Previous Year Question
With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements:
There is no minimum capital requirement for wholly owned banking subsidiaries in India.
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?
Only 1
Only 2
Both 1 and 2
Neither 1 nor 2
Correct Answer: B
Detailed Solution
Statement 1 is incorrect.
The Reserve Bank of India has prescribed a minimum capital requirement for a foreign bank establishing a Wholly Owned Subsidiary—WOS in India. Such a subsidiary is required to have minimum paid-up voting equity capital of ₹500 crore.
Therefore, the claim that no minimum capital requirement exists is incorrect. The capital requirement ensures that the subsidiary possesses an adequate financial base to conduct banking operations and absorb potential risks.
The Indian WOS of a foreign bank is established as a company incorporated in India. It constitutes a separate legal entity and is regulated by RBI under Indian banking laws and applicable prudential norms.
Statement 2 is correct.
Under the RBI framework, at least 50% of the directors on the board of the wholly owned banking subsidiary of a foreign bank must be Indian nationals.
The requirement promotes an understanding of local banking conditions, effective corporate governance and accountability within India. RBI also prescribes other conditions relating to independent and non-executive directors and experience in fields such as banking, finance, law and risk management.
A distinction exists between the branch model and the WOS model. A foreign bank may operate through branches or establish a separate wholly owned subsidiary under Indian law. The capital and liabilities of the WOS are legally separated from those of its foreign parent, strengthening the protection of local depositors and the Indian banking system.