India offers a complex but structured regulatory environment for foreign banks looking to establish a presence within its borders. This article delves into the intricacies of setting up a foreign bank in India, whether through a branch or a wholly-owned subsidiary (“WOS”), along with the regulatory guidelines and requirements laid down by the Reserve Bank of India (“RBI”).
Entry Options for Foreign Banks in India
Foreign banks not currently operating in India but wish to do so can operate either through a branch or as a wholly-owned subsidiary. However, if circumstances change to fall under specific regulatory conditions, these banks must convert their branches into a WOS.
- Branch Mode1
- Expansion Limits: Branch expansion is limited by India's commitments to the World Trade Organization (WTO), restricting market access to 12 branches per year for all foreign banks combined.
- Initial Capital: Assigned capital of USD 25 million (approximately INR 208.5 crores) is required at the time of opening the first branch.
- Compliance and Functioning: The bank's track record, home country supervisory reports, and bilateral diplomatic relations influence the approval process.
- Wholly-Owned Subsidiary
- Eligibility: Requires approval from the home country regulator and must demonstrate adherence to international prudential supervision standards.
- Other Factors Considered: Applications are evaluated based on economic and political relations, reciprocity, financial soundness, ownership patterns, international and home country rankings, ratings, and risk management systems.
Conditions Mandating Establishment of Wholly-Owned Subsidiaries2
Foreign banks must establish a WOS if any of the following conditions apply:
- Legislation in Home Country: If the home country gives preferential claims to deposits during winding-up proceedings.
- Disclosure Requirements: Inadequate disclosure requirements in the home jurisdiction.
- Complex Structures: Presence of complex organisational structures.
- Ownership: If the bank is not widely held.
- Supervisory Arrangements: Inadequate supervisory or market discipline in the home country.
- RBI Discretion: Any other reasons deemed necessary by the RBI.
Regulatory Compliance Requirements for Wholly-Owned Subsidiaries
- Minimum Capital Requirement
For a WOS, the initial minimum paid-up voting equity capital is INR 5 billion (INR 500 crores). This capital must be brought in upfront through free foreign exchange remittance from the parent bank. The WOS must also continuously adhere to Basel III requirements, maintaining a minimum capital adequacy ratio of 10% for the first three years alongside other required buffers.
- Corporate Governance
Foreign banks operating through a WOS must adhere to specific corporate governance standards:
- Board Composition: At least 51 percent of the board members must meet criteria under Section 10A of the Banking Regulation Act, 1949.
- Non-Executive Directors: At least Two-thirds of the board should consist of non-executive directors, with one-third being independent of the management of the subsidiary, parent, or any associate.
- Indian Nationals: At least 50 percent of the board should be Indian nationals/NRIs/PIOs, with one-third resident in India.
- Leadership Structure: WOSs must have a part-time Chairman and a full-time CEO, with RBI approval required for appointments and remuneration.
- Branch Expansion for WOS
Branch expansion for WOS follows the same guidelines applicable to domestic scheduled commercial banks. This ensures a level playing field and maintains consistency in regulatory compliance.
FDI Policy 2020: Channels for Foreign Banks to Establish Presence in India
Foreign banks regulated by their home country's supervisory authority and meeting RBI's licensing criteria can hold 100% paid-up capital to establish a WOS3. They may operate in India through one of the following channels viz., (i) branches (ii) a wholly-owned subsidiary and (iii) a subsidiary with aggregate foreign investment up to a maximum of 74 per cent in a private bank (automatic up to 49% and government approved route beyond 49% and up to 74%).
Foreign banks can establish a subsidiary through conversion of existing branches, a fresh banking license, or by acquiring shares in an existing private sector bank, provided at least 26% of the bank's paid capital is held by residents.
Conclusion
India's regulatory framework for foreign banks is meticulously crafted to ensure stability, transparency, and fairness in the banking sector. Foreign banks have the option to enter the Indian market either through branches or wholly-owned subsidiaries, with each route having its own set of requirements and conditions. By adhering to the RBI's guidelines and maintaining high standards of governance and compliance, foreign banks can successfully navigate the Indian financial landscape and contribute to its dynamic banking sector.
Footnotes
1 Section 23 of the Banking Regulation Act, 1949 – Master Circular on Branch Authorisation, available at: https://website.rbi.org.in/web/rbi/-/notifications/master-circular-on-branch-authorisation-9014?p_l_back_url=%2Fweb%2Frbi%2Fsearch%3Fq%3DMaster%2520Circular%2520on%2520Branch%2520Authorisation%26type%3Dcom.liferay.journal.model.JournalArticle%26type%3Dcom.liferay.portal.kernel.model.Layout%26togs%3Dexact%26orderBy%3Dnewest
2 Scheme for Setting up of Wholly Owned Subsidiaries (WOS) by foreign banks in India, available at: https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2758
3 Annexure 8, FDI Policy, 2020, available at: https://www.meity.gov.in/writereaddata/files/FDI-PolicyCircular-2020-29October2020_0.pdf
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.