File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Entry and Regulation of Foreign Banks: A study on the Indian Scenario

Banks in India are highly regulated and are very closely monitored by the regulator i.e. by the [1]Central Bank of the country. The main reason for such close supervision is that a bank is not the owner of the money it rather holds the money as a custodian of the deposits. Even a minor breach of trust or confidence of the customer or depositor in the banking and financial system leads to a disastrous impact. The same reasons have to lead to several reasonable restrictions and approval of competent authorities that govern the entry of foreign banks.

Modes of Entry
Broadly, there are two mode of entry for foreign banks in India:
  1. Branch Office; and
  2. Company

In addition to the above, there is a third mode of presence for foreign banks. It is called Representative Office or "Liaison Office". There are certain reasons for which I have not counted it as a mode of presence. Representative Office has been discussed in later in this Article.

Branch Office
As of now, foreign banks is carrying on banking business in India only through branches

As per RBI guidelines, a foreign bank whether or not carrying on banking business in India can carry on banking business in India through branch mode provided certain conditions prescribed by RBI is not applicable to it. We shall discuss such conditions later in this Article. However, for the ease of reference we shall refer such conditions as Certain Conditions.

Above paragraph can be demystified in below points:
  1. Foreign banks, not carrying on business in India and to which Certain Conditions are not applicable can choose to carry on the banking business through branch mode. It is pertinent to note here that such foreign banks also have the option to carry on business in India through Company mode.
     
  2. Foreign banks, already carrying on business in India through branch mode from August 2010, to which Certain Conditions are not applicable can continue to carry on the banking business through branch mode. It is to be noted that such foreign banks are required to give undertaking to RBI that they would convert their branches to Company if Certain Conditions gets applicable to them anytime afterwards.
     
  3. Foreign banks, already carrying on business in India through branch mode before August 2010, can continue to carry on the banking business through branch mode. Such foreign banks shall also have the option to carry on business in India through Company mode.

Foreign Bank desiring to establish Branch Office in India need to approach RBI. The application to establish Branch Office of Foreign Bank will be received and examined by the Department of Banking Regulation (DBR), Reserve Bank of India, Central Office.

Company
In November, 2013 RBI issued the framework for setting up of Wholly Owned Subsidiaries (WOS) by foreign banks in India. The said framework was issued in pursuance of the announcement made in [2]Second Quarter review of Monetary Policy of 2013-14.

As per this scheme, foreign bank can enter into Indian market in the form of a Company, which shall be wholly owned subsidiary (WOS) of the foreign bank. This whole scheme for setting up of WOS by foreign banks in India can be summarised as below:
  1. Foreign banks, not carrying on banking business in India and to which Certain Condition are shall carry on banking business in India only through a wholly owned subsidiary.
  2. Foreign banks, already carrying on business in India through branch mode from August 2010, to which Certain Conditions gets applicable at later stage, would have would convert their branches to Company.
  3. Foreign banks, already carrying on business in India through branch mode before August 2010 shall have the option to carry on business in India through Company mode.

What are The Certain Conditions?
It becomes clear that either a foreign bank existing in India (after August 2010) or contemplating to enter India shall be required to establish WOS in India if Certain Conditions gets applicable. Such Certain Conditions are prescribed below:
  1. If the laws of home country of foreign bank gives preferential claim to deposits of home country in winding up proceedings. To clarify this point, I would like to explain the concept of branch. A branch is not distinct from its parent company rather it is considered as an extension of its parent company. Thus, if the depositors of home country are given preference during winding up of the parent company, then Indian depositors shall be at huge risk of losing their deposits. For the said reasons, it is imperative that a separate legal entity is formed to protect the interest of local depositors.
     
  2. If the home jurisdiction of foreign company does not have adequate disclosure requirement or if Reserve Bank of India is not satisfied with the adequacy of supervisory arrangements (including disclosure arrangements) and market discipline in the country of their incorporation.

    Trust is the key element of banking. Without transparency, a bank cannot instil trust and confidence among the people. If the trust is broken for any reason, no bank can survive. Failure of one bank can lead to failure of other banks too because they may be interconnected with each other. Inadequate disclosure or inadequate supervisory requirements in the home country of foreign bank may lead to many risks including risks associated with money laundering, poor financial health or regulatory penal actions etc., which in turn may pose risk to the operation of branch of foreign bank in India. To avoid such risks RBI wants foreign banks to establish local entity to insulate it from aforesaid risks.
     
  3. Banks with complex structures; Entities with complex structures are difficult to manage. Itís difficult to track beneficial owners who are running the show. They are prone to money laundering risks. Hence, RBI wants such foreign banks to establish locally incorporated unit instead of branch.
     
  4. Banks which are not widely held; Foreign banks, which are not widely held, come within the category which are required to incorporate local entity to run banking business in India. From the governance perspective, RBI is more comfortable with an entity which is widely held than an entity where the concentrated in hands of few people. Because such people can influence the decision making power of the bank. Thus, incorporation of local entity is resolution to prevent the risk of bank from carrying on business in a manner likely to create a risk of serious loss to the bankís creditors/depositors.
     
  5. In addition to the aforesaid reasons, RBI may cite any other conditions which may make it necessary foreign bank to establish a local entity.

Subsidiary form of presence
RBI further clarifies the form and manner in which such entity can be incorporated in India. RBI prescribes that such company can be incorporated in the form of wholly owned subsidiary of the foreign bank.

It means that a foreign bank, who is required to establish a local entity to carry on banking business in India, shall establish a company under the applicable laws of India. Such company shall be wholly owned subsidiary of the foreign bank.

Such wholly owned subsidiary (WOS) is advantageous for both foreign bank as well as regulator. Being a locally incorporated entity, there is a clarity and certainty with respect to applicability of laws and RBI can exercise effective control while on the other hand, WOS remains an independent legal entity and given treatment at-par with locally incorporated bank.

Private Company Vs Public Company
So far we have concluded that a Company, which is a wholly owned subsidiary shall be incorporated by foreign bank. The next important question which comes to the mind is that whether such subsidiary company will be private company or Public Company.

On the aforesaid aspect, there is no clarity from the regulator. As per one school of thought, since there is no clarity and since RBI does not prohibit formation of private company, itís preferred to form a private company as it involves lesser number of post incorporation formalities.

While the other school of thought opines that it would be better to follow the type of company which is more aligned to business of banking and which is stricter to follow and thus a public company is more suitable for banking business. In favour of their argument, they add that since WOS shall be afforded near national treatment, it would be wiser to follow market practice, which is to form public company for conducting banking business in India.

Considering the aforesaid facts, it would be preferred to form WOS in the form of Public company. However, the applicants may consider to approach RBI to get formal clarity on this issue.

Representative Office
In addition to aforesaid two popular mode of entry for foreign banks in India, foreign banks may consider to establish representative office in India. Representative office is also called as Liaison Office.

Representative offices are easy to establish but can conduct very limited activities. As the name itself suggests its main objective is to represent parent company/ group company in India. Such representative offices also act as a communication channel between the parent company and Indian companies.

Usually the application to establish representative office is considered by AD Category- I Bank under the powers delegated by RBI. However, in case of foreign banks willing to establish representative office in India needs to submit application to Department of Banking Regulation (DBR), Reserve Bank of India, Central Office directly.

CONCLUSION
Banks are highly regulated and closely monitored by the regulator i.e. Reserve Bank of India (RBI). The first and foremost reason for such close supervision is that a bank is not the owner of the money deposited with it rather the bank is custodian of such deposits. Even a minor breach of trust or confidence of depositor in the banking and financial system will have a disastrous impact. It is also for the same reasons that entry of foreign banks are subject to reasonable restrictions and approval of competent authorities.

Bibliography:
  • Citi Bank.(2020). press room citi bank. Retrieved from citi bank: https://www.online.citibank.co.in/press-room/citi-in-india.htm
  • HSBC. (2020). ABOUT HBSC INDIA. Retrieved from HBSC: https://www.about.hsbc.co.in/hsbc-in-india
  • Kenton, W. (2020, september 30). Wholly Owned Subsidiary. Retrieved from investopedia : https://www.investopedia.com/
  • Ray, A. (n.d.). DBS BANK. Retrieved from Economic Times: https://economictimes.indiatimes.com/industry/banking/finance/banking/
    dbs-bank-looks-to-grow-indian-business-throughpartnerships/articleshow/64955936.cms?from=mdr
  • Reserve Bank of India. (n.d.). data base . Retrieved from Reserve bank of India : https://m.rbi.org.in/
  • Sethi, S. (n.d.). Foreign Banking Ė Its entry and regulation. Retrieved from Law times journal: http://lawtimesjournal.in
  • Shrivastava, R. (2017). Entry of foreign banks in India. Retrieved from linkedin: https://www.linkedin.com/
  • Standard Chartered . (2020). About Us. Retrieved from Standard Chartered Bank 2020 : https://www.sc.com/in/about-us/
End-Notes:
  1. The Reserve Bank of India is India's central bank, which controls the issue and supply of the Indian rupee
  2. Dr. Raghuram G. Rajan, than Governor of Reserve Bank of India announced the second quarterly review decisions were based on a detailed assessment of the global and domestic macroeconomic situation. The outlook for global growth has improved modestly and the prospect of delay in the taper of the Federal Reserveís bond purchases has brought calm to financial markets.

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers



Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


LawArticles

Section 482 CrPc - Quashing Of FIR: Guid...

Titile

The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of th...

Whether Caveat Application is legally pe...

Titile

Whether in a criminal proceeding a Caveat Application is legally permissible to be filed as pro...

How To File For Mutual Divorce In Delhi

Titile

How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Copyright: An important element of Intel...

Titile

The Intellectual Property Rights (IPR) has its own economic value when it puts into any market ...

The Factories Act,1948

Titile

There has been rise of large scale factory/ industry in India in the later half of nineteenth ce...

Law of Writs In Indian Constitution

Titile

Origin of Writ In common law, Writ is a formal written order issued by a body with administrati...

Lawyers Registration
Lawyers Membership - Get Clients Online


File caveat In Supreme Court Instantly