Government of India Volume I: Analysis and Recommendations

ANNEXES
(c) There must be ring-fencing of banks vis-a-vis other non-bank entities. Further,
banks must not lend to intermediaries which are not regulated by a financial
sector regulator. However, the operation of certain financial institutions such
as mutual funds might require access to short-term funding. Such short-term
funding must be within stringent prudential regulations.
7. This WG recommends that laws relating to banking should be ownership neutral
and should provide a level playing field for all banks. As a necessary consequence
this WG recommends corporatisation of all Public Sector Banks (PSBs). 1
8. In case of foreign banks having branches in India, this WG recommends that all such
foreign banks set up a Wholly Owned Subsidiary (WOS) in India. Transition issues
will need to be addressed by the Government of India (GOI) so that they do not
incur taxation from capital gains, or stamp duty, when they convert from branch
operations to WOS.
9. On the issue of deposit taking by co-operative societies this WG recommends that
there should be some restriction on deposit taking by co-operative societies and
that such activity should fall under the regulatory purview of the relevant legislation.
The deliberation was on whether the restriction should be based on number
of members or on the value of deposits. While some members expressed the view
that restriction should be based on number of members i.e. a co-operative society
accepting deposits from more than 50 members should fall within the regulatory
ambit of the RBI, the opinion finally weighed in favour of value of deposits. The WG
finally concluded by recommending that any co-operative credit society accepting
deposits exceeding a specified value must follow the provisions of the relevant legislation.
10. The WG recommends that there should be no exemption from the jurisdiction of
the CCI under the Competition Act, 2002 (Competition Act) for mergers of banks.
The WG, however makes a distinction between voluntary and assisted mergers. All
voluntary mergers will be subject to the review and approval by the competition
regulator. One of the key recommendations of the Commission is the establishment
of a resolution corporation to ensure prompt and orderly resolution of weak
financial institutions. One of the tools of resolution involves sale or merger of weak
firm with a healthy acquirer through appropriate mechanisms of due-diligence. To
achieve this framework, the WG recommends that all assisted mergers involving
sale of a failing bank to a healthy bank will be done under the supervisory review
of the resolution corporation.
11. This WG recommends corporatisation of all PSBs, such as SBI, its subsidiaries, corresponding
new banks within the meaning of the Bank Nationalisation Acts and RRBs
by converting them into companies under the Companies Act. This would level
the playing field and will also rationalise the merger/ amalgamation provisions by
bringing them with a single unified framework under the BR Act. In addition, this
WG also endorses the policy approach that co-operative banks accepting “public
deposits” must obtain a bank license from the regulator.
12. Ownership in banks must be dispersed. The WG recommends that the current position
of law in this regard be maintained.
13. Bank supervisors must have powers to comprehensively look at human resource
policy documents of a bank and recommend changes to the extent such policies
impinge upon excessive risk-taking and soundness. The Board of Directors (BOD)
and shareholders of banks must have the power to claw back payments made to
the top management in line with the global trend of curbing excessive risk taking
by the top management.
1 In its submission to the Commission, the RBI has made a strong case for integrating the various statutes governing
different segments of the banking industry and different dimensions of the banking business into a harmonised law
to provide clarity and transparency.
184 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION