New private sector banks have not been allowed to be set up in India since 1969. With a view to increasing competition in the banking industry and in line with the recommendations of the Narasimhan Committee, the Government has now allowed the entry of such banks. However, the freedom of the entry into the banking sector will be carefully managed by the RBI. The RBI will grant approvals for entry of private sector banks provided such banks offer competitive, efficient and low cost financial intermediation services, result in upgradation of technology in the banking sector, are financially viable and do not resort to unfair means like preemption and concentration of credit, monopolization of economic power, cross holding with industrial groups etc.

Foreign Investment in Banking Sector

Under the scheme, Non Resident Indians are allowed to have primary equity in a new banking company to the extent of 40%. In the case of a foreign banking company or a finance company acting as a technical collaboration or a co-promoter, equity participation is restricted to 20%.

Foreign Investment through GDRs (Euro Issues)

Foreign Investment through GDRs is treated as Foreign Direct Investment

Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads. There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year . A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a projects not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.

The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India. However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticiption pf the use of funds for approved end uses.

he RBI issued guidelines regarding the formation and functioning of private sector banks in January 1993. These guidelines are as follows:

1. The banks shall be governed by the provisions of

• The Reserve Bank of India Act, 1934
• The Banking Regulations Act, 1949
• Other relevant statutaries

2. Private sector banks are required to be registered as public limited companies in India.

3. The authority to grant a license lies with the RBI

4. The shares of banks are required to be listed on stock exchanges

5. Preference will be given to those banks whose headquarters are proposed to be located in a centre which does not have headquarters of any other bank.

6. Maximum voting rights of an individual shareholder would be limited to 1% of total voting rights.

7. The new bank would not be allowed to have as its director any person who is already a director in a banking company.

8. The bank will be subject to prudential norms in respect of banking operations, accounting policies and other policies, as laid down by RBI. The bank will be required to adhere to the following:

• Minimum paid up share capital of Rs. 1 bln.

• Promoters' contribution as determined by the RBI

• Capital adequacy of 8% of the risk weighted assets

• Single borrower and group borrower exposure limits in force

• Priority sector lending

• Export credit

• Loan policy within overall policy guidelines laid down by the RBI

9. The banks will be free to open branches anywhere once they satisfy the capital adequacy and prudential accounting norms

10.The banks would not be allowed to have investments in subsidiaries, mutual funds and portfolio investments in other companies in excess of 20% of the banks' own paid up capital and reserves.

11. The banks would be required to use modern infrastructural facilities in office equipment, computer, telecommunications etc.

^^ Insurance Sector to be opened for Domestic Private Sector.

NOTE-  ^^-Budget' 98 proposal

Source: Doing Business with India

Last Upate: July 31, 1998