Economic consequences of deregulation: Evidence from the removal of voting cap in Indian banks

We examine the effect of the 2005 Banking Regulation Amendment Bill and the 2011 Banking Laws Amendment Bill proposals for removal of the 10 percent voting rights cap in Indian Banks. The 2011 Banking Laws Bill was first introduced in 2005, but lapsed with the dissolution of the 14th Lok Sabha. The Bill was passed in December 2012 and raised the voting cap in private sector banks from 10 to 26 percent. We present evidence that the removal of the voting cap enhances the value of votes of bank stocks by reducing the wedge between cash-flow and control rights, thus increasing monitoring and the probability of takeover. Post-deregulation analysis reveals that the passage of the Bill was followed by increasing blockholders' number and percentage of shares held in larger and government banks. Furthermore, a stronger negative relationship between banks' profitability and size, as well as share of non-performing loans is observed. This study makes an important contribution to the growing literature on the valuation impact and efficiency gains of liberalization of ownership restrictions in emerging markets, as well as the rich literature on corporate governance and control relating to the value of voting privilege in companies with disparate voting rights.