DAVIS POLK & WARDWELL
October 17, 2003
Securities and Exchange Commission
Ladies and Gentlemen:
We are pleased to submit this comment letter on behalf of ICICI Bank Limited ("ICICI Bank"), an Indian banking corporation1, strongly supporting the proposal by the Securities and Exchange Commission (the "SEC") to exempt qualified foreign banks from the insider lending prohibition of Section 13(k) of the Securities Exchange Act of 1934, as amended ("Exchange Act").
ICICI Bank agrees that an exemption for non-U.S. banks, based on scope and conditions that are comparable to the statutory exemption conditions for U.S. insured depository institutions, is in the public interest and consistent with investor protection and ICICI Bank thanks the SEC for taking action.2
ICICI Bank also agrees generally with the Proposed Rule but would like to request changes as set forth below. ICICI Bank also notes, and refers to in this letter as relevant, the comment letter submitted to the SEC on behalf of several European banking organizations (the "European Bank Group Letter").3
Comment 1 - Comprehensive Consolidated Supervision ("CCS") and Deposit Insurance should remain alternative conditions.
We are concerned about the complexity involved in applying the Proposed Rule, and indeed question whether CCS or deposit insurance is necessary if the proposed exemption requires compliance with home country insider lending rules or the fundamental elements of Regulation O, or both. We believe that the alternative CCS and deposit insurance conditions could be replaced with a third alternative - a simple showing that the foreign bank is subject to comprehensive home country supervision and regulation.
To the extent, however, that the SEC continues to believe that CCS or deposit insurance are appropriate tests, ICICI Bank strongly agrees with the SEC that the conditions of CCS and Deposit Insurance should be alternative conditions as currently proposed. The requirement for deposit insurance is directly comparable to the insurance requirement for the U.S. domestic banks and as the SEC has noted, evidences extensive supervision for banks that have not been the subject of a Federal Reserve Board CCS determination. The CCS condition equally serves as an indicator reflecting an international best practice standard of the Basle Committee that, for various reasons, has not been implemented in many countries.
Significantly, a foreign bank cannot itself control whether it receives a CCS determination. First, the Federal Reserve Board cannot make a CCS determination in the absence of an application by a foreign bank to take some action in the United States: either (i) seeking to establish a branch or agency office or a commercial lending company subsidiary; (ii) seeking to acquire control of a U.S. bank; or (iii) for a foreign bank that already operates a branch or agency office or controls a U.S. bank or commercial lending company, electing to become a financial holding company ("FHC"). Moreover, the Federal Reserve Board has discretion to decline to make a CCS determination when acting on branch, agency or commercial lending company applications, or FHC elections, if certain other factors are present; a CCS determination is required only when a foreign bank seeks to obtain control of a U.S. bank. Secondly, a foreign bank has no control over whether the content of its home country laws meets the standards of CCS.
India and ICICI Bank are a case in point. The Reserve Bank of India's supervision has not been considered by the Federal Reserve Board under CCS standards because no Indian bank has sought to establish a branch or agency office, or to acquire a U.S. bank, since CCS was made a consideration in 1991. For its own business reasons, ICICI Bank may not wish to establish a U.S. presence requiring a CCS determination, and the business strategies of other Indian banks are wholly beyond ICICI Bank's power to control. Moreover, to the degree that Indian financial regulation may not rise to the level of CCS, it is similarly not within ICICI Bank's power to secure necessary changes to Indian law. India does however, like many other countries, have a requirement for participation in a deposit insurance program.
In the absence of an alternative criterion of deposit insurance, the proposed foreign bank exemption would have no relevance for ICICI Bank. Practically, ICICI Bank would be left with two equally unpalatable options: (a) seeking to establish a U.S. presence that would require a CCS determination and pressing for any necessary changes in Indian law, or (b) continuing to not provide loans to high level and long serving employees with all the resultant competitive disadvantages in the context where loans form a major element of ICICI Bank's and Indian banking compensation arrangements.
Accordingly, on behalf of ICICI Bank we urge the SEC to retain the conditions of CCS and deposit insurance as alternative conditions.
Comment 2 - There should be no minimum quantitative or qualitative requirements for the deposit insurance scheme.
To the extent that the SEC continues to believe that deposit insurance is an appropriate test, ICICI Bank supports the concept of deference to home country deposit insurance as proposed. As the SEC has recognized, deposit insurance schemes vary greatly from country to country. An obvious example is in the context of emerging market countries, where deposit insurance schemes are typically lower in absolute dollar coverage than in developed countries.4 Significantly, each deposit insurance scheme is designed to address the nature and level of bank insolvency risk, the average deposit size particular to the country and its economic development. What is appropriate for one country may be burdensome or deficient for another. Accordingly, ICICI Bank believes that deference to the foreign banking supervisor regarding details of its deposit insurance scheme is appropriate, and that no minimum quantitative or qualitative criteria for the deposit insurance scheme should be specified.
Comment 3 - The CCS condition should not be satisfied solely by a CCS determination specific to the foreign bank.
ICICI Bank believes that the proposed alternative CCS condition should not be satisfied solely by a CCS determination specific to the non-U.S. bank, but that it should also permit a non-U.S. bank to rely upon a CCS determination in respect of another bank from its home country. ICICI Bank believes that a foreign bank should be able to meet the CCS condition by (i) obtaining a specific determination from the Federal Reserve Board that it is subject to CCS, or (ii) furnishing a certificate to the SEC attaching a Federal Reserve Board determination that a bank from the foreign bank's home jurisdiction is subject to CCS and certifying that the foreign bank is subject to substantially the same regulation and supervision in all material respects. In this regard, ICICI Bank respectfully supports and adopts the submissions made to the SEC in the European Bank Group Letter.
Comment 4 - There should be no minimum content requirement on home country insider lending restrictions.
The proposed foreign bank exemption appears to be conditioned upon home country insider lending restrictions containing the fundamental elements of Regulation O5. India's insider lending restrictions only apply to "directors" and do not cover "executive officers" unless they are also directors. Accordingly, ICICI Bank would be excluded from the proposed exemption notwithstanding its inability to direct a change in Indian law and notwithstanding that factually it complies with the minimum content requirements on account of its internal norms or policies.6
ICICI Bank requests the SEC to drop its requirement that foreign insider lending restrictions satisfy specified minimum content requirements and in this regard respectfully supports and adopts the submissions made in the European Bank Group Letter.
Comment 5 - Request for determination that loans below a threshold amount should be wholly exempted from section 13(k).
Assuming there is home country insider lending supervision, we would also propose an additional alternative for smaller banks, that would be simple to administer and would avoid the large compliance burden otherwise placed upon them. Specifically, ICICI Bank requests the SEC to consider exempting from the Section 13(k) prohibition, loans of a de minimis amount - say, an amount not exceeding $200,000 - made by non-U.S. banks to directors and executive officers on a preferential basis, if made in accordance with a program that makes such loans available to a wide range of employees and in compliance with home country insider lending restrictions.
We note that the Section 13(k) prohibition was targeted at practices adopted by certain U.S. companies, typically not in the lending business, of giving very large loans - as high as US $400 million - to executive officers, as disguised compensation. We do not believe the prohibition had in mind, as the mischief to address, far smaller, personal loans made by non-U.S. banks in the ordinary course of their lending business as part of their ordinary employee benefit programs and otherwise regulated by home country laws and regulations.
As part of an employee benefit program that is widely available to all its employees, ICICI Bank has long made loans to its employees (including, prior to Section 13(k), to its executive officers and executive directors7) on terms that are preferential compared to those offered to the public. The preferential employee loan program is a key element of ICICI Bank's compensation package and we understand such to be equally true for employment contracts and compensation provided by many non-U.S. banks throughout the world. The use of these loans as compensation tools is more important than in the U.S. for a variety of reasons which include different tax structures and, for many countries, much less availability of personal and consumer credit.
We have been informed by our client that at August 31, 2003, ICICI Bank had 16 executive directors and executive officers8. The combined average length of service for executive directors and executive officers was around 24 years. As disclosed in ICICI Bank's Annual Report on Form 20-F for the year ended March 31, 2003, these executive directors and executive officers received earnings, including bonuses, for fiscal 2003 ranging from US $77,816 to US $213,792.9 At March 31, 2003, loans extended to executive directors and executive officers, as of that date, prior to enactment of Section 13(k) were outstanding in an amount of US $ 550,972, and the average loan was for an amount of US $55,097, in compliance with the current maximum permissible loan amount of US $165,453.
We do not believe that ICICI Bank's range of executive compensation or the scope of the standard Indian employee preferential loan program justifies the competitive disadvantage10, and large administrative compliance burden imposed upon ICICI Bank and similarly placed non-U.S. banks by the operation of Section 13(k).
Accordingly, ICICI Bank requests the SEC to provide an exemption for personal loans made by any non-U.S. bank to its executive officers or directors on a preferential basis, if the aggregate amount of all personal loans made by such non-U.S. bank to any single executive officer or director is less than US $200,000, provided that such loans are made in accordance with a program that makes such loans available to a wide range of employees and the non-U.S. bank is subject to insider lending rules under home country laws or regulations11. This type of rule would be - both for the foreign bank and the SEC - clear in its application and easy to apply.
Finally, ICICI Bank would urge the SEC to address these issues swiftly. Until the enactment of Section 13(k), loans to directors and executive officers were a key element of ICICI Bank's compensation packages. Currently, these arrangements are frozen. As a result, ICICI Bank has been placed at a competitive disadvantage in respect of recruiting and retaining staff in India and ICICI Bank's directors and executive officers have been placed at a competitive disadvantage vis á vis other employees at ICICI Bank.
We hope that the foregoing is useful to you as you consider the Proposed Rule. Please do not hesitate to contact me in Paris (011-331-5659-3670) if you would like to discuss these matters further.