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Guidelines on Shareholdings in Banking Companies

Reserve Bank of India (RBI) has issued guidelines on shareholding in banking companies.

What are the guidelines on major shareholding in banking companies?

‘Major shareholding’ means aggregate holding of 5% or more of the paid-up share capital or voting rights in a banking company by a person.

  • In terms of Section 12B(1) of Banking Regulation Act, 1949 (BR Act, 1949), any person who intends to make an acquisition which is likely to result in major shareholding in a banking company, is required to seek previous approval of Reserve Bank of India (RBI).
  • On receipt of the application, RBI may seek comments from the banking company on the proposed acquisition. On receipt of the reference from RBI, the concerned banking company shall furnish its comments along with a copy of the relevant board resolution and information to RBI within 30 days. RBI would undertake due diligence to assess the ‘fit and proper’ status of the applicant. 
  • The decision of RBI to (a) accord or deny permission or (b) accord permission for acquisition of a lower quantum of aggregate holding than that has been applied for, shall be binding on the applicant and the concerned banking company.
  • Subsequent to such acquisition, if at any point in time the aggregate holding falls below 5%, the person will be required to seek fresh approval from RBI if the person intends to again raise the aggregate holding to 5% or more of the paid-up share capital or total voting rights of the banking company.
  • Any person who intends to acquire shares or voting rights in a banking company beyond the limit for which approval was obtained from RBI, is required to apply to RBI for prior approval to increase their aggregate holding in the banking company.
  • The persons from Financial Action Task Force (FATF) non-compliant jurisdictions shall not be permitted to acquire major shareholding in a banking company. The existing major shareholders from such FATF non-compliant jurisdictions will, however, be allowed to continue with their investment, provided that there shall not be any further acquisition without prior approval of RBI.

What are the limits on shareholdings?

Permission of RBI to acquire shares or voting rights in a banking company shall be subject to the following limits –

Non-promoter –

  • 10% of the paid-up share capital or voting rights of the banking company in case of natural persons, non-financial institutions, financial institutions directly or indirectly connected with Large Industrial Houses and financial institutions that are owned to the extent of 50% or more or controlled by individuals (including the relatives and persons acting in concert), or
  • 15% of the paid-up share capital or voting rights of the banking company in case of financial institutions (excluding those mentioned above), supranational institutions, public sector undertaking and central / state government.

Promoter – 

  • 26% of the paid-up share capital or voting rights of the banking company after the completion of 15 years from commencement of business of the banking company.
  • During the period prior to the completion of the 15 years, the promoters of banking companies may be allowed to hold a higher percentage of shareholding as part of the licensing conditions or as part of the shareholding dilution plan submitted by the banking company and approved by RBI.

In specific cases where State Government / Central Government / Union Territory / Public Sector Undertaking / Public Financial Institution / specifically permitted investors are promoters of banking companies or have been specifically permitted by RBI to hold a higher shareholding as promoter / non-promoter in certain special circumstances, RBI may prescribe a differentiated shareholding dilution plan for such holdings.

What are the lock-in requirements?

  • In case of a person permitted by RBI to have a shareholding of 10% or more but less than 40% of the paid-up equity share capital of the banking company, the shares acquired shall remain under lock-in for first 5 years from the date of completion of acquisition. 
  • In case of any person permitted to have a shareholding of 40% or more of the paid-up equity share capital of the banking company, only 40% of paid-up equity share capital shall remain under lock-in for first 5 years from the date of completion of acquisition.
  • The shares which are under lock-in, shall not be encumbered under any circumstances. 
  • Promoters and promoter group are required to report details of creation / invocation / release of encumbrance on shares which are not under lock-in to the banking company within 2 working days of such an event.
  • After the end of the lock-in period, there is no requirement for any minimum shareholding.

What is the ceiling on voting rights?

  • As per Section 12(2) of BR Act, 1949, no shareholder in a banking company can exercise voting rights on poll in excess of 26% of total voting rights of all the shareholders of the banking company.
  • Any major shareholder who is covered by Section 12B(3) of BR Act, 1949, and has not obtained prior approval of RBI, can exercise voting rights only after obtaining the approval of RBI for major shareholding.

Whose ‘fit and proper’ status shall be monitored?

A banking company shall continuously monitor that the following persons are ‘fit and proper’ on an ongoing basis –

  • Its major shareholders who have completed the approved acquisition.
  • Those applicants for whom comments have been provided by the concerned banking company to RBI for approval to have major shareholding.
  • Those applicants who have been approved by RBI to have major shareholding but are yet to complete the approved acquisition.

What are the reporting requirements for banks?

  • Bank shall obtain, within 1 month of the close of financial year, a report on any changes in the information provided by the major shareholder / applicant.
  • Bank shall forward the comments of its Board regarding the ‘fit and proper’ status of its major shareholders / applicants, to RBI, not later than September 30 every year.
  • The banking companies shall put in place a mechanism to obtain information on any change in Significant Beneficial Owner or acquisition by a person to the extent of 10% or more of paid-up equity share capital of the major shareholder. The banking company shall, within 30 days from receipt of information on such changes, submit a brief report, along with the board note and resolution to RBI.
  • After issue and allotment of shares, a banking company shall report the details within 14 days of completion of the allotment process. 
  • The banking company shall forward the details on encumbrance of shares reported by promoters and promoter group within 1 working day. Further, the banking company shall place the report before its board and within 30 days from the date of event submit a report to RBI.

To which banks are the guidelines applicable?

  • The guidelines apply to all banking companies [as defined in Section 5(c) of BR Act, 1949], including Local Area Banks (LABs), Small Finance Banks (SFBs) and Payments Banks (PBs) operating in India. 
  • The guidelines are not applicable to foreign banks [operating either through branch mode or Wholly Owned Subsidiary (WOS) mode].

The banking companies (excluding Payments Banks) which are operational as on January 16, 2023 and where the aggregate holding of a person is not in conformance with the Guidelines shall within 6 months submit a shareholding dilution plan.


References

Reserve Bank of India. (2023, January 16). 'Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12440&Mode=0

Reserve Bank of India. (2023, January 16). 'Master Direction – Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12439&Mode=0


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