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Banking mergers and acquisitions to be under purview of central bank
March, 25th 2011

The government, for now, has sought to put to rest the issue of who is to regulate mergers and acquisitions (M&A) in the banking sector, by conferring the power on the Reserve Bank of India (RBI).

The Banking Laws (Amendment) Bill, 2011, tabled in the Lok Sabha recently, comes in the wake of pressure from RBI to clarify the matter.

Predictably, the Competition Commission of India (CCI) is not very pleased at this development. While not officially grumbling, officials in CCI say if monitoring powers over banks M&A are taken away from the competition watchdog, there could be similar demand in other sectors.

For the record, a senior CCI official said: There is no turf war. This is a dynamic situation. Tomorrow, if the government feels CCI should regulate (bank) M&As, it can do so.

The Competition Act itself empowers the government to allow such exemptions, he noted. Under the Competition Act, 2002, CCI has the power to regulate combinations (M&A) which cause or are likely to cause an appreciable adverse effect on competition within the relevant market in India. The Act also allows the government to make exceptions in the larger public interest if a particular industrial segment needs to be out of its purview.

The banking Bill proposes to insert a new section, 2A, in the Banking Regulation Act, 1949, to exempt mergers of banking companies from applicability of the Competition Act. The RBI had expressed reservations about putting bank M&A under the purview of the CCI. It felt any other watchdog would not be able to appreciate the complexities in banks mergers.

Though the Competition Act was passed in 2002, CCI became functional only in May 2009. It had notified rules relating to mergers only recently.

This is the third major occasion where the government has tried to address RBI reservations on regulatory issues.

After a spat between the regulators for the capital markets and the insurance sector on unit-linked products, the Union finance ministry had decided on an oversight panel chaired by the finance minister.

After RBI resisted, the central bank governor was made vice-chairman of the mechanism. There were similar RBI objections to the proposal for a Financial Stability and Development Council. It was decided to have one sub-committee of the Council, to be chaired by the RBI chief.

The opposition from RBI was because it used to chair the coordination committee between financial sector regulators and these decisions by the finance ministry diluted its earlier role. The banking laws amendment bill also proposes to empower RBI to call for information and returns from associate enterprises of banking companies and to inspect these, if necessary.

This may lead to a turf war, if these associate enterprises fall in other regulators domain, analysts said.

 
 
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