As a background:

a)    At present, foreign banks have presence in India only through branches.

b)    The global financial crisis of 2008 has shown that the growing complexity and interconnectedness of financial institutions, coupled with the lack of effective cross-border resolution regimes, have compromised 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. Globally a number of policy options have been proposed to address this problem, including measures to contain the negative externalities arising out of size and interconnectedness, improving the capital and liquidity buffers held by such institutions, and enhancing their resolvability. The lessons learnt during the crisis lean in favour of domestic incorporation of foreign banks.

c)    In general, following are the main advantages of local incorporation:

i.    It creates separate legal entities, having their own capital base and local board of directors;

ii.    It ensures that there is a clear delineation between the assets and liabilities of the domestic bank and those of its foreign parent and clearly provides for ring fenced capital and assets within the host country;

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

iv.    A locally incorporated bank has its own board of directors and these directors are required to act in the best interests 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.    Local incorporation provides effective control to the local regulators.

d)    A number of jurisdictions, therefore, impose requirement of local incorporation for foreign banks mainly for (i) protecting local retail depositors, (ii) easing the resolution process, and (iii) affording greater regulatory comfort.