Jurisdiction - India
Reports and Analysis
India – Banking And Finance Snapshots.

28 January, 2014

 

Legal News & Analysis – Asia Pacific – India – Banking & Finance

 

  • On November 6, 2013, RBI released the Scheme for Setting up of Wholly Owned Subsidiaries (‘WOS’) by foreign banks in India (‘Scheme’). RBI had been proposing such a framework for foreign banks to set up wholly owned subsidiaries since 2008, as mentioned in their Roadmap for the presence of foreign banks in India in 2005 and several other committee reports and discussion papers. The Scheme now makes it mandatory for certain foreign banks to operate as WOS, while incentivising other foreign banks that operate as branches to convert to WOS.

 

The following types of foreign banks have been mandated to enter into only through the WOS mode: (i) banks with complex structures; (ii) banks that do not provide adequate disclosure in their home jurisdiction; (iii) banks that are not widely held; (iv) banks from jurisdictions having legislation giving a preferential claim to depositors of their home country in winding up proceedings; and (v) banks that commenced banking business in India in August, 2010, that were required to furnish an undertaking to RBI that they will convert their branches to WOS if required by RBI.

 

Foreign banks to which the aforesaid conditions do not apply can opt for a branch or WOS form of operations. Foreign banks that commenced banking business in India before August 2010 will have the option to continue their banking business through the branch mode but have been incentivised to convert into WOS by providing “near national treatment” to WOS.

 

A foreign bank opting for branch form of presence will convert into a WOS as and when the above conditions become applicable to it or it becomes systemically important on account of the size of its balance sheet in India.

RBI has proposed near-national treatment for WOS subsidiaries of banks with respect to inter alia, the following aspects:

 

    • Branch licensing: The recently liberalised branch expansion guidelines as applicable to domestic scheduled commercial banks will generally be applicable to WOSs of foreign banks except that they will require prior approval of RBI for opening branches at certain locations that are sensitive from the perspective of national security.

 

    • Initial Capital: The initial minimum paid-up voting equity capital for a WOS must be INR5b for new entrants. Existing branches of foreign banks desiring to convert into WOS must have a minimum net worth of INR5b. This is in line with the minimum capital requirement imposed for new private sector banks in terms of the applicable RBI licensing guidelines.

 

    • Priority Sector lending requirements: Priority sector lending requirements have been entirely aligned with the treatment of domestic banks, with only the flexibility of 5 years for the achievement of targets.

 

    • Rupee Resource raising: WOS will be permitted to raise rupee resources through the issuance of non equity capital instruments such as innovative perpetual debt instruments, Tier I & II preference shares and subordinate debt, as permitted for domestic banks.

 

    • Declaration of dividend: WOS may declare dividends, subject to compliance with minimum prudential requirements prescribed by RBI, and such dividends may be repatriated in compliance with FEMA.

 

    • Setting up of subsidiaries / NBFCs: WOS will be permitted to invest in subsidiaries subject to compliance with extant regulations. However, the approval for the setting up of Non Banking Finance Companies (‘NBFCs’) will be granted after considering whether the parent entity’s subsidiaries already include an NBFC undertaking similar activities.
 

There are, however, certain points of distinction with domestic banks, including restriction on further capitalisation if the foreign bank branches in India exceed 20 per cent of the capital and reserves of the entire banking system the requirement to dilute foreign ownership to 74 per cent in line with the FDI policy, and calibrated permission for M&A transactions with domestic banks. On account of the foregoing differences, it is not clear if existing foreign banks will opt to convert to WOS.

 

  • By way of a circular dated December 3, 2013, RBI permitted holding companies and core investment companies (‘CICs’) to avail of external commercial borrowings (‘ECBs’) for project use in Special Purpose Vehicles (‘SPVs’) that are engaged in infrastructure as defined in the extant ECB guidelines subject to inter alia certain prescribed terms and conditions: Interestingly, RBI has not specified the manner in which the CIC / holding company is required to infuse the ECB funds into the SPV.

 

  • On December 17, 2013, RBI released a discussion paper ‘Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy’ (‘NPA Discussion Paper’). The NPA Discussion Paper outlines a corrective action plan that will incentivise early identification of problematic cases, timely restructuring of accounts that are considered to be viable, and taking of prompt steps by banks for recovery or sale of unviable accounts. The main proposals in the NPA Discussion Paper are set out below:
 

i. Early formation of a lenders’ committee with timelines to agree to a plan for resolution and incentives for lenders to agree collectively and quickly to a plan – better regulatory treatment of stressed assets if a resolution plan is underway, accelerated provisioning if no agreement can be reached.
ii. Improvement in current restructuring process, mandatory independent evaluation of large value restructurings, with a focus on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors.
iii. More expensive future borrowing for borrowers who do not co-operate with lenders in resolution.
iv. More liberal regulatory treatment of asset sales through certain prescribed means.

 

  • The Committee of Comprehensive Financial Services for low income households and small businesses (‘CCFS’) submitted its report to the Governor of RBI on December 31, 2013. The key recommendations of the CCFS include:
 

i. Restoration of the permission to NBFCs to act as business correspondents (‘BCs’) of a bank and elimination of the distance criteria between the BC and the nearest branch of the sponsor bank.
ii. Regional weightages based on the level of difficulty in lending to be imposed for priority sector lending targets. CCFS has also recommended the transfer of priority sector assets through priority sector lending certificates and securitisation.
iii. Collapsing of all categories of NBFCs into: (i) CICs and (ii) all other NBFCs.
iv. Regulatory convergence between banks and NBFCs with regard to classification of non-performing assets and eligibility under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
v. Creation of a new category of payment banks for garnering deposits and permitting remittances, subject to the same regulatory framework
vi. Creation of a State Finance Regulatory Commission (‘SFRC’) into which all the existing State Government-level regulators can be merged, along with functions like the regulation of non-governmental organisations, micro finance institutions and local money services businesses. The Committee has recommended that RBI should issue regulations on assessing suitability for clients prior to offering specific products and services, applicable specifically for individuals and small businesses, to all regulated entities within its purview so that the violation of such regulations would result in penal action for the institution as contemplated under the relevant statutes through a variety of measures, including fines, cease-and-desist orders, and modification and cancellation of licences.

 

AZB

 

For further information, please contact:

 

Zia Mody, AZB & Partners
[email protected]

 

Abhijit Joshi, AZB & Partners 
[email protected]


Shuva Mandal, AZB & Partners 

[email protected]

 

Samir Gandhi, AZB & Partners
[email protected]


Percy Billimoria, AZB & Partners 

[email protected]

 

Aditya Bhat, AZB & Partners 
[email protected]

 

AZB & Partners Banking & Finance Practice Profile in India

 
Banking & Finance Law Firms in India

Comments are closed.