Amendment is good news for private sector banks

The Banking Laws (Amendment) Bill, 2012, was recently passed by the parliament of India and received the assent of the president of India on 5 January 2013 (the Amendment). The Amendment has been heavily debated since it was first introduced in May 2005 and has undergone extensive changes in the course of seven and a half years. In addition to strengthening the supervisory powers of the Reserve Bank of India (RBI), the Amendment seeks to make investments in Indian private sector banks more attractive for prospective investors.

Voting rights

In terms of section 12(2) of the Banking Regulation Act, 1949 (BR Act), a shareholder of a private sector bank is not permitted to exercise voting rights on poll in excess of 10% of the total voting rights of all shareholders of the bank. The Amendment has raised the ceiling on voting rights from 10% to 26%, which would be implemented in a phased manner as determined by the RBI.

It is worthwhile to note that the earlier draft of the Banking Laws (Amendment) Bill, 2012, had proposed a complete removal of the voting rights ceiling, thus allowing a bank’s shareholders to exercise voting rights in proportion to their shareholding. The Standing Committee on Finance, however, reiterated that the legislative intent behind the 10% ceiling under the BR Act was to address concerns associated with the concentration of management control of banks in the hands of a single entity or conglomerate. In an attempt to balance the above concern with the objective of attracting further investment from investors, the Standing Committee on Finance recommended that the ceiling on voting rights be raised to 26%.

Ravindra Bandhakavi is a partner and Parnika Malhotra is an associate at Amarchand & Mangaldas & Suresh A Shroff and Co, New Delhi. The views expressed in this article are those of the authors and do not reflect the position of the firm.