RBI Notification

Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies

Banking Companies

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.

Procedure for Prior Approval

  1. Any person wishing to acquire considerable shares in a banking firm must apply to the Reserve Bank for approval.
  2. The Reserve Bank will seek comments from the banking companies on the proposed acquisition after getting the application.
  3. The banking company’s board of directors will evaluate the person’s “fit and proper” criteria based on the information given and the due diligence, and it will submit the findings to the RBI in Form A1 along with a copy of the board resolution within 30 days.
  4. The Reserve Bank will conduct a thorough investigation to determine the applicant’s “fit and proper” status, and it may impose conditions on both the applicant and the banking company.
  5. Individuals from non-compliance jurisdictions with the Financial Action Task Force (FATF) will not be allowed to purchase a majority of shares in a banking company. Current major shareholders from this FATF non-compliant jurisdiction will be permitted to keep the investment, but they can’t make any additional purchases without the RBI’s prior approval.
  6. If the total holding ever drops below 5% of the paid-up every share capital or the complete voting rights of the banking company, the person wishing to increase the total holding to 5% or higher will need to request new Reserve Bank approval.
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Limits on holding shares

Approval from the Reserve Bank to purchase shares or voting rights in a banking company shall be subjected to the following restriction:

  1. Non-promoter: 
    • 10% of the banking company’s paid-up share capital or voting rights in the case of natural persons, non-financial institutions, financial institutions connected to Large Industrial Houses directly or indirectly, and financial institutions owned by individuals at a percentage of at least 50% or more. (including the relatives and persons acting in concert).
    • 15% of the voting rights of the banking company or the paid-up share capital, whichever is greater, in the event of financial institutions (except those financial institutions connected to Large Industrial Houses directly or indirectly, financial institutions owned by individuals at a percentage of at least 50% or more), public sector organisations, and central/state governments.
  2. Promoter: Once 15 years have passed since the banking company’s commencement, 26% of the paid-up share capital or voting rights will be considered promoters.
    • As part of the licencing requirements or as part of the shareholding dilution plan submitted by the banking company and approved by the Reserve Bank with such conditions as are deemed fit, the promoters of banking companies may be permitted to hold a higher percentage of shareholding during the period prior to the completion of the 15 years.
    • The Reserve Bank may also, on a case-by-case basis, permit higher shareholdings [than those outlined in the above point] in situations like existing promoters’ relinquishment, supervisory intervention, including under Prompt Corrective Action, bank reconstruction or restructuring, the entrenchment of existing promoters, or any other action in the interest of the banking company and its depositors or in the interest of consolidation in the banking sector, etc. Reserve Bank may apply constraints while permitting such larger shareholding if it sees proper (including dilution of such higher shareholding within a timeline).
    • The Reserve Bank may impose a differentiated shareholding dilution plan for such holdings in specific instances where the State Government, Central Government, Union Territory, Public Sector Undertaking, Public Financial Institution, or specifically permitted investors are the promoters of banking companies or have been expressly granted permission by the Reserve Bank to hold a higher shareholding as promoter/non-promoter in certain special circumstances.

Information to be provided for continuous monitoring

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.

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Continuous Monitoring

  • Banking businesses are expected to regularly monitor the ‘fit and proper status of their 
  1. Major shareholders,
  2. Applicants for major shareholding, and 
  3. Those who have been approved by the Reserve Bank of India but have yet to execute the approved acquisition.
  • To do this, they need to find a way out of any updates to the Form A application, any issues with or information about the applicants or major shareholders, any changes to the major Beneficial Owners, and any purchases of 10% or more of the paid-up share capital of the major shareholder by a person.
  • The Department of Regulation of the RBI must receive a report from banking companies detailing their evaluation of the major shareholders’ and applicants’ “fit and proper” status within 30 days of receiving the information, together with a board resolution and note.
  • According to Section 12B (1) of the Banking Regulations Act, 1949, banking organisations are required to set up a continuous monitoring system to make sure that key shareholders acquire prior Reserve Bank permission for their shareholding/voting rights.
  • Additionally, the banking firm is required to report to its board on a regular basis regarding the continuous monitoring procedures in order to determine if it complies with S- 12B (5) of the Banking Regulation Act, 1949.
  • The banking companies must refer the Reserve Bank with the copy and relevant paperwork of the board note if it believes that the strategies used to combine or acquire the holding were intended to avoid complying with the law.

Reporting requirements for Banking Companies

  • After 14 days of the completion of the allotment, banking companies are required to declare the allotment of shares and specifics of the offering in Form A2. They must also ensure no one exceeds the restrictions set by the RBI for them. In addition, they must send a report to the Department of Regulation (RBI) within thirty days, detailing the encumbrance of shares as shown by the promoters and promoter group in Form B, to the Department of Supervision within one working day.
  • Within six months of the Directions’ issuance, banking businesses must present a plan for reducing their shareholding to comply with the Guidelines. Payments Banks are excluded.
  • The RBI (Acquisition and Holding of Shares or Voting Rights in Banking Businesses) Directions, 2023, which combines three previous master directives, are repealed from the date these directives are issued.
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Lock-in requirement

  • Suppose a person is granted permission by the Reserve Bank to hold 10% or more of the banking company’s paid-up equity share capital but less than 40% of the paid-up equity share capital. In that case, the shares they acquire must be locked in for the first five years following the date the acquisition was finalised. Only 40% of the paid-up equity share capital of the banking business shall be subject to lock-in for the first five years following the date the acquisition was completed in the case of any person authorised to have a shareholding of 40% or more.
  • Under no circumstances may the shares that are locked in be encumbered. Within two working days of the occurrence, the promoter(s) and promoter group must provide Form B, in the format outlined in these Guidelines, to the banking institution with information about the creation, invocation, and release of encumbrances on shares that are not locked in.
  • There is no minimum shareholding requirement beyond the lock-in period’s conclusion.

Ceiling on Voting Rights

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.

Conclusion

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 Shares
Transmission of Shares under Companies Act, 2013

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