December 2016 \ Business & Investment \ Special Column on law & diplomacy
Opening Indian Branch Offices of Foreign Banks

At present, foreign banks have presence in India only through branches.

By Mr K K Anand

‘Control’ shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.

    Providing the extent of national treatment to WOS of foreign banks needs to be considered from the financial stability perspective. From financial stability perspective down side risk may arise if the foreign banks, i.e. WOSs of the foreign banks and foreign bank branches together come to dominate the domestic financial system. To address this risk, restrictions would be placed on further entry of new WOSs of foreign banks, when the capital and reserves of the foreign banks (i.e. WOSs and foreign bank branches) in India exceed 20% of the capital and reserves of the banking system. In such eventuality prior approval of RBI will be required for capital infusion into the existing WOSs of foreign banks. As regards foreign banks in branch mode of presence, as per the WTO commitments licences for new foreign banks may be denied when the maximum share of assets in India both on and off balance sheet of foreign banks’ branches to total assets both on and off balance sheet of the banking system exceeds 15 per cent. 

6.    Minimum capital requirement

a)    The initial minimum paid-up voting equity capital for a WOS shall be `5 billion.

b)    The newly set up WOS of the foreign bank would be required to bring in the entire amount of initial capital upfront, which should be funded by free foreign exchange remittance from its parent.

c)    In the case of an existing foreign bank having branch presence in India, which desires or is required to convert into a WOS:

o    It should convert its branch capital into the capital of WOS. The components, elements and eligibility criteria of the regulatory capital instruments for the WOS would be as applicable to the other domestic banks.

o    It shall have a minimum net worth of 5 billion.

o    If the net worth upon conversion is less than the minimum capital prescribed under these guidelines, the shortfall shall have to be brought in, towards infusion of equity, upfront from its parent as inward remittance.

d)    The WOS shall meet the Basel III requirements on a continuous basis from the time of its entry / conversion. WOS shall, however, maintain a minimum capital adequacy ratio, on a continuous basis for an initial period of 3 years from the commencement of its operations, at 10 per cent i.e. 1 per cent higher than that required under the phased implementation of Basel III6. In addition, WOS shall also maintain capital conservation buffer and other buffers as applicable under extant capital adequacy framework.

—The author is Founding and Managing Partner of Anand Law Practice. He can be reached at kamalkanand@anandlawpractice.com

 




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