The committee believes that paring of the government stake in banks and that of RBI's stake in State Bank is essential for enhancing the effectiveness and efficiency of the system. At present, the law stipulates that not less than 51 per cent of the share capital of public-sector banks should be held by the government, while not less than 55 per cent of the share capital of the State Bank should be held by the RBI.

The committee has pointed out that the RBI as regulator of the monetary system should not be the owner of a bank. "Accessing the market would engender a discipline of its own in terms of performance which would enhance shareholder and enterprise value...The market is usually a hardtaskmaster," it says. Responsibility would, therefore, be cast on managements to manage their institutions in a manner which enhances profitability through improvements in productivity and efficiency.

It would, however, not be necessary for the government and the RBI to divest their stake in those nationalised banks accessing the market and in State Bank of India. A reduction in their shares would come about through additional subscription by the market to their enhanced capital.

The committee has also said that a proportion of 5-10 per cent of the equity of the bank concerned may be reserved for employees of the bank with a provision at some later date for the introduction of stock options. This, the committee has felt, would give employees a positive stake in the banks and their involvement in its progress.

The committee has noted that while a measure of depoliticisation has been effected with regard to the chairmen and managing directors and executive directors of public sector banks, the same hasnot been the case with other board level appointments.

The committee has therefore suggested that all board appointments should be made by the government on the recommendations of the Appointments Board. The appointment of chairmen and managing directors should be left to the boards of the banks and the boards should in turn be elected by shareholders, the committee has said.

Raise capital base of new private banks:

The committee has also said that the start-up capital requirements of Rs 100 crore for new private banks which was set in 1993, calls for a review with a view to its enhancement and as an incentive for the emergence of stronger private sector banks. The committee has also said that there should be a well defined criteria and a transparent mechanism for deciding the ability of promoters to professionally manage the banks and no category should be excluded on priority grounds.

"The question of a minimum threshold capital for old private banks also deserves attention and mergers could be oneof the options available for reaching the required capital thresholds. The committee has also said that as long as it is laid down that any promoter group cannot hold more than 40 per cent of the equity of a bank, any further restriction of voting rights by limiting it to 10 per cent should be done away with. Allow foreign banks to set up subsidiaries:

The committee is also of the view that foreign banks should be allowed to set up subsidiaries or joint ventures in India. "Such subsidiaries or joint ventures should be treated on par with other private banks and be subjected to the same conditions with regard to branches and directed credit as these banks. Currently, foreign banks are allowed to operate in the country only as branches.

The committee has said that only reputed foreign commercial banks with a well-diversified ownership pattern should be eligible to set up subsidiaries or majority owned subsidiaries.

"The minimum capital requirements for subsidiaries may be higher than the amountprescribed for the Indian banks for prudential reasons," the committee has said. It has also called for the need to raise the minimum start up capital requirement from $10 million to $25 million.