The Banking Laws (Amendment) Bill

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The Banking Laws (Amendment) Bill was recently cleared by the Central Cabinet. The Bill seeks to amend the Banking Regulation Act, 1949, the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.


What is interesting from a competition law perspective is that the Bill seeks to exempt the banking sector from the applicability of Section 5 and 6 of the Competition Act, 2002. The proposed Section 2A of the Act states that Competition Act will not be applicable “to any banking company, the SBI, any subsidiary bank, any corresponding new bank or any regional rural bank or cooperative bank in respect of matters relating to amalgamation, merger, reconstruction, transfer, reconstitution or acquisition…”


The proposed Section 2A reads as follows:


2A. Notwithstanding anything to the contrary contained in section 2, nothing contained in the Competition Act, 2002 shall apply to any banking company, the State Bank of India, any subsidiary bank, any corresponding new bank or any regional rural bank or co-operative bank or multi-state co-operative bank in respect of the matters relating to amalgamation, merger, reconstruction, transfer, reconstitution or acquisition under—
(i) this Act;
(ii) the State Bank of India Act, 1955;
(iii) the State Bank of India (Subsidiary Banks) Act, 1959;
(iv) the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970;
(v) the Regional Rural Banks Act, 1976;
(vi) the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980;
(vii) the Multi-State Co-operative Societies Act, 2002; and
(viii) any State law relating to co-operative societies.


This issue was discussed by the Standing Committee on Finance (2011-12) of the Lok Sabha before the Cabinet cleared the Bill for introduction in the Lok Sabha. The rationale given by the Department of Financial Services, Ministry of Finance, is as follows:


Banking is some kind of an entity and the trust of people on the banking system is paramount. There are times when decisions have to be taken very quickly. Competition Commission‘s procedures gives sometime for scrutiny and for decision to be taken. Our financial sector in some sense is getting strengthened and it would take sometime to find them as quick to be US or EU kind of a system. So after great deliberations the Government took the view that we will keep the mergers and acquisitions of banks with the RBI. Obviously, when time demands, we will revisit. For the time being, the Government‘s careful consideration is that it remains with the RBI so that we are in a position to ensure the safety, security, trust and confidence of people in the banking system are maintained. Today, until the financial system becomes very strong we need to ensure that the depositors, the customers and stakeholders in the system retain their faith in the financial system of the Government. So, the best way is to keep it within the confines of the Reserve Bank of India. Otherwise, all issues would be published, everything would come into public domain, people would think this is unsafe, and the confidence in the system would be shaken and it would become a run on the bank, not only on one but on other banks also. So, a kind of stability should be provided.


There is a procedure under the existing Competition Act for a certain period of time when application is given should be in the public domain, some investigation has to be made, after investigation, the same has to be proposed to the Commission Members; they have to scrutinize -it can take a good amount of time.


Hon‘ble Members are aware, I know, that certain mergers have been done with an overnight kind of a focus and it has stood the test of time because the confidence of the people in the financial system got restored as a result of such actions were taken. So, that is the reason. Let me look at the NPAs, the financial stability, those kinds of things-unless we come to that mature level, it will take some more time to get into that.


The Standing Committee agreed with the view of the Department and stated that this exemption should be considered as a special case and should be revisited in the future in light of the experience gained by both, the Competition Commission of India (CCI) as well as the Reserve Bank of India.


The explanation of the Department of Finance should be revisited in light of the order in the HSBC-RBS combination. This is till date the only combination in the banking sector which has been decided upon by the CCI. In this case, the CCI received notice of the combination on the March 27, 2012 and the order of the CCI was released on the April 19, 2012.

Further, the Department of Finance states that this exemption "would be revisited... when time demands". This gives a overarching jurisdictional power to RBI on the matter and there is no definitive time frame when this would be revisited. 

Further, it is also pertinent to note that the telecom sector is also lobbying for an exemption from the applicability of the Competition Act in the sector.

An excellent article by Mr. Pradeep Mehta in the Business Standard on this issue is here.


Update (May 18, 2012) - An article by Dr. S.L. Rao in the Financial Express on this issue is here. Incidentally Dr. Rao is also a member of the Eminent Persons Advisory Group of the CCI.


While the two articles linked above are both for allowing the CCI to regulate mergers and acquisitions in the banking sector, a number of experts have made a counter-argument as well. You can visit the Fun Comp Forum moderated by the CUTS Centre for Competition, Investment and Economic Regulation.