JNANA VARDHINI
SIBSTC MONTHLY NEWSLETTER -COVERING
CONTEMPORARY BANKING RELATED TOPICS
39TH ISSUE
OCTOBER – 2013
SOUTHERN INDIA BANKS’ STAFF
TRAINING COLLEGE
No.531, Faiz Avenue, 11th Main, 32nd Cross
IV Block, Jayanagar, BANGALORE-560 011
Website: www.sibstc.edu.in
Email:
[email protected]
[email protected]
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RBI FRAMEWORK FOR SETTING UP OF WHOLLY
OWNED SUBSIDIARIES (WOS) BY FOREIGN BANKS IN
INDIA.
Background
In 2004, Government of India with a view to liberalizing foreign direct investments (FDI)
in private sector banks raised the FDI limit to 74 per cent in the private sector banks
under the automatic route and also permitted foreign banks, regulated by a banking
supervisory authority in the home country and meeting the Reserve Bank’s licensing
criteria to hold 100 per cent paid up capital, to set up a WOS in India.
To operationalise the FDI guidelines, the Reserve Bank released the roadmap for
presence of foreign banks in India in consultation with the Government of India on
February 28, 2005. The roadmap was divided into two phases – the first phase spanning
the period March 2005 to March 2009 and the second phase beginning after a review of
experience gained in the first phase. In the first phase, foreign banks already operating in
India were allowed to convert their existing branches to WOS while following the
‘one-mode presence’ criterion and the WOS was to be treated at par with the existing
branches of foreign banks for branch expansion in India. The second phase of the
roadmap which was to commence in April 2009 envisaged removal of limitations on the
operations of WOS and treating them on par with the domestic banks to the extent
appropriate. During the first phase no foreign bank came forward to set up or convert
their branches into WOS in the absence of adequate incentives.
As a sequel to the roadmap of 2005 and pursuant to the announcements made in the
Annual Policy Statement for 2010-11, the Reserve Bank has issued the framework for
setting up of WOS by foreign banks in India
The policy is guided by the two cardinal principles of (i) reciprocity and (ii) single mode
of presence. As a locally incorporated bank, the WOSs will be given near national
treatment which will enable them to open branches anywhere in the country at par with
Indian banks (except in certain sensitive areas where the Reserve Bank’s prior approval
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would be required). They would also be able to participate fully in the development of the
Indian financial sector. The policy incentivises the existing foreign bank branches which
operate within the framework of India’s commitment to the World Trade Organization
(WTO) to convert into WOS due to the attractiveness of near national treatment. To
provide safeguards against the possibility of the Indian banking system being dominated
by foreign banks, the framework has certain measures to contain their expansion if the
share of foreign banks exceeds a critical size. Certain measures from corporate
governance perspective have also been built in so as to ensure that the public interest is
safeguarded
Key features of the Framework:

Banks with complex structures, banks which do not provide adequate disclosure in
their home jurisdiction, banks which are not widely held, banks from jurisdictions
having legislation giving a preferential claim to depositors of home country in a
winding up proceedings, etc., would be mandated entry into India only in the WOS
mode.

Foreign banks in whose case the above conditions do not apply can opt for a branch
or WOS form of presence.

A foreign bank opting for branch form of presence shall convert into a WOS as and
when the above conditions become applicable to it or it becomes systemically
important on account of its balance sheet size in India.

Foreign banks which commenced banking business in India before August 2010 shall
have the option to continue their banking business through the branch mode.
However, they will be incentivised to convert into WOS because of the attractiveness
of the near national treatment afforded to WOS.

To prevent domination by foreign banks, restrictions would be placed on further entry
of new WOSs of foreign banks/ capital infusion, when the capital and reserves of the
WOSs and foreign bank branches in India exceed 20 per cent of the capital and
reserves of the banking system.
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
The initial minimum paid-up voting equity capital for a WOS shall be Rs 5 billion for
new entrants. Existing branches of foreign banks desiring to convert into WOS shall
have a minimum net worth of Rs 5 billion.

The parent of the WOS would be required to issue a letter of comfort to the RBI for
meeting the liabilities of the WOS.

Corporate Governance – (i) not less than two-third of the directors should be nonexecutive directors; (ii) a minimum of one-third of the directors should be
independent of the management of the subsidiary in India, its parent or associates;
(iii) not less than fifty per cent of the directors should be Indian nationals /NRIs/PIOs
subject to the condition that not less than 1/3rd of the directors are Indian nationals
resident in India.

The branch expansion guidelines as applicable to domestic scheduled commercial
banks would generally be applicable to WOSs of foreign banks except that they will
require prior approval of RBI for opening branches at certain locations that are
sensitive from the perspective of national security.

Priority Sector lending requirement would be 40 per cent for WOS like domestic
scheduled commercial banks with adequate transition period for existing foreign bank
branches converting into WOS.

On arm’s length basis, WOS would be permitted to use parental guarantee/ credit
rating only for the purpose of providing custodial services and for their international
operations. However, WOS should not provide counter guarantee to its parent for
such support.

WOSs may, at their option, dilute their stake to 74 per cent or less in accordance with
the existing FDI policy. In the event of dilution, they will have to list themselves.
The issue of permitting WOS to enter into M&A transactions with any private sector
bank in India subject to the overall investment limit of 74 per cent would be considered
after a review is made with regard to the extent of penetration of foreign investment in
Indian banks and functioning of foreign banks (branch mode and WOS).
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Scheme for Setting up of Wholly Owned Subsidiaries (WOS) by foreign banks in
India
1. Background
At present, foreign banks have presence in India only through branches. The global
financial crisis of 2008 has shown that the growing complexity and interconnectedness of
financial institutions, coupled with the lack of effective cross-border resolution regimes,
have compromised the ability of home and host authorities to cope with the failure of too
big to fail (TBTF) and too connected to fail (TCTF) institutions. Globally a number of
policy options have been proposed to address this problem, including measures to contain
the negative externalities arising out of size and interconnectedness, improving the capital
and liquidity buffers held by such institutions, and enhancing their resolvability. The
lessons learnt during the crisis lean in favour of domestic incorporation of foreign banks.
In general, following are the main advantages of local incorporation:
i) It creates separate legal entities, having their own capital base and local board of
directors;
ii) It ensures that there is a clear delineation between the assets and liabilities of the
domestic bank and those of its foreign parent and clearly provides for ring fenced
capital and assets within the host country;
iii) It imparts clarity and certainty with respect to applicability of the laws of country of
incorporation on the locally incorporated subsidiary;
iv) A locally incorporated bank has its own board of directors and these directors are
required to act in the best interests of the bank, to prevent the bank from carrying on
business in a manner likely to create a risk of serious loss to the bank’s
creditors/depositors;
v) Local incorporation provides effective control to the local regulators.
A number of jurisdictions, therefore, impose requirement of local incorporation for
foreign banks mainly for (i) protecting local retail depositors, (ii) easing the resolution
process, and (iii) affording greater regulatory comfort.
2. Branch mode or wholly owned subsidiary
a) All foreign banks which are not carrying on banking business in India and which wish
to do so in the future shall carry on banking business in India only through a wholly
owned subsidiary.
b) Foreign banks which are not carrying on banking business in India and wish to do so
in the future have the option to carry on banking business in India either through a
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wholly owned subsidiary or through the branch mode. If they choose to carry on
banking business through the branch mode, and in case at a later date they come
within the purview of paragraph 4, they shall convert their branches into WOS.
c) Foreign banks which commenced banking business in India from August 2010
onwards were required to furnish an undertaking that they would convert their
branches into wholly owned subsidiaries if so required by RBI. Accordingly, such
banks shall convert their branches into a wholly owned subsidiary if the matters
specified in paragraph 4 apply to them.
d) Foreign banks which commenced banking business in India before August 2010 shall
have the option either to continue their banking business through the branch mode or
to convert those branches into a wholly owned subsidiary.
e) The branch expansion of both the existing foreign banks and the new entrants present
in the branch mode would be subject to India’s WTO commitments.
f) In respect of foreign banks which are presently carrying on banking business in India
and which are required to convert their branches into a wholly owned subsidiary or
opt to do so, the conversion shall only be in accordance with a scheme mandated in
the public interest to be approved by RBI under Section 44A of the Banking
Regulation Act 1949 and which is in accordance with the conditions specified in
paragraph 20.
3. Eligibility for setting up a wholly owned subsidiary
a) Setting up of WOS by a foreign bank in India should have the approval of the home
country regulator/supervisor.
b) A foreign bank applying for setting up a WOS in India must satisfy RBI that it is
subject to adequate prudential supervision as per internationally accepted standards,
which includes consolidated supervision in its home country.
c) The factors taken into account while considering applications for setting up WOS in
India would include the following:
(i) Economic and political relations with the country of incorporation of the parent
bank,
(ii) Reciprocity with home country of the parent bank,
iii) Financial soundness,
iv) Ownership pattern,
v) International and home country ranking of the parent bank by a reputed agency,
vi) Home country/parent bank rating by a rating agency of international repute such
as Moody Investors Service, Standard & Poor’s and Fitch Ratings,
vii) International presence of the bank,
viii) Adequate risk management and internal control systems.
4. Conditions requiring presence as WOS only
Foreign banks which have commenced banking business in India after August 2010 or
foreign banks which are not at present carrying on banking business in India but wish to
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do so in the future shall carry on banking business in India only through a wholly owned
subsidiary, if any of the matters as described hereunder are applicable:
i) Banks incorporated in a jurisdiction having legislation giving a preferential claim
to deposits of home country in a winding up proceedings;
ii) Banks that do not have adequate disclosure requirements in their home
jurisdiction;
iii) Banks with complex structures;
iv) Banks which are not widely held;
v) 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; and
vi) For any other reason that the Reserve Bank of India considers necessary for
subsidiary form of presence of the bank;
5. National treatment
Providing the extent of national treatment to WOS of foreign banks needs to be
considered from the financial stability perspective. From financial stability perspective
down side risk may arise if the foreign banks, i.e. WOSs of the foreign banks and foreign
bank branches together come to dominate the domestic financial system. To address this
risk, restrictions would be placed on further entry of new WOSs of foreign banks, when
the capital and reserves of the foreign banks (i.e. WOSs and foreign bank branches) in
India exceed 20% of the capital and reserves of the banking system. In such eventuality
prior approval of RBI will be required for opening WOSs.
6. Minimum capital requirement
a) The initial minimum paid-up voting equity capital for a WOS shall be Rs.5 billion.
b) The newly set up WOS of the foreign bank would be required to bring in the entire
amount of initial capital upfront, which should be funded by free foreign exchange
remittance from its parent.
c) In the case of an existing foreign bank having branch presence in India, which desires
or is required to convert into a WOS:
(i). It should convert its branch capital into the capital of WOS. The components,
elements and eligibility criteria of the regulatory capital instruments for the WOS
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would be as applicable to the other domestic banks as stipulated in the Master
Circular on Basel III Capital Regulations.
(ii). It shall have a minimum net worth of Rs 5 billion. If the net worth upon conversion is
less than the minimum capital prescribed under these guidelines, the shortfall shall
have to be brought in, towards infusion of equity, upfront from its parent as inward
remittance.
d) The WOS shall meet the Basel III requirements on a continuous basis from the time of
its entry / conversion. WOS shall, however, maintain a minimum capital adequacy
ratio, on a continuous basis for an initial period of 3 years from the commencement of
its operations, at 10 per cent i.e. 1 per cent
7. Corporate governance
The composition of the board of directors of WOS should meet the following
requirements:
a) not less than 51 percent of the total number of members of the board of directors shall
consist of persons as defined under Section 10A of the Banking Regulation Act, 1949;
b) not less than two-third of the directors should be non-executive directors;
c) not less than one-third of the directors should be independent of the management of the
subsidiary in India, its parent and any subsidiary or other associate of the foreign bank
parent;
d) not less than 50 per cent directors should be Indian nationals/NRIs/PIOs subject to the
condition that one-third of the directors are Indian nationals resident in India;
e) WOSs of foreign banks will have Part-time Chairman and full time Chief Executive
Officer (CEO);
9. Statutory, regulatory, prudential and other requirements
The WOS will be governed by the provisions of the Companies Act, 1956, Banking
Regulation Act, 1949, Reserve Bank of India Act, 1934, Foreign Exchange Management
Act, 1999, Payment and Settlement Systems Act, 2007 and other relevant statutes,
directives, prudential regulations and other guidelines/instructions issued by RBI and
other regulators from time to time.
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10. Raising of Non-equity capital in India
WOS of foreign banks may raise rupee resources through issue of non-equity capital
instruments, as allowed to domestic banks.
11. Branch Expansion/Authorisation
a) The guidelines on branch authorisation presently applicable to domestic scheduled
commercial banks and as amended from time to time would generally be applicable to
WOS of foreign banks.
b) In accordance with extant guidelines, WOS would be permitted to open branches in
Tier 1 to 6 centres (except at certain sensitive locations) without having the need to take
prior permission from Reserve Bank of India in each case, subject to reporting, as under:
i) At least 25 percent of the total number of branches opened during the financial year
must be opened in unbanked rural (Tier 5 and Tier 6) centres, i.e. centres which do not
have a brick and mortar structure of any scheduled commercial bank for customer based
banking transactions.
ii) The total number of branches opened in Tier 1 centres during the financial year cannot
exceed the total number of branches opened in Tier 2 to 6 centres and all centres in the
North Eastern States and Sikkim.
iii) An incentive in the form of a branch in a Tier 1 centre would be given for opening of
branch in Tier 2 to Tier 6 centres of underbanked districts of underbanked States.
iv) In case the WOS is unable to open all the branches it is eligible for in Tier 1 centres, it
may carry-over (open) these branches during subsequent two years.
v) If for some reason a WOS is unable to meet obligations of opening branches in Tier 2
to 6 centres in aggregate, or in unbanked rural centres (Tiers 5 to 6 centres) during the
financial year, it must necessarily rectify the shortfall in the next financial year.
vi) This general permission would be subject to compliance with the parameters stated
above as well as regulatory/supervisory comfort in respect of the individual WOS. RBI
would have the option to withhold the general permission to banks which fail to meet the
above mentioned criteria along with imposing penal measures on banks which fail to
meet the inclusion obligations above.
c) WOS would require prior approval of RBI for opening branches at certain locations
that are sensitive from the perspective of national security and the general permission
referred to at (b) above would not be applicable to opening of branches in such centres. A
list of such centres would be made available to WOSs by RBI.
12. Priority sector lending requirements for WOS
The WOSs will comply with the priority sector lending requirements as laid down in
RBI’s Circulars issued from time to time.
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PRINCIPLE CENTERED LEADERSHIP FOR HIGH
PERFORMING TEAMS
A leader has to be necessarily principle centered because that alone strengthens and
enables him to give and keep giving the results continuously.
Kaizen is the term
prevalent in Japan which means continuous improvement. Leader has to internalise and
practice this concept. Research on effective leadership has identified eight characteristics
which every good leader ought to imbibe.
1. Continual Learning:
Management works in the system while leadership works on
the system. Leaders strive to expand their competence and ability to do things. Lincoln
said “a good leader is one who keeps on keeping on”. More one knows more he realizes
that he doesn’t know and a good leader falls in this category. It may be noted that most
of leader’s learning and growth energy is self initiated and feeds upon itself.
2. Service Orientation: Those who are principle centered see life as a mission, not just a
career. A leader is a dealer in hope and this paradigm enables him to create umpteen
avenues of service to the organization and society.
In effect, every morning they do not
just wake up rather they yoke up and put on the harness of service, thinking of others.
Every leader would do well if he remember the following great lines of
Dr. Rabindranath Tagore
“ I slept and dreamt that life is joy
I woke and found that life is service
I served and understood that service is joy”
3. Positive Energy: The countenances of principle centered leaders are cheerful, pleasant
and happy. Their attitude is optimistic, positive and upbeat. Their spirit is enthusiastic,
hopeful and believing. The positive energy of the leader is like an energy field or an aura
that surrounds them. It is capable of charging or changing the weaker. Positive energy
can neutralize or sidestep the negative energy.
4. Belief in Other People: Principle centered leader do not overreact to negative
behaviors, criticism, or human weaknesses.
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Leaders believe in the unseen potential of
all people. They feel grateful for their blessings and show compassion to forgive and
forget the mistakes of others. They don’t label, stereotype, categorize and prejudge
others. Believing is seeing.
5. Leading Balanced Lives: Good leaders have many interests. Within the limits of age
and health they are active physically. They have a healthy sense of humuor. They are
open in their communication - simple, direct and non manipulative.
They do not divide
everything into two parts, seeing everything as good or bad, as either/or. They have the
power to discriminate, to sense the similarities and differences in each situation. Their
actions and attitudes are proportionate to the situation – balanced, moderate and wise.
6. They See Life as an Adventure: Leaders are like courageous explorers going on an
expedition into uncharted territories; they are really not sure what is going to happen, but
they are confident it will be exciting and result oriented. Their security lies in their
initiative, resourcefulness, creativity, willpower, courage, stamina and native intelligence
rather than in the safety, protection and abundance of their comfort zones.
7. They are Synergistic: Synergy is the state in which the whole is more than the sum of
the parts. Principle centered leaders are basically synergistic. They are change catalysts.
They improve almost any situation they get into. They work as smart as they work hard.
They are amazingly productive, but in new and creative ways.
8. Self Renewal: Principal centered leader regularly exercise four dimensions of human
personality: physical, mental, emotional and spiritual. Balanced, moderate, and regular
stretching exercises are a must for the leader. Reading, creative problem solving, writing
and visualizing provide mental exercise. Emotionally they can make an effort to be
patient, to listen to others with genuine empathy, to show unconditional love, and to
accept
responsibility for their own lives. Spiritually they focus on prayer, meditation
and fasting.
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How can we develop our personality?
Shakespeare the great once told “we know what we are but not what we might be”. Like
a tree, we can branch out and create new leaves almost always. We are like an ice berg –
one by eighth is only above the water level. God has created us with all tools of growth.
One has to take the responsibility of growing oneself. We can not blame any force
outside us for not succeeding in life. We must lead our life in such a way that it is
impossible to fail. Growth is not just physical. Growth in us is multi dimensional and
multi faceted. The proof of life is in living and living with a committed purpose of self
and service to others, is the greatest challenge one must accept with love, devotion and
contribution. ‘What we are God’s gift to us, what we can become is our gift to God! ’
Here are some tips for self development and self actualization:
Have inspiring goals in life: Without solid goals in sight we can not enter roles in life.
If you can not play a role how can you ever generate activities that bring results, profit,
name, fame etc. If you don’t deserve how can you desire? Set goals for you right today
because tomorrow it may be too late. While setting goals remember the SMART rule:

S – Specific M - Measurable A - Achievable R – Realistic T – Time bound
Hard work: Our main problem is not ignorance, it is inaction. Hard work helps you get
results in life. Remember the old saying ‘No pain, no gain’. The path of an achiever is
not smooth and easy going. There are challenges and constraints almost at every juncture.
Successful people make their own path by walking first! If you don’t find the path you
have to make the one. This calls for adequate efforts on a continuous basis.
Self discipline: You may see that the above two steps binds you to a task on hand as if
you tied to it till you get results. That is what the self discipline is about. In self discipline
you accept responsibility on your own. There is no shirking from work or giving reasons
for not doing. Self discipline is the foundation for your success in life. The world outside
watches you whether you have it or lack it. Self discipline makes you the leader, follower
with consummate ease poise and dignity. You are wanted every where as one individual
you make majority! Indiscipline and recklessness lands you nowhere in life. You may
get temporary attention and sense of importance but then remember your ‘admirers’ will
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forget you soon. Be committed to the following at all times: Your work, Your words.
Your worth
Develop new skills: The world we live in is a wonder of wonders. Possibilities that exist
are inexhaustible. Where does then the limitation lie? It is in our opinion about us. We
have a poor image of ourselves. Come out of these self limiting thoughts and try new
things in life to be better equipped. Knowledge is a must for all of us. If you are afraid
that it is not your cup of tea you are mistaken. People have succeeded because they take
risk of falling and failing. Failure only means that you have not succeeded yet. Read at
least one new book per week. In one year you will have read 52 new books and you so
much better, richer and finer than those who did not.
Character: Character is like a tree and reputation its shadow. Tree is the reality while
shadow is not. Strong and impeccable character stands you in good stead at all times.
Build your personality based on character. You know some mighty organizations have
had their fall because of unethical practices resorted to by a few at the top levels. The
society can accept poor, incompetent, less qualified ….. but certainly not bad character.
Nowhere in the world is wealth certificate demanded, what they ask for invariably is the
character certificate!
Ten steps for self development:

Learn, listen and train yourself almost always

3 Cs to avoid as far as possible : criticism , comment and condemnation

Never ever postpone what you can do today , now , this moment

Serve others to the extent you can. What you give always comes back

Take care of what you say. Your words can make or mar others

Create values. Generate results. Keep scaling higher and higher in life

Keep yourself away from negative thinkers, cynics and lazy people

Be creative in whatever way you can

Form habits that help you to succeed

Have passion for learning throughout your life
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