India: Presentation On Conversion Of Branches Of Foreign Banks Into WOS

Last Updated: 6 September 2017
Article by SNG & Partners

Brief background

2005

  • Road map of presence of Foreign Banks in India unveiled. Phase I (March 2005 to March 2009) and Phase II (April 2009 Onwards) for presence of Foreign Banks in India.

2005-2009

  • In first phase, Foreign Banks were permitted to establish presence by way of setting up a wholly owned subsidiary (WOS) or conversion of existing branches into a WOS.

2009 – till date

  • Current policy and procedures governing the presence of Foreign Banks will be continued;
  • Proposed in Annual Policy statement for 2010-2011 to prepare a discussion paper on the mode of presence of Foreign Banks through branch or WOS;
  • Discussion paper on presence of Foreign Banks in India released, January 2011;
  • RBI introduced broad framework for setting up wholly owned subsidiaries by foreign banks in India on 6th Nov, 2013;
  • Policy set out in the discussion paper is yet to fructify into law.

Branch v. WOS

Regulator's Intent for WOS:

  •  Ring fenced capital within the host country.
  •  Easier to define laws of which jurisdiction would apply.
  •  Better corporate governance and effective control in a banking crisis.
  •  Better systemic stability to the host country.

Concerns for WOS:

  •  WOS doesn't not necessarily ensure support from the parent bank.
  •  Impact on domestic banking sector, if WOS advantageously placed against its domestic counterparts.
  •  Capital of parent bank gets blocked.
  •  Easy availability of credit to branch vis-a-vis the WOS.
  •  Restrictions on free movement of profits unlike branches.
  •  Increase in compliance requirements.

Eligibility Criteria

  • Parent Banks should have adequate prudential supervision in their home country.
  • Setting up of WOS in India should have the approval of the home country regulator.
  • Other factors (but not limited to):
    1. Economic and political relations between India and the country of incorporation of the Foreign Bank;
    2. Reciprocity with the home country of the parent bank;
    3. Financial soundness of the Foreign Bank;
    4. Ownership pattern of the Foreign Bank;
    5. International and home country ranking of the Foreign Bank;
    6. Rating of the Foreign Bank by international rating agencies;
    7. International presence of the Foreign Bank;
    8. Adequate risk management and internal control systems.

Cases where presence could only be through WOS

  • Existence of any of the following situations:

    • Where parent country gives legislative sanction of preferential claim of homeland depositors upon winding up;
    • Lack of adequate disclosure requirements in home country;
    • Banks with complex structures;
    • Banks which are not widely held;
    • RBI not satisfied with supervisory arrangements and market discipline;
    • For any other reason which RBI may deem fit; and
    • Bank operating in India through branch mode and set up after August 2010 and considered systemically important by virtue of size of its business.

Capital Requirement

  • Initial minimum paid up equity of a new foreign bank WOS = Rs. 5 Billion;
  • In case of existing foreign banks operating in India, conversion to WOS model, net worth = Rs. 5 Billion. If net worth upon conversion is less than the aforesaid then shortfall to be infused by way of equity by parent bank (upfront through inward remittance). Compliance of BASEL III capital regulations as prescribed under Master circular;
  • Continued compliance of Basel III from the time of entry/conversion. Maintenance of capital adequacy ratio on continuous basis for an intial period of 3 years at 10% (from commencement of operations);
  • Maintenance of additional buffers including capital conservation buffer (as applicable)
  • Existing foreign Banks should convert their branch capital to capital of WOS. Ineligible capital could be repatriated with prior approval of RBI.

Corporate Governance

  • 51% of total board comprised of persons defined under section 10 A of Banking Regulation Act, 1949;
  • Not less than 2/3rd of Directors should be non-executive;
  • Not less than 1/3rd be Independent of the Indian management, its parent, any subsidiary or other associate of the foreign bank parent;
  • Not less than 50% be Indian nationals/NRIs/PIOs, subject to the condition that 1/3rd are Indian nationals resident in India;
  • WOSs of foreign banks will have part-time Chairman and full time CEO;
  • RBI's approval for appointment/re-appointment of the Part-time Chairman (non-executive director) should be obtained in terms of Section 10B(1A) of the Banking Regulation Act, 1949;
  • RBI's approval for appointment/re-appointment, etc. of the CEO/ Whole Time Directors including remuneration and other terms of appointment should be obtained in terms of Section 35B of the Banking Regulation Act, 1949;
  • The guidelines for compensation of WTDs/CEOs issued to private sector banks shall also apply to WOSs;
  • CEO to be appointed on full-time basis and should be resident in India;
  • Directors should confirm to 'fit & proper' criteria laid down by RBI;
  • All other provisions in relation to composition of board as applicable to private sector banks shall also be applicable to WOSs.

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