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On January 16, 2023, the Reserve Bank of India (RBI) published the guidelines on the purchase and possession of shares or voting rights in Banking Companies. In order to make sure that the exclusive ownership and control of banking companies are diversified and the significant shareholders of banking companies are consistently “fit and proper,” the Reserve Bank of India (RBI) recently issued the “Directions – Holding of Shares and Acquisition or Voting Rights in Banking Companies”. This action has been taken to exercise the power granted to it under Sections 12, 12B, and 35A of the Banking Regulation Act of 1949[1].
The direction has been given to make sure that the shareholders of banking sectors are qualified to manage control of the banking companies. The Guidelines on Holding of Shares and Acquisition or Voting Rights in Banking Businesses established by the Reserve Bank of India guided the issuance of the Directions. To determine the shareholders of banking companies are “fit and proper,” the RBI has established a set of regulations. These requirements include the shareholders’ experience, reputation and financial stability.
All banking organisations functioning in India, including Small Finance Banks (SFBs), Local Area Banks (LABs), and Payments Banks, would be subject to this directive. By laying down clear guidelines for the holding of shares and acquisition or voting rights in banking organisations, the directions seek to make sure the safety and protection of the banking industry.
Table of Contents
Approval from the Reserve Bank to purchase shares or voting rights in a banking company shall be subjected to the following restriction:
Major shareholders who have completed the approved acquisition, applicants who have received approval to have major shareholdings or applicants who have applied to obtain prior approval must inform the banking company of any changes to the information provided in Form A or any other developments that may have an impact on the status of being “fit and proper” in addition to providing the information requested by the banking company.
Regarding the cap on voting rights, the RBI emphasises that a depository may only exercise voting rights on behalf of the holder of depository receipts (DR) when it can be shown that their holdings are compliant with Section 12B of the Banking Regulation Act.
The RBI further clarified that a person might only exercise voting rights on behalf of registered shareholders when it can be shown that the combined voting rights of those shareholders comply with Section 12B of the Act.
Finally, these directives offer precise standards for acquiring and holding stock or voting rights in financial organisations. Any planned acquisition must receive RBI permission, and banks must regularly check on the “fit and proper” criteria of significant shareholders and applicants. In order to comply with the Guidelines, banks must present reports and a plan for reducing their holdings. Stricter regulations lessen the possibility of fraudulent activities and promote shareholder transparency to prevent unwanted claims or conflicts.
Also Read:Restriction on Transfer of Physical SharesTransmission of Shares under Companies Act, 2013
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