FOREIGN BANKS

Under the FDI policy as set out in the Government of India’s Department of Industrial Policy and Promotion WOSs of the foreign banks, even though locally incorporated, being foreign owned and controlled companies, will be treated as “foreign banks” in terms of which a company owned by non-residents ‘means an Indian company where more than 50% of the capital in it is beneficially owned by non-residents and/or “controlled“ by non-residents. The term ‘control’ has been defined as under:

‘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.

—The author is Founding and Managing Partner of Anand Law Practice. He can be reached at KamalKAnand@yahoo.com, kkanand_6@yahoo.co.in