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Clarifications to Queries on Guidelines for Licensing of New Banks in the Private Sector

Q.168. Furthermore, does the 5 percent ‘direct or indirect’ ceiling apply at the immediate bank level; or on a pass-through basis i.e. if a FII holds 10% shares in the promoter entity and the promoter holds 100 percent equity of the NOFHC, will the FII be deemed to hold 10 percent equity in the bank ‘indirectly’? What if the same situation arises regarding a private equity investor in an unlisted promoter company? To take another example, if an NRI holds 5 percent investment in the promoter entity, which in turn holds 100 per cent investment in the NOFHC, can the same NRI hold any additional equity in the bank? +

A. The 5 percent limit on shareholding by any non-resident shareholder would apply at the bank level. The indirect foreign investments through the Promoter Group companies [owned and controlled by residents – paragraph 2 (A) of the guidelines], which would hold the NOFHC, will not be counted for foreign investments in the bank.

Q.169. Would non-resident shareholding in any Promoter Group entity holding shares in NOFHC be treated as ‘indirect’ non-resident shareholding in the Bank? +

The indirect foreign investments through the Promoter Group companies [owned and controlled by residents – paragraph 2 (A) of the guidelines], which would hold the NOFHC, will not be counted for foreign investments in the bank, as only companies/entities in the Promoter Group that are owned and controlled by resident in India are allowed to hold the voting equity shares of NOFHC. [Paragraph 2 (F) of the guidelines]

Q.170. If yes, how would such ‘indirect’ non-resident shareholding in the Bank be calculated for the purpose of 5% and 49% limit? +

Q.171. Will residents of India (as per FEMA), who have Overseas Citizenship of India (‘OCI’) be allowed to hold 10 per cent in the NOFHC if they are regarded as promoters? +

A. The requirement is that the NOFHC has to be wholly owned by entities/ Groups in the private sector that are ‘owned and controlled by residents’ [ as defined in Department of Industrial Policy and Promotion(DIPP) Press Note 2, 3, and 4 of 2009/FEMA Regulations as amended from time to time]. Therefore OCIs cannot hold shares in the NOFHC.

Q.172. Will residents of India (as per FEMA), who are Persons of Indian origin (‘PIO’), not having an Indian passport, be allowed to hold 10 per cent in the NOFHC if they are regarded as promoters? Will residents of India, who are non-NRIs, non-PIOs, non-OCIs be allowed to hold 10 per cent in the NOFHC, if they are promoters; or in the bank, if they are non-promoters. +

No single entity or group of related entities, other than the NOFHC, shall have shareholding or control, directly or indirectly, in excess of 10 per cent of the paid-up voting equity capital of the bank [para 2 (K) (iii) of the guidelines].

Any acquisition of shares by persons resident in India or otherwise which will take the aggregate holding of an individual / entity / group to the equivalent of 5 per cent or more of the paid-up voting equity capital of the bank, will require prior approval of RBI [Para 2 (K) (ii) of the guidelines].

Q.173. Will OCIs / PIOs be allowed to become Chairman/CEO of the proposed bank? +

A. OCIs/PIOs will be allowed to become Chairman/CEO of the proposed bank provided they are persons resident in India as per Foreign Exchange Management Act, 1999.

Q.174. We understand that the term ‘major supplier and major customer’ will have the same meaning throughout the guidelines i.e. as defined at endnote 4(including for the purposes of maintaining an arm’s length relationship by the bank as required in paragraph K(iv) of the guidelines. Is this correct? +

A. Yes. The term ‘major supplier and major customer’ will normally have the same meaning (as defined in footnote 4 at page 7 of the guidelines) throughout the guidelines.

Q.175. (I) Since the provisions at para 2 (L) of the guidelines mandate transfer of ‘activities’, does it mean that the existing book of assets may be retained in the transferor entity and future activity of similar nature needs to be conducted from the bank? For example, an NBFC holding a large asset book of home loans can start booking new home loans in the bank post- commencement, but does it also need to migrate the existing portfolio? (ii) Since banks will be allowed to retain branches under the prescribed framework for banks, can NBFC branches be retained for the limited businesses not allowed /allowed with restrictions in the bank? (iii) Furthermore, if migration of the existing portfolio is required, wille net-worth of the demerged business (migrating business) be considered towards the ` 5 billion requirement? +

A. (i) The general principle for activities that have to be conducted from within the bank and by NBFCs in the group is that para-banking activities, such as credit cards, primary dealer, leasing, hire purchase, factoring, etc., can be conducted either inside the bank departmentally or outside the bank through subsidiary/ joint venture /associate. Activities such as asset management, insurance, stock broking, asset reconstruction, venture capital funding and infrastructure financing through Infrastructure Development Fund (IDF) sponsored by the bank can be undertaken only outside the bank. Lending activities must be conducted from inside the bank. However, other regulated financial services entities (excluding entities engaged in credit rating and commodity broking) in which the Promoter/Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) have to be held under the NOFHC and not under the bank unless it is legally required or specifically permitted by RBI. [para 2 (C) (iv) of the guidelines].

The existing business of NBFCs of the Promoter Group setting up/converting into a bank will have to be reorganized accordingly.

(ii) RBI may consider allowing the bank to take over and convert the existing NBFC branches into bank branches only in the Tier 2 to 6 centres. All NBFC branches in Tier 1 centres which would carry out banking business may be permitted to be converted into bank branches and the excess over the entitled number of Tier 1 branches would be adjusted against the future entitlements of the new bank within a maximum period of 3 years from the date of commencement of business by the bank. The branches of the bank and NBFC should be distinct and separate. Erstwhile branches of NBFC, retained and converted into bank branches, cannot conduct businesses of the NBFC.

Q.176. Can RBI provide more clarity on the initial capital required for a bank? Is it net worth of ` 500 crore or the paid up equity capital of ` 500 crore as per paragraph 2D(i) and 2L(b)? +

The new bank should have a minimum voting equity capital of `5 billion. However, where an NBFC is permitted to convert into a bank, it should have a minimum networth of ` 5 billion at all times.[para 2(L)(C) of the guidelines].

Q.177. We presume that the minimum paid up equity voting capital of ` 5 billion can also be complied by Net Worth of the entity and not entirely by paid-up voting equity capital. +