if a group of persons acquires sizeable equity or voting rights in a bank without following the acknowledgement procedure. there is no statutory power for directing disgorgement of shares and as such, if any such acquisition takes place, it may result only in contravention in provisions of br act. the main object of preventing the management of a bank from being captured by persons who are not fit and proper for holding such sizeable interest will not be achieved. rbi should, therefore, have the power to direct, by order, at any time that persons who are not fit and proper to hold such equity or voting power in contravention of these provisions, shall not have voting power. the 2011 bill proposes to confer such power on rbi. this will help prevent unscrupulous persons from exercising control over banks. deposit collection activity currently, collection of deposits from members / shareholders is not treated as acceptance of public deposits. this is a matter of serious concern, particularly, with respect to co - operative societies. deposits are accepted by enrolling members on tap and by collecting nominal bis central bankers ’ speeches amounts from them, exposing such depositors to serious risks. banking regulation act does not apply to such co - operative societies and they are outside the regulatory purview of the reserve bank. it is necessary to plug this important loophole. unless deposits are received from members who have voting rights, the deposits have to be treated as public deposits and the exemption from the provisions of banking regulation act should not be made applicable. every entity that accepts deposits from persons having no voting rights has to be treated as deposit accepting entity and should be regulated as such by rbi. rbi should have the discretion to determine the level and intensity of regulation and supervision depending upon the risk to the system from such entities. financial conglomerates in india, banks are entitled to carry on certain financial activities under the bank subsidiary model. some banks have formed subsidiaries to carry on securities and insurance business. the performance of the subsidiaries affects the balance sheet of the bank. on account of varied activities carried on by the entities in the group which fall within the regulatory jurisdiction of multiple regulators, the risk to the system as a whole posed by such financial conglomerates is difficult to assess. these raise systemic issues and rbi as the regulator of banks needs to be empowered to obtain information, with respect to each of the entities functioning under the umbrella of a bank. the 2011 bill proposes to confer such powers on rbi to get information with respect

anand sinha : legislative reforms – strengthening the banking sector address by mr anand sinha, deputy governor of the reserve bank of india, at the financial planning congress ’ 11, organised by the financial planning standards board of india, mumbai, 18 december 2011. * * * inputs provided by p r ravi mohan, g s hegde, subrat das and smt sadhana varma are gratefully acknowledged. justice ( retd. ) shri b. n. srikrishna, chairman, financial sector legislative reforms commission ( fslrc ), shri swarup and shri malegam ( members of fslrc ), shri yogesh agarwal, chairman, pension fund regulatory and development authority ( pfrda ), shri mudholkar and shri chikermane, and other delegates. it is an honour and privilege for me to address you today, on some of the key issues with regard to “ reforms in the banking sector ” and i thank financial planning standards board of india for this opportunity. this financial planning congress comes at a very opportune time when the far reaching exercise of rewriting financial laws is being undertaken by the fslrc and i commend the organisers for their efforts in putting together this congress. i. introduction empirical research shows that better developed financial systems accelerate economic growth and shrink income inequality by disproportionately increasing the earnings of lower income families1 i. e. enabling growth with equity, which is so vital for our country. a well developed financial system will require sound legislative framework because, legislation is the foundation on which institutional frameworks stand. to be effective, legislation not only needs to be unambiguous and fair but also should be robust enough to address all the existing concerns while, at the same time, being flexible enough to accommodate the new needs on account of evolving environment. role of legislation in the context of economic development in general and the financial sector in particular, is an interesting area of study. it has been argued that strong legal systems foster development of sophisticated financial markets and intermediaries2, which enhances the economy ’ s ability to manage risk and eventually lead to economic growth. measures such as robust contract enforcement and disclosure discipline go a long way in strengthening the financial systems. every legislation has a time dimension and its relevance has to be seen vis - a - vis this dimension. with the changing environment, practices and processes change, necessitating a review of extant legislations. this holds