After the global economic crisis, India has been encouraging foreign banks to operate through subsidiaries, a move that promises to provide regulatory comfort to the government.
WHAT IS SUBSIDIARISATION OF FOREIGN BANKS?
The conversion of a foreign bank with branch presence into a subsidiary is called subsidiarisation. This arrangement protects Indian capital and operations from external economic shocks as such outfits follow local guidelines.
HOW IS IT DIFFERENT FROM THE CURRENT STRUCTURE?
At present, most foreign banks operate as branches or representative offices of the parent. Unlike branches, locally incorporated subsidiaries are separate legal entities. They have their own capital base and board of directors. In the case of branches, parent banks are, in principle, responsible for their liabilities.
HOW IS INDIA ENCOURAGING SUBSIDIARISATION?
Last week, Finance Minister Pranab Mukherjee proposed tax neutrality for this route. Existing laws require overseas lenders to pay up to 30% of the market value of their assets as capital gains and stamp duty while converting branches into a new entity. Besides, the RBI had, in its discussion paper, supported incentives for setting up subsidiaries, including liberal branch expansion and allowing raising of rupee resources by issuing non-equity capital instruments in form of hybrid instruments and subordinate debt. Current regulations allow foreign banks to raise resources only from their parent body or head office through Innovative Perpetual Debt Instruments.
BUT WHY ARE FOREIGN BANKS RELUCTANT?
Because they first want absolute clarity on the proposed tax neutrality, branch licensing policy, priority lending norms and listing guidelines. At present, it's not easy for foreign banks to acquire branch licences. On an average, the RBI issues about 14 branch permits to all foreign banks every year. Also, the priority sector limit for foreign banks is pegged at 32% against 40% for domestic banks. But foreign banks want a more liberal limit.
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