Historically, the RBI appears to have had a preference for allowing foreign banks to operate in India as branches rather than separately incorporated subsidiaries. Consequently, most (if not all) foreign banks have been established as branches for the purposes of banking law as well as company law. Apart from the fact that a branch enjoys the support, creditworthiness, and solvency of the main entity (as the branch is merely a part thereof), it was always an intriguing question as to why there was a preference for this form.
In the last 5 years, however, RBI has revisited this position and has now expressed (in a roadmap issued in 2005) a preference for the subsidiary structure rather than the branch structure for foreign banks to operate in India. RBI has not only looked at the experience of other countries, but has also closely monitored lessons from the financial crisis.
A few weeks ago, the RBI issued a Discussion Paper on the “Presence of Foreign Banks in India”, which discusses the advantages of the subsidiary structure. These include clear delineation of assets and liabilities (from that of the parent), easier identification of laws that apply to the subsidiary, more effective control and regulation, greater clarity with corporate governance norms applicable to the subsidiary as well as treatment of assets and liability during insolvency. The discussion paper also encourages foreign banks with existing branches to convert them into subsidiaries.
An editorial in the Hindu Business Line sets out the gist of the discussion paper and also points to some open issues:
In the last 5 years, however, RBI has revisited this position and has now expressed (in a roadmap issued in 2005) a preference for the subsidiary structure rather than the branch structure for foreign banks to operate in India. RBI has not only looked at the experience of other countries, but has also closely monitored lessons from the financial crisis.
A few weeks ago, the RBI issued a Discussion Paper on the “Presence of Foreign Banks in India”, which discusses the advantages of the subsidiary structure. These include clear delineation of assets and liabilities (from that of the parent), easier identification of laws that apply to the subsidiary, more effective control and regulation, greater clarity with corporate governance norms applicable to the subsidiary as well as treatment of assets and liability during insolvency. The discussion paper also encourages foreign banks with existing branches to convert them into subsidiaries.
An editorial in the Hindu Business Line sets out the gist of the discussion paper and also points to some open issues:
The paper considers two vehicles for foreign bank expansion — branches and ‘wholly-owned subsidiaries' (WOS) — and, guided by experience, roots for the latter. Wholly-owned subsidiaries, unlike branches, can be treated as separate legal entities; locally incorporated, they have their own capital base and their own local board of directors. In the case of branches, parent banks are, in principle, responsible for their liabilities but assets can easily be transferred to head offices and, should the branch fail, it would be difficult to determine the assets available to satisfy the claims of local creditors. Managements of the subsidiaries, in short, have fiduciary responsibility to their local clients, branches do not. Of course, subsidiaries in trouble can be abandoned by their parents, as some were in the Argentine crisis, or in good times dominate the domestic system, but with sufficient “prudential measures” the RBI feels confident of maintaining a level field. But a problem arises: since the RBI would like to “mandate” new entrants as wholly-owned subsidiaries what happens to existing bank branches? Here, ambiguity steps in for the paper leaves it to the existing foreign banks voluntarily to convert their branches into subsidiaries even as regulation would mandate local incorporation for new entrants.