New Delhi: The Union cabinet on Thursday cleared a Bill to liberalize banking rules in the country by giving shareholders voting rights in line with their equity holding and allowing banks to raise money through additional instruments such as preference shares so as to expand business.
The Bill seeks to help further liberalize the Indian banking sector, Montek Singh Ahluwalia, deputy chairman of the Planning Commission, said at a conference in Delhi on Thursday. Currently, shareholder voting rights are limited to 1% in state-owned banks and 10% in private banks irrespective of the equity holding.
The Bill is expected to be introduced in the ongoing budget session. In his budget speech on 28 February, finance minister Pranab Mukherjee listed the Banking Laws (Amendment) Bill, which was introduced in 2005 during the United Progressive Alliance (UPA) government’s first term, as one of the seven Bills that the government proposed to take up to pursue financial sector reforms.
“The financial sector reforms initiated during the early 1990s have borne good results for the Indian economy. The UPA government is committed to take this process further,” Mukherjee said in his speech. Prime Minister Manmohan Singh has also indicated that the government will try to introduce reform-oriented legislation in the budget session to boost investor sentiment, which appears to have been hit adversely by recent controversies and corruption charges against the government.
When the Bill was introduced in 2005, its objectives were regulating acquisition of shares in banking firms and increasing the flexibility on the statutory liquidity ratio (SLR), including preference shares as capital, allowing banks to lend to firms in which their directors are engaged, monitoring the activities of associate enterprises of banks, vesting the Reserve Bank of India (RBI) with powers to supersede the board of directors of a bank, disallowing primary credit societies from banking activities, and changing the definition of “approved securities”.
SLR is the proportion of assets that banks need to hold in the form of government securities.
An official of the Indian Banks’ Association said the move will mainly benefit private sector banks. The current curb on voting rights “was to ensure that a majority shareholder does not get controlling power over the board,” the official said. “With this law, the 10% ceiling will be removed. However, anyone holding more than 5% stake and getting equivalent voting rights will have to get RBI approval.”
The change won’t affect public sector banks much as the government is the majority shareholder in them, he said.
Private sector banks will also be able to raise capital through preference shares, which was something only public sector banks can do now, he said.
According to a person familiar with the development, the government will try to push through as much legislation as it can in the budget session.
“The government is also mulling the idea of continuing the budget session without the three-week recess as scheduled earlier and conclude it before April because the political parties will be busy with assembly elections in March and April,” said the person on condition of anonymity. The other options before the government are to hold the second part of the session after the polls get over or extend the monsoon session, likely to begin in July.
The current budget session is scheduled to continue till 16 March and resume on 4-21 April. However, the Election Commission on Tuesday announced elections to five state assemblies during April-10 May. The government will discuss the matter with all political parties, the person added.
The cabinet on Thursday also approved the Protection of Children from Sexual Abuses Bill, which seeks stringent punishment for such offences, said a cabinet minister who attended the meeting in Parliament, but declined to be identified.
The proposed legislation is aimed at protecting children against sexual assault, sexual harassment and pornography, and provides for the establishment of special courts for the trial of such offences. The Bill provides for treating sexual assault as “aggravated offence” when it is committed by a person in position of trust or authority over a child, including a member of the security forces, police officer, public servant, management or staff of a children’s home, hospital or educational institution.
The electoral code of conduct that came into effect on Tuesday with the announcement of assembly elections may have persuaded the cabinet to postpone decisions on some items. These are the revision of the Central list for other backward classes, the Rajiv Gandhi Awas Yojana (a welfare scheme for urban slum dwellers), and a couple of memoranda of understanding, said an official in the know of things.
Sangeeta Singh and Remya Nair of Mint, PTI and Reuters also contributed to this story.