India: RBI Moots Incorporation Of WOS By Foreign Banks

Last Updated: 18 February 2011

Article by Satwinder Singh, Partner, Vaish Associates, Advocates and Hitesh Sablok, Associate, Vaish Associates, Advocates, New Delhi, India

The Reserve Bank Of India ("Rbi") Has Recently Released A Discussion Paper titled "Discussion Paper – Presence of Foreign Banks in India" ("Discussion Paper"), wherein RBI has proposed that the foreign banks which are desirous of having presence in India should, in certain circumstances ("WOS Category"), mandatorily incorporate wholly owned subsidiary ("WOS"). RBI has also preferred that the existing branches of foreign banks and the foreign banks which do not fall under WOS Category should also adopt WOS structure. Further, in the event the said foreign bank chooses branch model as the preferred mode of presence, then, such branch would have to be compulsorily converted into WOS in case (i) any of the conditions for WOS Category materialize, in the judgment of RBI; or (ii) the same becomes systematically important ("Systematically Important") by virtue of the balance sheet size of the branch.

RBI feels that local incorporation of WOS of foreign bank would have the following advantages:

  1. the same would ensure clear delineation between assets and liabilities of the foreign bank's WOS vis-à-vis that of the foreign bank;
  2. it may be easier to define laws pertaining to jurisdiction issues;
  3. separate and focused management to act in the best interest of the foreign bank's WOS;
  4. local incorporation provides more effective control in a banking crisis; and
  5. enables authorities of the host country to act more independently, as compared to the branch operations.

RBI has stated that in view of Indian WTO commitments, existing branches of foreign banks in India would not be mandatorily required to convert into WOS. However, it is expected by RBI, that keeping in mind the incentives provided to WOS under the Discussion Paper (as compared to branch of a foreign bank), the existing branches which satisfy parameters for the WOS Category, or which become Systematically Important, would voluntarily convert themselves into WOS. The incentives are briefly stated herein below:

  1. in terms of national treatment, the WOS of a foreign bank would be on a better footing as compared to branch of a foreign bank (but less than a domestic bank);
  2. RBI may allow the WOS of a foreign bank to raise rupee resources through issue of non-equity capital instruments in the form of Innovative Perpetual Debt Instruments, Tier I and Tier II preference shares and subordinate debt, as allowed to domestic private sector banks; and
  3. the branch expansion policy as applicable to the domestic banks may be extended to WOS of the foreign bank which would, in turn, enable the WOS to open branches in Tier 3 to 6 centers (except at a few locations considered sensitive on security considerations).

It may also be highlighted herein that in order to address the issue of market dominance, the RBI has proposed that in case capital and reserves of the foreign banks in India including WOS and branches exceed 25% of the capital of the banking system, then restrictions would be placed by RBI on (i) further entry of new foreign banks, (ii) branch expansion in Tier I and Tier II centres and (iii) capital infusion into the WOS (will require RBI's prior approval).

TAX ISSUES

With regard to the capital gain tax liability, RBI has tried to address the issue by providing in the Discussion Paper the following paragraph:

"It appears that for any Capital Gains Tax arising out of transfer of property, goodwill and other assets of capital nature to its own newly incorporated subsidiary in India the provisions of Section 47(iv) of Income Tax Act, 1961 would be applicable to foreign banks converting their branches into subsidiaries".

In terms of section 47(iv) of the Income Tax Act, 1961, no capital gains is applicable in case of any transfer of a capital asset by a company to its subsidiary company if (a) the parent company or its nominees hold the whole of the share capital of the subsidiary company; and (b) the subsidiary company is an Indian company. However, the Discussion Paper has put a disclaimer that "Foreign banks may approach the appropriate authority for suitable clarification".

RBI has also taken cognizance of the issue with regard to repatriation of profits. As a branch, profits are allowed to be repatriated in the ordinary course of business. However, on conversion of the branch into WOS, profits would have to be distributed by way of dividends, which shall be subject to the minimum prudential requirements laid down by RBI. It may be noted that the dividend declared by a company incorporated under Indian laws is subject to payment of the dividend distribution tax, as levied under section 115 O of the Income Tax Act, 1961. It is suggested in the Discussion Paper that in the initial few years of incorporation, the WOS should be allowed to remit profits like a branch in India. Any such suggestion of RBI, in our opinion, would require suitable amendment in the Income Tax Act, 1961, to exempt levy of dividend distribution tax. At the same time, the decision regarding conversion of branch into WOS would also have to factor in the levy of branch profit tax, proposed in the Direct Tax Code, which provides for levy of additional tax @ 15% in respect of profits of the branch.

It remains to be seen that how far the proposals mooted by RBI would incentivize the foreign banks to adopt WOS structure for operations in India. RBI has invited suggestions / comments pertaining to the same by March 7, 2011.

The complete text of the Discussion Paper can be viewed at http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=23795

© 2011. All rights reserved with Vaish Associates Advocates, Flat No. 5 to 7, Dakshineshwar, 10,
Hailey Road, New Delhi-110001, India, Ph.: +91-11-42492525 email: satwinder@vaishlaw.com

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

Specific Questions relating to this article should be addressed directly to the author.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions