New Delhi: A parliamentary panel on Tuesday recommended raising voting rights of investors in the private sector banks but with a cap of 26 percent with a view to maintaining a balance between economic control and promoting corporate democracy.

The Banking Laws (Amendment) Bill 2011, introduced in the Lok Sabha in March this year, had proposed providing voting rights to investors commensurate with their shareholding in the private sector banks.

At present, the voting right is capped at 10 percent.

"The (Finance) Ministry may consider increasing the limit only to 26 percent in order to keep a balance between conflicting factors underpinning the decision, namely concentration of economic power/control and promotion of corporate democracy," said the Parliamentary Standing on Finance headed by BJP leader Yashwant Sinha.

The Committee in its report on the Banking Laws (Amendment) Bill 2011 tabled in the Lok Sabha suggested the RBI must ensure that regulatory mechanism is adequate and strictly complied with to prevent any misuse of the provision of increasing the limit.

It recommended that RBI, being the nodal agency in the banking sector, should conduct due diligence of "fit and proper persons/entities...".

The apex bank should also take sufficient safeguards while stipulating conditions as to credentials, source of funds, track record, financial inclusion, before granting approvals under this clause, it said.

The committee, in its report, also asked the government to consider merits of issuing non-voting shares as an avenue to expand the capital base of banks without allowing concentration of management control in a few hands and which would also enable the banks to grow faster.

The panel, however, has supported the government's proposal to keep bank mergers outside the purview of the Competition Commission of India temporarily but with certain caveats.

While it supports the government's proposal to keep bank mergers outside CCI's purview, it recommended that this exception should be considered as a special case.
It suggested an expedient measure be revisited in "due course in the light of experience gained by" regulators RBI and CCI.

The government had tabled the Bill in Parliament during the Budget Session, after which it was referred to the committee.

While presenting the report, the committee, however, clarified that the report does not convey its views on mergers and acquisition policy in banking sector as such, saying that the issue merits a separate discourse.

The Standing Committee also suggested the proposed Depositor Education and Awareness Fund as provided in the Bill should be created without compromising the rights and claims
of depositors or their legal heirs who should be able to secure their claims without difficulty.
The panel said legal heirs of depositors should be informed before transfer of funds to the Depositor Education Protection Fund.

According to it, even after the transfer to the fund, the bank would be liable to repay with interest justified claims of depositors within a period of one month of claim.

The report suggested that the RBI should be mandated to refund the claimed amount under the fund immediately on demand from the concerned bank.

It added the government may also consider incorporating a similar provision for deciding the fate of unclaimed articles under safe custody of the banking company or lying in the lockers which have not been operated for more than a certain period of time.

The Standing Committee said that while it broadly endorses proposals contained in the Bill, recent failures of some major private banks internationally and lessons from that episode should not be lost sight of while formulating the new policy on banking licences.

 It said that stability of the banking system should be preserved while nurturing growth and development of the banking sector as a whole and issues and concerns like banking penetration, and financial inclusion should remain paramount.

It also said that as frequent amendments in banking laws are being suggested, the government should come up with an integrated modern banking law for the country, which will be comprehensive and will consolidate all related provision of banking presently dispersed in different statues.

It also suggested changing the words "other purpose", which could have a wide connotation and lead to ambiguities, with "incidental or ancillary to the promotion of depositor interest" with regard to utilisation of the depositors' fund.

The panel suggested that considering the wide scope and amplitude proposed in the definition of 'Associate Enterprises' of a banking company, the RBI regulatory mechanism should be beefed up in view of their expending role and augmented functions as proposed in the Bill.

With regard to suppression of board of directors of banking company and appointment of administrator, the committee has recommended changes to be made in the provisions
to indicate the qualification of the administrator.

It suggested that no serving and retired officer of the central government and state governments should be considered for appointment as administrator and called for suitable amendments in the sub-clause of the Bill dealing with this provision.