Banking: Subsidiarization in India

A subsidiary bank is a type of foreign entity that is located and incorporated in a foreign country but majority owned by a parent corporation in a different nation. For example, London-based Merrill Lynch International is the largest operating subsidiary of the Bank of America Merrill Lynch, outside of the USA.
The subsidiary banking model helps the parent company avoid unfavorable
regulations enforced by the host country. Also, subsidiary banks don’t need to adhere to regulations that apply in the home country or nations where the parent company is incorporated. Instead, they operate under the laws and regulations of the host

Are subsidiary and foreign branches the same?

Subsidiary banks and foreign branch banks differ in the various services they can offer customers. For instance, foreign branch banks are bound by regulations that apply to the parent company and country where the bank operates. Furthermore, branch banks can originate larger loans than a subsidiary bank, as assets held by the parent company influence loan sizes. In India, hitherto, foreign banks have presence only through local branches.

Financial crisis of 2008: Lessons learnt

The global financial crisis of 2008 has shown that the growing complexity and
interconnectedness of financial institutions, coupled with the lack of effective crossborder resolution regimes can compromise the ability of home and host authorities to cope with the failure of ‘too big to fail’ (TBTF) and ‘too connected to fail’ (TCTF) institutions.
The lessons learnt during the crisis lean in favor of domestic incorporation of foreign bank.

Advantages of local incorporation1 :
i. Creating separate legal entities, having their own capital base and local board of directors;

ii. Ensuring there is a clear delineation between the assets and liabilities of the domestic bank and those of its foreign parent;

iii. Imparting clarity and certainty with respect to applicability of the laws of the country of incorporation on the locally incorporated subsidiary;

iv. Requiring the Board of Directors to act in the best interest of the bank, to prevent the bank from carrying on business in a manner likely to create a risk of serious loss to the bank’s creditors/depositors;

v. Providing an effective control to the local regulators.

R.B.I. Approvals

At present, The Reserve Bank of India (R.B.I.), allows foreign banks to set up business in India through a single mode of presence, i.e. either branch mode or a wholly owned subsidiary (WOS) mode1. As on date, two foreign banks, viz. DBS Bank (Singapore) and State Bank of Mauritius (Mauritius) have applied for WOS licenses; both have been granted in-principle approval by R.B.I. We anticipate significant governance and talent perspectives for foreign banks operating as WOS’s in India.

Regulatory Requirements:
• No less than 2/3 of the directors will be non-executive;
• At least 1/3 of the directors need to be independent;
• 1/2 the directors should be Indian Nationals /NRI’s, of which 1/3 should be
resident in India

These regulations will give rise to opportunities for well-qualified resident Indians with an impeccable track-record to be appointed to the Board of Directors. In addition, the WOS Banks will need to invest resources and time
in the induction of newly-appointed directors, training of senior management in board matters, and formally structuring the board / board committees, and formulating the terms of reference for the board.

Talent Management Initiatives
The board and senior management will need to formulate policies to ensure
the capabilities and effectiveness of the senior management is continuously
enhanced. Further, appropriate training and development interventions will be needed.(It is expected that critical roles, including that of the C.E.O. will need to be necessarily filled by Indian nationals.) The board will also
need to devise and implement appropriate succession planning policies to ensure there is sufficient depth of talent within the bank in critical functions.