Banking on change: banking laws amended

The year has started on a bright note for the banking sector with the enactment of the Banking Laws (Amendment) Act, 2012, which makes several far-reaching changes to existing banking legislation and increases the ambit of regulatory oversight of the Reserve Bank of India (RBI). It is expected that these changes will pave the way for entry of new players in this field, leading to greater competition, efficiency and wider financial inclusion.

Capital amendments

The act stipulates that new banks will have an authorized share capital of ₹30 billion (US$565 million), doubling the previous limit of ₹15 billion, comprising 3 billion fully paid-up shares of ₹10 each. While banks may obtain the RBI’s permission to vary the number and denomination of shares, the central government may, in consultation with the RBI, increase or decrease the authorized capital limit.

Another welcome development has been the permission granted to banks to issue preference shares (not permitted earlier) in accordance with guidelines framed by the RBI. The act expressly states that such preference shares, if issued, would however not enjoy voting rights. Under Indian company law, limited voting rights are typically associated with such instruments.

Sawant Singh is a partner, Aditya Bhargava is a senior associate, and Davis Kanjamala is an associate at the Mumbai office of Phoenix Legal.