These two banks have gone public over the past one year, while State Bank of Hyderabad is waiting for better market conditions before it takes the plunge.

Individual shareholding in these banks is automatically restricted by the fact that the face value of the shares is Rs 100. But should even a single such instance take place, post-issue dialogues between the National Securities Depository Ltd (NSDL) and the bank managements revealed that the Depository Act, 1995, provides only for the automatic transfer of shares and would not be able to take care of these finer legal nuances. Therefore, if any SBI bank does go in for dematerialisation, it could end up violating the provisions of this Act since the Depository Act andsystems do not provide for rejection of such share transfers involving individual transactions exceeding 200 shares.

The clause says that no person shall be registered as a shareholder in respect of any shares in an SBI subsidiary and as a result could not hold in excess of 200 shares whether in his own name or jointly with other persons or even be entitled to dividends or other shareholders rights on these excess holdings. However, institutional entities such as SBI itself, the state government concerned, corporations, insurance companies, local co-operative societies, among others, are exempted from this ceiling.

According to a senior bank official, this clause was framed way back in 1959 at a time when the concept of widely-dispersed holdings was frowned upon.

Before the public issues of these two SBI associates, legal opinion was obtained on the status of foreign institutional investors (FIIs), asset-management companies and custodians -- all of which have appeared on the scene recently, and longafter the Act was framed.

The legal opinion was that as corporate bodies formed under the Companies Act, 1956, these would be categorised under corporations and exempted from the ceiling of 200 shares. In any case, the cut-off level of 24 per cent that applies to FIIs is monitored not by the depository but by the custodians, which informs the Reserve Bank of India (RBI) whenever this level is breached, with the RBI then reversing the trades. As of today, there is no provision for the same facility to be extended to individuals too.

Incidentally, there was a similar section in the State Bank of India (SBI) Act restricting individual investment, too, although this was expunged when the Act was amended in 1993, just before the SBI went public. The SBI had suggested a similar amendment to the SBI Associates Act, but till now no concrete action has been taken by any of the successive governments.

Dematerialisation of bank scrips is hindered by such as a regulatory framework that refuses to move in sync withthe reforms. Another constraint, which is reportedly being looked into by the RBI, is a central bank directive which says that all banks should obtain the RBI acknowledgement whenever the transfer of bank scrips results in a change in the shareholding of an individual, group or institution to 1 per cent and over of the paid-up capital of the banking company.

While this is aimed at preventing hostile takeovers, large sections of bankers feel that the RBI, which along with with Securities & Exchange Board of India, is furthering the cause of dematerialisation, does not need to wield this weapon, armed as it is with two other potent weapons. One is the fact that voting rights of all categories of bank shareholders (except the RBI itself in SBI and the central government in all public sector banks) is restricted to 10 per cent irrespective of the quantum of holding. The other is the compulsory RBI permission that is required for appointing directors on boards of banks -- and no predator would be satisfied withless than board control.