New FAQ Page 2 - ಆರ್‌ಬಿ‌ಐ

RbiAnnouncementWeb

FAQ DetailPage Breadcrumb

Search Bar

Search Results

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

Q.138. Para 2D(iii) of the Guidelines talks about the minimum voting equity capital requirements for banks and shareholding by NOFHC. It states that "the shareholding by the NOFHC in the bank in excess of 40 percent of the total paid-up voting equity capital shall be brought down to 40 percent within three years from the date of commencement of business of the bank". Keeping the principle of diversified ownership in mind, could you clarify the following two points in particular context of a widely held, listed NOFHC with no Promoter/Promoter Group and with no single entity owning more than 10 percent: (i) Would such an NOFHC be required to dilutes stake in the Bank to 40 percent? (ii) Would the Bank held by such an NOFHC need to be listed? +

A. The Promoters/Promoter Group have to set up a wholly owned NOFHC as per the corporate structure prescribed in para 2(C) of the guidelines. The NOFHC, therefore, cannot be a listed company. The wholly owned NOFHC has to bring down its shareholding in the bank in excess of 40 percent to 40 percent within three years from the date of commencement of the business of the bank. The bank shall get its shares listed in stock exchanges within three years of its commencement of the business.

Q.139. (i) Under DIPP guidelines, if the non-resident shareholding in a company is less than 50 percent, the ‘see through’ clause does not apply for downstream investments. As per Para 2F of the Guidelines for licensing of New Banks in the Private Sector, no non-resident can hold more than 5 percent in the Bank. In a situation where the total foreign shareholding in an NOFHC is less than 50 percent, could a non-resident individual shareholder continue to hold more than 5 percent but less than 10 percent in the NOFHC, since the "see through" clause does not apply? Please clarify. (ii) In the same vein as the above point, in a situation where the NOFHC is holds>50 percent by Indian share holders, does NOFHC holding qualify as Indian ownership considering no "see though". In this context, when the Bank has to be listed and its holding by the NOFHC dilutes 40 percent, can the Bank have up to 49 percent aggregate non-resident shareholding? Please clarify. +

A. (i) The requirement is that the NOFHC has to be wholly owned and controlled by resident. Therefore, non-residents cannot hold shares in the NOFHC.

(ii) The NOFHC being wholly owned by the entities / Groups in the private sector that are ‘owned and controlled by residents’, its shareholdings in the bank would not be counted for non-resident shareholding, and the bank can have an aggregate foreign shareholding of 49 per cent of the paid up voting equity capital for the first five years from the date of licensing. [Paragraph 2 (F) of the guidelines]

Q.140. Para 2C(iii) of the Guidelines states that "The NOHFC shall hold the bank as well as all the other financial services entities of the Group …". Notwithstanding this para, could the NOFHC hold a non-financial services company as a subsidiary, provided however, such a company is a Section 25 Company for the sole purpose of carrying out Corporate Social Responsibility activities? Please clarify. +

A. No, unless permitted by RBI.

Q.141. (i) Whether a Multi-State Cooperative Society is eligible to promote a bank as per the NOFHC? This clarification is sought as “Private Sector” is not defined in the guidelines. (ii) Whether entities registered under the Multi State Cooperative Societies Act wholly owned by Cooperatives with no GOI equity are eligible to be counted as being in Private Sector? +

A: The guidelines do not bar a Multi-State Cooperative Society (MSCS) from being a Promoter. A MSCS can be a public sector entity or private sector entity depending upon the extent of Government control. These guidelines do not cover setting up of private sector banks by cooperative banks or conversion of cooperative banks into commercial banks in the private sector.

Q.142. The proposed guidelines require the Promoter / Promoter Group to set up a Bank only through a wholly owned Non-Operative Financial Holding Company (NOFHC). NOFHC is also required to hold all the other financial services entities of the Group regulated by RBI or other financial services regulators. We seek clarification on the applicability of this provision in the guidelines for joining of two different entities to form the Promoter Group. +

The NOFHC has to be wholly owned by a single Promoter/Promoter Group (as per the definition given in Annex 1 to the guidelines) and the pattern of shareholding would be as per the provisions laid down at par 2(C)(ii) & (iii) of the guidelines. Two or more separate groups cannot combine together to set up a NOFHC.

Q.143. Can two or more unrelated listed entities act as promoters in NOFHC? +

Q.144. Can a Promoter / Promoter group which even though has an existing NBFC, choose to be classified under Para 2 A (i) (promote a bank through a wholly-owned Non-Operative Financial Holding Company (NOFHC)) instead of Para 2 A (ii) (promote a bank or convert the NBFC into bank and transfer permitted activities to the bank), such that there is no requirement of the conditions set out in Para 2 (L) which deals with migration of NBFC business into the bank? +

A. Yes. Promoters/Promoter Group having an existing NBFC can choose to promote a bank through a wholly owned NOFHC. However, the existing business of the NBFC will have to be migrated into the bank in compliance with conditions laid down in para 2 (L) and 2 (C) (iv) of the guidelines.

Q.145. The Final Guidelines indicate that the RBI would come out with an overall policy discussion paper on banking structure in India within two months. Kindly clarify what this is and whether the existing guidelines will undergo a change due to this? +

A. The policy discussion paper mentioned in the guidelines relates to the banking structure of the country. The policy discussion paper mentioned in the guidelines will relate to the banking structure in the country and will be applicable both to existing and new banks. The present policy guidelines for licensing of new banks in the private sector will not undergo any change due to the policy discussion paper on banking structure in India.

Q.146. Para 2 C deals with Corporate structure of the NOFHC. Para 2 C (i) states that the NOFHC should be wholly owned by the Promoter“/ Promoter G”o–p. We request you to clarify what is meant by the term "wholly owned" - To confirm that there is no problem for any minority foreign share h’lding in the promoter / promoter group entities that promote the NOFHC's. For Eg: If A promotes an NOFHC, there is no issue if another foreign entity / entities own a minority stake between 10 to 35 percent in A, as long as A is a Promoter entity and it is Indian owned and controlled. While the entity will be mainly owned and controlled by the Indian promoter, can there be some small minority foreign investors in the NOFHC who could either be financial investors or could be long term technology / operation partners. +

A. The Promoters/Promoter Group entity setting up the NOFHC can have minority foreign shareholding provided these entities are ‘owned and controlled by residents’ as per para 2(A)(i) of the guidelines. The guidelines do not envisage any direct holding by non-promoters/promoter group entities including foreign investors in the NOFHC. Further, the promoters will have to comply with stipulations at–para 2 (C) (i) and (ii) of the guidelines.

Q.147. Para 2 C (ii) (a) - mentions about a cap of 10 percent on ownership by individuals while Para 2 C (ii) (b) mentions about shares of the NOFHC being held to the extent of 51 percent by companies in which public hold “more than 51 percent”. This seems to be contrary to the definition of a "wholly owned NOFHC". As this may result in a situation where companies which are not fully owned & controlled by the Promoters becoming shareholders of the NOFHC, this may please be clarified. +

A. The guidelines provide that a NOFHC should be wholly owned by the Promoters/Promoter Group i.e., by individuals belonging to the promoter group and entities in the promoter group in which the Promoter/Promoter Group are in effective control. Within such shareholding, not less than 51 percent of the voting equity shareholding of the NOFHC must be held by companies in which the public hold not less than 51 percent of the voting equity shareholding. The remaining 49 per cent of voting equity shareholding in such publicly held companies [para 2(C)(ii)(b) of the guidelines] will be held by promoter group individuals/ entities who have ‘significant influence’ and ‘control’ (as defined in Accounting Standard 23) over such companies.

Q.148. Can there be a NOFHC only for–the bank while the other financial entities are held by another NOFHC - Para 2 C (iii) and Para 2 C (viii). Here the Main NOFHC will hold all finance sector activities and also hold another NOFHC which holds the Bank. This would ensure all financial activities are ring fenced and regulated by RBI. The bank will also be ring fenced and controlled by a separate NOFHC. We presume that this will also be allowed as it has a stronger structure which meets the regulatory requirements also. +

A. Two NOFHCs are not envisaged. Only one NOFHC shall hold the bank as well as all the other regulated financial services entities of the Group in which the Promoter Group has ‘significant influence’ or ‘control’(as defined in Accounting Standard 23). [para 2 (C) (iii) & (vii) of the guidelines]

Q.149. Promoter holding in the Bank Clause 2 C (viii) indicates that the Promoter / Promoter Group should hold their investments in the bank and other financial entities only through the NOFHC. In our view, this only indicates that the NOFHC should be the holding vehicle for the Promoter / Promoter Group and there is no restriction on a financial entity under the NOFHC- say an NBFC, to hold shares in the Bank. As there does not appear to be any specific provision against such holding, this may be clarified. +

A. No. Paragraph 2 (C) (viii) stipulates that the Promoter / Promoter Group entities / individuals associated with Promoter Group shall hold equity investment in the bank and other financial entities held by it, only through the NOFHC. Further, paragraph 2 (I) (iv) (b) of the guidelines indicate that the financial entities held by NOFHC shall not make investment in the equity / debt capital instruments amongst themselves. Therefore, an NBFC held by the NOFHC cannot hold shares in ‘he bank.

Q.150. Please confirm if paragraph 2(L) will apply only for 'banks to be promoted by existing NBFCs’ and that the same will not apply to promoter / promoter group of NBFC's, which will in turn be the promoter / shareholders of the NOFHC. +

A. Para 2 (L) of the guidelines will be applicable both to promoter converting the NBFC into a bank or promoting a bank.

Q.151. How does RBI propose to grant a level playing field between the new banks and the existing banks? Generally, a new entrant should be encouraged and given preference as the old players are already well entrenched and earning profits and have a branch network. However, a perusal of the Final Guidelines indicates that the requirements are more stringent for new entrants. To name a few like - (a) At least 25 percent of the Branches should be in Tier 3 to Tier 6 cities (b) Existing Banks are allowed upto 74 percent FDI, while the new entrants are allowed only upto 49 percent FDI (c) Existing Banks have floated within their group NBFCs and Housing finance companies while RBI seems to impose restrictions for the new banks. I– it possible that RBI will have uniform dispensation to all the banks - Existing and New, with some privileges and dispensations to the New entrants to meet the Regulations / directions over a period of time due to more difficult conditions, competition etc. +

A. With a view to enhancing financial inclusion, the conditions relating to the branch network are specifically prescribed at 25 percent for unbanked rural centres. Further, this norm has been extended to the existing banks also and they are required to comply with this stipulation while opening new branches.

As regards the foreign investment, it is capped at 49 percent for the initial period of 5 years to ensure that domestic banks are established in the private sector. However, after expiry of 5 years, the aggregate foreign shareholding in the bank would be allowed as per the extant FDI policy of the Government.

The reason for not permitting the NOFHC to set up any new financial services entity for at least three years from the date of commencement of the NOFHC is on account of the fact that it is necessary that the newly set up bank gets on sound footing before the NOFHC diversifies into other financial sector business. The existing regulated financial sector business would, however, continue under the NOFHC.

Q.152. Will individuals in the promoter group who are not relatives, as defined in Section 6 of the Companies Act, 1956, be allowed to hold 10 per cent each in the NOHFC or will their aggregate shareholding be restricted 10 per cent? +

The limit of 10 per cent applies to an individual’s own shareholding along with the shares held by his relatives (as defined in Section 6 of the Companies Act, 1956) and the entities in which he and / or his relatives hold not less than 50 per cent of voting equity shares [para 2 (C) (ii) (a) of the guidelines].If there are two or more individuals who are part of the Promoter Group and are not relatives of each other, the limit would apply individually, and need not be aggregated. However, all such individuals cannot hold more than 49 per cent of the voting equity shares of the NOFHC.

Q.153. Where a Group has two or more otherwise unconnected individuals as its promoters, will each individual (along with relatives and entities connected to such individual) be permitted to hold up to 10 percent of the voting equity shares of the NOFHC or will the 10 percent limit apply in aggregate to the shares held by all individuals (and connected persons) forming part of the promoter group? This is in terms of the requirements set out in paragraph 2(C)(ii)(a) +

Q.154. The present guidelines use the term ‘voting equity’, whereas the 2005 guidelines (February 28, 2005) on ownership and governance use ‘equity capital’ to determine ownership. One reason for this could be the possibility that the new banks will have ‘indirect’ ownership going up many levels and therefore equity other than ‘voting equity’ needs to be ignored to avoid confusion, particularly with regard to financial investors above the NOFHC. It would be good to clarify whether non-voting equity directly held in the NOFHC/bank, wherever defined will also be ignored for the purpose of ownership. +

A. Only the voting equity share capital will be reckoned for the purpose of compliance with the guidelines on capital structure of the NOFHC, the minimum capital requirement for the new bank and shareholding by NOFHC in the new bank. The non-voting equity shares are out of the purview of these guidelines. [ para 2 (C)(ii) and para 2 (D) (i) to (v) of the guidelines ]

Q.155. The guidelines require that all regulated financial services entities of the Promoter Group, wherein effective controlling interest is held by the Promoter Group, will have be brought under the NOFHC. Are the terms Promoter/Promoter Group to be applied in exclusion? For example, if entity X (which is part of a large conglomerate but has no common controlling shareholding) applies for the licence aulfils 100 per cent investment through NOFHC, does it still need to fulfill all conditions applicable to a Promoter Group (as defined in paragraph C(iii) to include entities having a common brand name under the NOFHC? To rephrase, even if the promoter company is an entity with no common controlling shareholding, would it still need to bring all financial services business held by entities with a common brand name under the NOFHC? +

A. The Promoter Group includes a “Promoter” as per the definition of the Promoter Group given in Annex I to the guidelines and a Promoter is a “person” who satisfies the definition given in Annex I to the guidelines. As per para II(vi) of Annex I, Promoter Group includes entities sharing common brand names (please see this clause for details).All the regulated financial sector entities in which a Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard-23) will be held under the NOFHC. [ para 2(C)(vii) of the guidelines ]

Q.156. Does the term “public” refer to shareholding in a listed company; or does it also include shareholding by non-promoters in a widely held unlisted company? +

A. (156to158) A company in which public holds 51 per cent of the total voting equity shares need not necessarily be listed. The term ‘public’ refers to all the shareholders other than those belonging to Promoter/Promoter Group (as defined in Annex I to the guidelines).

For the purpose of these guidelines, ‘public shareholding’ implies that no person along with his relatives (as defined in Section 6 of the Companies Act, 1956) and entities in which he and / or his relatives hold not less than 50 per cent of the voting equity shares, by virtue of his shareholding or otherwise, exercises ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) over the company. [para 2 (C) (ii) of the guidelines]

Q.157. We understand that the term ‘public’ includes shareholding by all non-Promoter Group entities including Private Equity, FIIs and Domestic Institutional Investors in both listed and unlisted companies. Is this understanding correct? +

A company in which public holds 51 per cent of the total voting equity shares need not necessarily be listed. The term ‘public’ refers to all the shareholders other than those belonging to Promoter/Promoter Group (as defined in Annex I to the guidelines). For the purpose of these guidelines, ‘public shareholding’ implies that no person along with his relatives (as defined in Section 6 of the Companies Act, 1956) and entities in which he and / or his relatives hold not less than 50 per cent of the voting equity shares, by virtue of his shareholding or otherwise, exercises ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) over the company. [para 2 (C) (ii) of the guidelines]