Framework for presence of foreign banks in India

On 6 November, the Reserve Bank of India (RBI) issued its much awaited framework for the presence of foreign banks in India. The framework envisages that foreign banks will be present in India preferably through wholly owned subsidiaries (WOS) rather than branches, and such WOS will enjoy “near national treatment”.

Background

To implement the Indian government’s measure of permitting 74% foreign direct investment in Indian banks, the RBI issued a “roadmap” for the presence of foreign banks in India in 2005. While this roadmap contemplated banks incorporating locally in India, no foreign banks converted their Indian branches into WOS. Subsequently, in 2011, the RBI released a discussion paper on the presence of foreign banks in India. Based on public comments on the discussion paper, the RBI has now issued the framework.

The lessons learned in the global financial crisis of 2008 were the driving force for the issuance of the framework. A key imperative for the framework’s issuance was to require foreign banks to incorporate locally to conduct business in India, so as to ensure greater control of foreign banks’ Indian operations. As local incorporation requires separate legal entities, this is also expected to ensure that the assets of the Indian WOS are separated from those of the parent foreign bank. Local incorporation would also ensure that a board of directors based in India would manage the affairs of the Indian WOS keeping in mind the best interests of the WOS.

Rajat Mukherjee is a partner and Rishi Shroff is an associate at Khaitan & Co. The views of the authors are personal, and should not be considered as those of the firm.