced in order to amend the Banking Regulation Act, 1949, the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980. The said Bill has been passed by both the Houses of Parliament.

This Bill would strengthen the regulatory powers of Reserve Bank of India (RBI) and to further develop the banking sector in India. It will also enable the nationalized banks to raise capital by issue of preference shares or rights issue or issue of bonus shares. It would also enable them to increase or decrease the authorized capital with approval from the Government and RBI without being limited by the ceiling of a maximum of Rs.3000 crore.

Salient features of the Bill:

a)      The new regulation gives power to the Reserve Bank of India (RBI) to issue new bank licenses.

b)      The bill will increase voting rights of investors in the private sector banks to 26 percent from the existing 10 percent. This will make the Indian banking sector attractive for the overseas investors and is expected to lead to consolidation in the industry.

c)      The Bill will allow foreign banks to convert their Indian operations into local subsidiaries or transfer shareholding to a holding company of the bank without paying stamp duty. Foreign banks have long sought these changes to the law which they say would encourage them to expand their operations in India. Under current laws, foreign banks such as Citibank and Standard Chartered have to pay 20-30 per cent tax as capital gains and stamp duty when transferring branches to a new legal entity.

d)      The Bill proposes to establish a “Depositor Education and Awareness Fund”.  The Fund will take over the deposit accounts which have not been claimed or operated for a period of ten years or more.

e)      The amended bill will remove the ceiling of Rs 3000 crore on the amount of authorized capital that nationalized banks must hold. The approval to increase or decrease the authorized capital will have to be taken from the Central Government and the RBI. This move will help banks to enhance their capital by seeking appropriate approvals according to the need they face.

f)       The amended bill also states that nationalized banks will be allowed to issue bonus and rights shares without the explicit approval of the RBI and the government. This step lends them a whole lot of functional autonomy at the operational level, and provides them great relief in terms of capital infusion going ahead.

g)      The bill will give powers to the Reserve Bank of India (RBI) to inspect the books of all associates of a banking company. This is a major step as it expedites the process of RBI clearing banking licenses to companies who want to foray into the sector.

Under the regulations of the Banking Regulations Act, 1949, the RBI has the power to remove a director or any other officers of the banking company.  The Statement of Objects and Reasons of the Bill states that such power is not adequate if the entire Board of Directors is working against the interest of the depositors and the company. This Bill proposes to confer powers on the RBI to supersede the Board of Directors of a banking company for not more than 12 months and appoint an administrator for the managing the company during that period.