The Banking and Strategy Initiative

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Bank subsidiarisation: The costs of additional capital

Goldman Sachs Headquarters, New York City

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The EFSF may not be a great example for growth hungry Asia, but Basel 3 and the Indian banking FDI guidelines have intertwining themes much as we have discussed here for policymakers over the last 3 years. RBI has recommended in its most current draft as it gets closer to law, two distinct facets of Indian regulation, which would be global benchmarks to come if not already implemented. We do remain distinctly pro-market in policy making though that traditional view of

*( being hands off == being market friendly)**no+policy+is good+policy

already losing currency with each European nation(peripheral) looking for $100 billion in capital support from the EFSF.

India has recently also homogenised regulation with a call for equal voting rights for your stake without the limitation of 5-10% ahead of its new licences for national players for banks. Goldman Sachs waited as late as 2010 to get a banking license in India and foreign banks are still not allowed to bid for more than 5% of an existing bank. Though unlikely, in the pipeline was also a spanner to cut FDI from 74% in the banking sector to 49% but the same is likely to be seen as a retrograde step especially as one now sees a homogenity and a likely larger magnitude in India’s FDI flows.  I cannot foresee the central bank being in a hurry to allow larger merger stakes for the foreign banks, however limits on number of branches ( there are no limits on corporate and investment banking business in India) are likely to be lifted as per the current draft.

While it is well observed in the global media that the India market footprint is much more friendly to global players, we are not in the same league as big brother China in the deal ticket size and the capital availability by virtue of it being everyone’s big brother as a large commodities customer and as each of its banks remain comparable in size to the Western giants. What our regulation would additionally require is that each foreign bank be an independent Legal entity in India and a fully owned subsidiary of the global bank and/or such global offices as may see fit to be in control. Needless to say while it does make sense in terms of safety of capital, it brings additional complications for the global players in maintaining solvency and thus raise the spectre of having an independent credit rating that may also be governed by the sovereign rating of India.

That one is a toughie, but when you bring in Capital, you would also be rewarded per global parameters of leverage and financial success. Also,

you get access to one of the Worlds Top5 markets by value and volume as Standard Chartered found much to its pleasure. We have also never raised super taxes and sovereign risk in terms of regulatory and stability is thus that much higher than that of China, more comparable once the magnitude of foreign flows is evened out between the Aussies the Chinese and the BRICs vis a vis India.

Once this deregulation is envisaged for India, a wholesome integration of the Indian Capital markets and the Indian economy with the world becomes more likely and a more positive experience to look forward to. Thus, even though the entity is likely to be independently incorporated in India it will be part of the global Economy seamlessly and take India to the next step in globalization

The second one is also one that raises more than Aussie complications for the foreign global players but the risk is worth it. As FDI is limited to 74%, the banks will have to push the Central Bank for not asking for local partners in their ventures and the Central Bank have to find a way to oblige as the Vodafone experience and more from the Telecom saga has shown the negatives of blindly asking for local participation in the business.

All in all a lot of spring cleaning still required for GS and JPM to become household names in the Sub continent than symbols of supreme capitalist jingoism and ultra cosmopolitan Gen Y business

A representation of the Lion Capital of Ashoka...

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