CNBC-TV18 learns that the government has proposed privatising Indian Overseas Bank and Central Bank. There are three legislative ways to privatise the banks and which route the government takes will make a difference to all public sector banks.

The point to note is this is not just privatising two banks it is a whole philosophy of reform that we will get to know when we know the route of privatisation. So just to get to the laws, the government can amend the Bank Nationalisation Act, or it can annul the Bank Nationalisation Act completely and bring banks under the Companies Act or third, it can create a holding company, which owns all the banks. Now which route it takes will determine the quality, the intensity of reform that the government intends to bring over.

Read Here: Government proposes to privatise IOB, Central Bank of India; details here

In the Bank Nationalisation Act, the requirement is that government must own more than 51 percent. Now, you can say I want a one-off exception for IOB, Central Bank and add that as an amendment to that act.

Alternatively, you can say that you amend the Bank Nationalisation Act itself and say the government's stake can go below 51 percent. Now, there the quality will be very different, whether you take the one-off route or whether you take a general provision.

Likewise, bringing the banks under the Companies Act now is something which PJ Nayak Committe had recommended; Dr YV Reddy way back in the year 2000 had made a speech to this effect saying that that will be genuine reform. Now, if you bring all banks under the Companies Act, you are actually annulling the Bank Nationalisation Act, but it is qualitatively superior because the government has powers over banks, under the Bank Regulation Act that will not apply.

You will behave like a company, all those audit rules, audit committee, NRC, the remuneration committee, the 51 percent independent directors all that will come. So the government's extraordinary influence will not be there on banks, they will run like a company under the Companies Act, that would be a stronger route, and it would be reform, it won't just be privatisation of two banks.

Finally, if you create a holding company then it is like a Temasek. I mean, do we know that DBS is not a private bank, it's a bank owned by the government of Singapore. But because it is owned by Temasek and they own DBS it behaves practically like any other privately-held foreign bank.

In this process we already have many examples - SBI owns SBI mutual fund, insurance, all those companies who are grandchildren of the government, as it had much more freedom, they are not responsible to the CVC, to the CAG. There is a greater degree of nominating people. You don't have to go through the banking recruitment exams, process. It is a real quality of management, freedom and autonomy improves that could be a third route.

We don’t know what the government will do but one hopes that it is not just privatisation but genuine reform.