Relationship between parent company and its Indian wholly owned subsidiary

Recently, RBI has laid the red carpet for foreign banks and has unveiled the road map for the presence of foreign banks in India, which are based on the Ministry of Commerce and Industry, Govt. of India’s revised guidelines on foreign direct investment (FDI) in the banking sector, which was announced on 5th of March 2004. The policy decision on these guidelines which also included investment by nonresident Indians (NRIs) and Flls (Foreign Institutional Investors) in the banking sector, revised the aggregate foreign investment in private banks to a maximum of 74% of the paid up capital was to be at least 26%.

The road map is divided into two phases and framed in such a manner that it will be in conformity with India’s commitment to the WTO. During the first phase, between March 2005 presents by way of setting up a wholly owned subsidiary (WOS) or conversion of the existing branches into a WOS.

Foreign banks wishing to establish a presence in India for the first time could either choose to operate through a branch presence or set up a 100% wholly. The guidelines for setting up of WOS are given separately governance and compliance with the ‘fit and proper’ criterion for owners (shareholders) and managers on the basis of a basket of several criteria like the the parent bank, minimum start up of 10% etc.

The qualifying criteria are designed to ensure that the WOS are not only able to draw upon the managerial strength of the parent bank but are also a financially strong entities in their own right Besides this, factors related to economic and political relations between India and the country of incorporation of the foreign bank will also be considered for allowing setting up of WOS. For new and existing foreign banks, it has been proposed to go beyond the existing WTO commitment of 12 branches in a year and preference for branch expansion in under banked areas. The number of branches permitted each year by RBI has already been higher than the WTO commitments.

The WOS will be treated on par with the existing branches of foreign banks for branch expansion in India. Permission for conversion of existing branches of a foreign bank into WOS will be guided by the manner in which the affairs of the branches of the Bank and the overall supervisory the locally available capital including the remarkable surplus retained in India will qualify. The Reserve Bank may prescribe market access and national treatment limitation the operations of WOS consistent with international practices and the country’s requirements.

However, some of the key tax issues arising from these guidelines include the tax impact of conversion of be adequate to ensure that such conversions are tax-neutral. Acquisition of Shareholding in Select Indian Private Sector Banks It will heighten competition for the private sector entities and allow the weaker private banks to access time to prepare themselves for permitted only in private sector banks that are identified by RBI for to acquire a controlling stake in a phased manner.

So, the smaller Indian banks, like United Western Bank, Lord Krishna Bank and that they have been spared the recurrent nightmares of being gobbled up by large foreign entities. If such kind of protection had not been given by RBI, majority of such smaller banks could have been easily grabbed by foreign banks because market capitalization (number of shares multiplied by the market price of these shares) of most private- sector banks in India is less than the quarterly profits of banking giants like Citigroup need no help from their overseas parents for acquisitions. They have enough financial muscle in India to snatch not one, but a couple of players in the old private banking space. The ball is in the private banks’ court to protect themselves by becoming financially stronger and raising their market capitalization. They have got four years to do so.

In considering an application made by a foreign bank, for acquisition of 5 % or more in the and reputation of the level and nature of presence of the foreign by the foreign bank concerned will be in the long-term interest of all the stakeholders in the it that the investor bank shall make a minimum acquisition of 15 per cent or more and may also specify the period of time for applicable.

Where such acquisition is by a foreign bank already having exceeding six months to conform to the ‘one form of presence’ concept will have to be submitted by the foreign bank along with the application for acquisition. ING is the only foreign bank so far to have acquired an Indian bank. It seems likely that other foreign banks seeking to make an Indian acquisition may have to take a similar route. ING gradually increased its minority stake in Vysya, a private bank, over three to four years, merging its local operations with it to form ING Vysya, in which ING owns a controlling stake of about 40%.

Though the Road Map is a cautious and guarded opening up of the Banking Sector for Foreign Banks until 2009 and with some assurances of widening of opportunities after that, it provides ample opportunity and time to the Indian Banks to gear up themselves for the Mr. Tamal Bandhopdhay, a banking sector analyst when he says: “Indian banks have at least a four-year leeway to pull up their socks and put their house in order.

Thus, all Indian banks with lower capital bases (there are at least a dozen of them) would have to consolidate and grow up. The larger local banks, too, would have to ramp up both in terms of size and efficiency in the banks, but also to thwart any takeover bids by them So, it is not only for the Bank Management but also for every employee (including all Association and Union people) of this sector too to wake up fast and find out ways to restructure their banks in such a way that they achieve the level of global efficiency parameters in every aspect of banking segments. Besides this, domestic banks have to improve their consumer services to become competitive and strong players to ensure their healthy survival in the new environment of post 2009 eras.

The WOS will be subject to the licensing requirements sector banks. The WOS will be treated on par with the existing branches of foreign banks for access and national treatment limitation consistent with WTO as also other appropriate limitations the country’s other relevant statutes and instructions issued by RBI and other regulators from time to time.

Foreign banks applying to the RBI for setting up a WOS in India must satisfy RBI that they are subject to adequate prudential supervision in their exercised by the home. The setting up of a wholly owned banking subsidiary in India should have the approval of the home country regulator. All the above requirements prescribed for setting up WOS will be applicable to existing foreign bank branches converting into a WOS. In addition they would have to satisfy the following requirements Permission for conversion of existing branches of a foreign bank into a WOS will interlaid be guided by the manner in which the affairs of the branches of the bank prudential requirements and the overall supervisory comfort of the Reserve Bank.

The minimum net worth of the WOS on conversion would not be maintained a minimum capital adequacy ratio of 10 per cent of the risk weighted assets or as may be prescribed from time to time on locally available capital including remarkable surplus. The Reserve Bank will cause an inspection/ audit to assess the financial position of the branches operating in India and arrive at the aggregate net worth of the ultimate.

Foreign banks may apply to the Reserve Bank for making the investment in private sector banks that are identified by RBI for restructuring. The Reserve Bank will examine the application with regard to the eligibility criteria prescribed for foreign banks to set up a WOS vide paragraphs 1 to 4 above as well as their track record in restructuring banks. While permitting foreign banks to acquire a stake in the identified privacy of the major shareholders to determine their ‘fit and proper’ status. Reserve Bank may also prescribe additional conditions in this regard as may be considered appropriate.

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