Key Reforms See Light Of Day In Parliament

Apart from the noisy scenes and disruption, the winter session of Parliament 2012 also saw some important bills being passed. Both the houses have recently passed two important bills, viz. the Banking Laws (Amendment) Bill, 2011 and the Companies Bill, 2011. Along with FDI in multi-brand retail, these two bills were being closely watched by investors to gauge the firmness of the government’s intent to carry the reform process to its logical end. Their passing by the legislature can be regarded as real steps towards furthering the reforms processes that were initiated few months ago.

As may be expected, the clearing of these two bills was far from being a smooth process. The proceedings of the Lok Sabha were adjourned twice, as the former ally of the UPA, Trinamool Congress, was joined by AIADMK and the Left parties in creating roadblocks. Finally, though, the bills were passed in the Lok Sabha as well as the Rajya Sabha.

Let us go through the bills one by one.

The Banking Laws (Amendment) Bill, 2011
In this bill, the government has taken a stance to increase the importance of the RBI. It is also likely to pave the way for the much-awaited issuing of new banking licenses.
The banking bill will increase shareholders' voting rights in private sector banks from 10% to 26%. This move is likely to attract more serious investors in this domain. However, anyone wishing to acquire 5% or more of the share capital of a banking company must obtain prior RBI approval.

The bill also proposes to confer powers on the RBI to supersede the Board of Directors of a banking company for not more than 12 months and to appoint an administrator to manage the company during that period. Such powers will definitely help the RBI to keep close tabs on the banks and on irregularities, if any.

In the context of the issuance of new banking licenses, the RBI needed to have access to entities that do not fall under its regulatory scope. That will boost the government's drive to expand access to financial services in a country where more than half of the population of 1.2 billion does not have a bank account. After much pressure from the opposition, the government heeds to the point and withdrew the clause that allows public sector banks enter commodity futures trading.

The Companies Bill, 2011
The Companies Bill, which was first passed in the year 1956, and after a span of nearly six decades, was presented again with some key changes. This was necessary as when it was passed in the year 1956, there were only around 30000 companies, which have now increased to more than 8 lakh. The bill has been passed by the Lok Sabha as well as the Rajya Sabha.

Among the key clauses introduced are that companies must ensure that they spend at least 2% of their net profit towards Corporate Social Responsibility (CSR) activities. If the company fails to spend this amount, the board has to specify in its report the reasons for not doing so.

Greater emphasis has been given to the Serious Fraud Investigation Office (SFIO), which has been conferred with the power to conduct searches and seizures on the premise of a fraudulent company. The bill will also keep a tab on remunerations for the Board of Directors and other executives of the companies.

Conclusion
The passing of these two bills in the Parliament gives credence to the reform process initiated by the government. However, there are certain bills like FDI in insurance and pension, as also land acquisition for infrastructure and mining projects, which have been postponed to next year.

The passage of the Banking Laws (Amendment) Bill, 2011 will certainly induce some positive vibes in the NBFC space and there are also some corporates lined up to get into this space. Large business houses like L&T, the Ambanis and the Mahindras are all eagerly anticipating the issue of new banking licenses. This could also entail some sort of consolidation in the banking space.

The positivity is reflecting in the stock price movement of some of the small private players like Lakshmi Vilas Bank, Karnataka Bank and DCB Bank, which are likely to be the takeover candidates. NBFCs like Bajaj Finserv, Shriram Transport Finance and Mahindra & Mahindra Financial Services, which are likely to get licenses, have also seen their share prices shooting up.

We believe that the passage of these long-pending reforms will definitely help to improve the country’s standing in the outside world as an investment destination.