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Banking Laws ( Amendment ) Bill 2012

The Banking Laws (Amendment) Bill, 2012 was cleared by both the Houses of the Indian Parliament in December 2012 and awaits the President’s assent to become the Banking Laws (Amendment) Act, 2012. 
The Bill aims to address the capital raising issues in banks, strengthen the regulatory powers of the banking regulator, the Reserve Bank of India (RBI) and pave the way for issuance of new banking licences.
The salient features of the Banking Laws (Amendment) Bill, 2012 are outlined as below
• Regulatory power to supersede board of banks
Whilst in terms of the extant Banking Regulations Act, 1949, (‘BR Act’), the RBI could remove a director or any other officer of the bank, this Bill empowers the RBI to supersede the board of directors of a bank for up 12 months if it feels that the board is not working in the interest of shareholders and depositors’.  In such a case, RBI could run the bank by appointing an administrator during the period. 
RBI now being armed with powers to supersede the Board, it could now effectively influence and regulate management of banks.  To limit arbitrary exercise of power by the RBI, the Bill provides for consultation with the Indian Government.  In terms of the Nationalisation Laws of 1970/1980, the Central Government has similar powers in respect of public sector banks.
• Inspect associate enterprises
The Bill empowers the RBI to call for any information and cause inspection of business of any ‘associate enterprise’ of a bank. This should provide legal framework for setting up of Bank Holding companies and pave the way for issue of new bank licenses.
Associate enterprises could be:
a. A holding company or a subsidiary company of the bank;
b. A Joint venture of the bank;
c. An Enterprise which controls the composition of the Board of Directors of the bank;
d. An enterprise that exercises significant influence on the bank in taking financial decisions; or
e. An enterprise that is able to obtain economic benefits from the activities of the bank.
RBI may not be able to call for information from 'associate enterprises' incorporated outside India of foreign banks. However, the Indian branches and Indian associate enterprises of a foreign bank will fall under the RBI purview of ‘associate enterprise’ and they may call for information. An associate enterprise (outside India) of a foreign bank which has a Wholly-Owned-Subsidiary (WOS) in India seems to be covered under the Amendment Bill.
This provision seems to have been incorporated to provide regulatory comfort to RBI, with power to call for information from the Non-Operating Holding Company etc., in case it allows business houses to set up banks in the forthcoming round of licencing of new private sector banks in India.
• Increase in voting rights
In terms of the extant BR Act, in public sector banks, no shareholder (except the Central Government) could exercise voting rights in excess of one percent of the total voting rights of all the shareholders. Further, the preference share holder (except the Central Government) also has an embargo on the voting rights up to one percent of total voting rights of all the shareholders holding preference share capital only. The Bill raises the shareholders’ voting rights in a public sector bank from one percent to 10 percent.
No shareholder, in a private sector bank, could exercise voting rights in excess of ten percent of the total voting rights of all the shareholders. The Bill raises the shareholders’ voting rights from 10 percent to 26 percent in a phased manner as determined by the RBI.
It is unclear the intent of this Bill to allow 26 percent voting rights in a phased manner.
• Other provisions of the Bill
a) Conversion of a branch of any bank into a WOS or transfer of shareholding of a bank to its holding company is now exempt from stamp duty.   This is a huge relief for foreign banks to convert their Indian branches into Indian wholly-owned subsidiary and expand their operations in India.
b) M&A (mergers and acquisitions) in banks will need approval of  the fair play watchdog - Competition Commission of India
c) Specific provisions in the nationalization laws for public sector banks to issue bonus shares and rights shares.
These amendments would be beneficial for various stakeholders in the banking sector. While the banking regulator gets enhanced powers that will result in effective compliance of regulations, banks will be able to attract more investments to raise funds for business expansion and to meet capital norms.

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