Question 94 from UPSC CSE 2024 - Economic s

Question

With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements:
1. There is no minimum capital requirement for wholly owned banking subsidiaries in India.
2. For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals.
Which of the statements given above is/are correct?

IASCODEX · Accepted Answer

Correct Option: B. 2 only

Strategy: - **Identify regulatory phrases:** Spot the phrases 'minimum capital requirement' and 'board members Indian nationals' as standard RBI norms for foreign bank subsidiaries.
- **Verify minimum capital requirement:** Recall that RBI mandates a significant minimum capital of Rs. 5 billion for foreign wholly-owned subsidiaries. This makes statement 1, if it implies otherwise, incorrect.
- **Verify board composition:** Confirm that RBI requires at least 50% of board members to be Indian nationals/NRIs/PIOs. This makes statement 2, if it aligns, correct.
- **Eliminate options:** Based on the accuracy of these statements, eliminate options containing incorrect assertions (e.g., options a and c if they include statement 1).

Key Info: Foreign banks in India may operate either as branches or through wholly owned subsidiaries (WOS), as permitted by the Reserve Bank of India (RBI). RBI requires a WOS of a foreign bank to have a minimum initial paid-up voting equity capital of Rs. 5 billion (Rs. 500 crore), contributed via foreign exchange remittance from the parent entity. This safeguard ensures financial stability and soundness.

Regarding board composition, RBI guidelines stipulate that at least 50% of the directors of a WOS must be Indian nationals / Non-Resident Indians (NRIs) / Persons of Indian Origin (PIOs), with an additional specification that at least one-third must be Indian nationals resident in India. Further, as per the Banking Regulation Act, 1949 (Section 10A), the board must also include non-executive and independent directors, ensuring governance standards are met and potential conflicts of interest mitigated.

Foreign banks are subject to the principle of single mode of presence, meaning they can operate either as branch or WOS, but not both. The regulatory regimen for subsidiaries is designed to align them more closely with domestic banks in terms of prudential and governance standards. These provisions work towards ensuring the stability, effective supervision, and integration of foreign entities in Indian banking. Statutory backing for these requirements is drawn from the Banking Regulation Act, 1949 and relevant RBI circulars/guidelines such as the 'Scheme for Setting up of Wholly Owned Subsidiaries by Foreign Banks in India' (2013 and its updates).

IASCODEX · Answer

Option A: 1 only

IASCODEX · Answer

Option C: Both 1 and 2

IASCODEX · Answer

Option D: Neither 1 nor 2