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

Q.218. Pursuant to paragraph 2 (I) (ii) (a), the consolidated NOFHC is required to adhere to all the exposure norms on the consolidated basis such as single and group borrower exposure limits, capital market exposure limit etc, as applicable to bank groups. Since NOFHC shall only hold investments in financial services entities in the group, it may breach single and group borrower exposure limits for such entities, the RBI therefore requested to clarify that these limits shall not be applicable to investment by the NOFHC in financial services entities that belong to the Promoter Group. Such consolidated monitoring should not be applicable to Policy Holder Funds of insurance companies and mutual funds held under the NOFHC. +

A. The exposure norms stipulated at paragraph 2 (I) (ii) (a) of the guidelines refer to third party exposures and capital market exposures of the consolidated NOFHC as defined in circular DBOD.No. BP.BC.72/21.04.018/2001-02 dated February 25, 2003. As regards the stand alone NOFHC, its exposure to the entities held under it are not subject to single and group borrower exposure limits. The overarching exposure norms of the insurance companies and mutual funds under the NOFHC have been indicated in Paragraph 2 (I) (iv) (a) to (c). Their exposure norms would be as prescribed by IRDA and SEBI respectively.

Q.219. We also request a clarification that in the event of conversion of an NBFC to a bank, it would be possible to transfer the business of such NBFC (assuming such business cannot be undertaken by the bank) to another NBFC held by NOFHC, before such conversion. +

A. All 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. If any activity is required to be carried on outside the bank, it is for the Promoters/Promoter Group to decide in which entity such activity would be carried on. The Promoters/Promoter Group may undertake transfer of business activities from one entity to another in the Group (after obtaining the approval of the concerned regulators and authorities, as required), for the purpose of compliance with the requirements of these guidelines only after obtaining ‘in-principle’ approval from the RBI for conversion of a NBFC into a bank or for setting up of a new bank. This may be completed within a period of 18 months from the date of in-principle approval of before commencement of the banking business, whichever is earlier.

Q.220. Paragraph 2 and 3 of Annexure II to the Guidelines provide that where the applicant belongs to an existing group , the details of ownership, management and corporate structure of all the entities in the group should be furnished, including an organogram showing shareholding and management and further Applications should also be supported by detailed information on the background of Promoters, their expertise, track record of business and financial worth, Memorandum and Articles of Association and latest financial statements of the Promoter entities for the past ten years, income tax returns for last three years, details of Promoters’ direct and indirect interests in various entities/companies/industries, details of credit/other facilities availed by the Promoters/ Promoter entity(ies)/ other group entity(ies) along with details of the bank’s/ financial institution’s branches where such facilities were / are availed. For a large diversified Promoter Group that has many entities, it is voluminous and laborious task to collate the aforementioned data for all entities. In light of the above we request a clarification from the Reserve Bank of India on whether it would be sufficient to submit the above data for the top 5 companies in the Promoter Group (as is accepted by SEBI for the purpose of filling a prospectus). +

A. The entities/individuals belonging to the Promoters/Promoter Groups, which would participate in the voting equity shares of the NOFHC, would have to provide the Memorandum and Articles of Association, financial statements for past ten years and IT returns for last three years, as appropriate, at the time of submission of their application. The last available financial statements in respect of other Group entities, which do not participate in the voting equity shares of the NOFHC will also have to be furnished. The details of the Promoters’ direct and indirect interest in various entities/companies/industries and details of credit/other facilities availed by the Promoters/Promoter Group would be required of all entities. [ para 3 of Annex II to the guidelines]

Q.221. In the application, the promoters / promoter group will show visibility into the investors who constitute the minimum Bank capitalization (Rs 5 billion) specified in the guidelines, and into investors that satisfy the minimum 40 per cent NOFHC shareholding requirements. We presume that this does not preclude the promoter / promoter group from presenting a business plan with higher than the minimum prescribed capitalization requirements, and that the investors (while fulfilling the ‘fit and proper’ criteria) who would contribute capital beyond the minimum threshold could be identified in future, unless specifically instructed otherwise? +

A. (i)Yes. The business plan can provide for share capital which is beyond the minimum prescribed.

(ii) It is essential that at least 40 per cent of the initial voting equity capital of the bank is held by the NOFHC and the NOFHC continues to hold at least 40 per cent of the voting equity capital during the first five years from the commencement of the business of the bank.

(iii) No single entity or the group of the related entities, other than the NOFHC shall have the shareholding or control, directly or indirectly, in excess of 10 per cent of the paid up voting equity capital of the bank and any acquisition of shares 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.

(iv) It is therefore essential that the full details to be furnished of all the individuals/ entities/ groups who will hold voting equity capital in the bank at its inception.

(v) The applicants should furnish the detailed information about the persons/entities who would subscribe to the voting equity capital of the proposed NOFHC and the bank including foreign equity participation in the proposed bank.

Q.222. The guidelines stipulate a 10 per cent maximum shareholding for promoter, his relatives and his majority-held companies in the NOFHC. Does the 10 per cent restriction also apply to non-promoter domestic investors (individuals / institutions) in the NOFHC? +

A. The NOFHC has to be wholly owned by the Promoters/Promoter Groups. Therefore, no investor (domestic or foreign) not being part of the Promoter Group can hold voting equity shares in the NOFHC. At least 51 per cent of the voting equity shares of the NOFHC have to be held by entity/entities in which public shareholding is not less than 51 per cent. A 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 can hold shares in excess of 10 per cent provided by virtue of his shareholding or otherwise, is not in a position to exercise ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) over the company

Q.223. If the promoter / promoter group companies hold a minority (i.e. <49 per cent) stake in one or more entities that also have stakes in the NOFHC, do we understand that these indirect holdings will not count towards the 10 per cent limit stipulated above? +

A. For the purpose of computing the 10 per cent limit for an individual belonging to the Promoter Group in the voting equity shares of the NOFHC, the voting equity shares to be held by 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 will be aggregated.[ para 2 (C)(ii)(a) of the guidelines] If an individual belonging to the Promoter Group holds a minority stake (i.e. <49 per cent) in one or more entities that also hold voting equity shares in the NOFHC, the shares holdings of those company/ies will not count towards the 10 per cent limit stipulated in terms of para 2C (ii)(a) of the guidelines. The individual shareholding referred to in para 2(C)(ii)(a) and (b) of the guidelines are not correlated.

Q.224. (i) If there is an individual foreign shareholder with minority stake in the investment vehicles that own the NOFHC, do we understand that this indirect stake does not count towards the 5 per cent limit for an individual foreign shareholder in the bank? (ii) In the total foreign shareholding of a bank (which needs to be below 49 per cent), do we presume foreign minority shareholding in investment vehicles that own the NOFHC will not be counted towards the 49 per cent limit? +

A. (i) & (ii) The NOFHC is required to be wholly owned by entities ‘owned and controlled’ by residents and individuals belonging to the Promoter Group. Therefore, if the investment vehicles of the Promoter Groups are ‘owned and controlled’ by residents, the indirect foreign investment through these entities will not be counted as foreign investments in the bank. [para 2(A)(i) and para 2(F) of the guidelines]

Q.225. Commercial banks currently can have foreign ownership beyond 5 per cent (upto a maximum of 10 per cent) with prior approval from the RBI. We presume that a similar rule and process will be applied to the new banks? +

A. No non-resident shareholder, directly or indirectly, individually or in groups, or through subsidiary, associate or joint venture will be permitted to hold 5 per cent or more of the paid-up voting equity capital of the bank for a period of 5 years from the date of commencement of business of the bank. After the expiry of 5 years from the date of commencement of business of the bank, the aggregate foreign shareholding would be as per the extant FDI policy. [para 2(F) of the guidelines]

Q.226. How will “voting equity shares” be specifically defined? Should we presume that all ownership restrictions specified in the guidelines apply only to voting equity shares? +

A. The voting equity shares are those that confer voting rights to the shareholders. The ownership restrictions specified in the guidelines apply only to voting equity shares.

Q.227. Having ensured that paid-up equity voting capital of the bank is over ` 5 billion, will the bank be able to offer preferential, convertible or other classes of voting shares or Tier II capital (subordinated debt)? +

A. The initial minimum paid-up voting equity capital for the bank is ` 5 billion. Depending upon the business plan, additional capital can be brought in. The bank will be able to issue preference shares permissible under the Banking Regulation Act, 1949, and other Tier I and Tier II capital instruments etc. as per RBI guidelines contained in circular DBOD.No.BP.BC.98/21.06.201/2012-13 dated May 2, 2012.

Q.228. i) We assume that all activities allowed currently for Feet-on-street (FOS) of commercial banks, will be permitted for the new banks as well; as we believe that the FOS model is a key pillar of achieving financial inclusion unless specifically advised otherwise. (ii) Many existing commercial banks have feet-on-street employees on the rolls of wholly owned subsidiaries –we assume that the new banks could, if they wish, adopt a similar model, unless specifically advised otherwise. (iii) Many existing commercial banks have Business Correspondents (BC) and hence we assume that the new banks will also be allowed to appoint BCs at the time of commencement of business, unless specifically advised otherwise. +

A. (i) Yes. A new bank can adopt FOS model for the purpose of financial inclusion. (ii) No. The bank cannot have a subsidiary under it. (iii) Yes. The new bank can appoint Business Correspondents for the purpose of financial inclusion.

Q.229. As per Section 2 (F) of the guidelines, foreign shareholding in the bank shall not exceed 49% of the paid-up voting equity capital for the first 5 years from the date of licensing of the bank. No non-resident shareholder, directly or indirectly, individually or in groups, or through subsidiary, associate or joint venture will be permitted to hold 5 % or more of the paid up voting equity capital of the bank for a period of 5 years from the date of commencement of business of the bank. Whether FII shareholding forming part of the public shareholding at the listed promoter company level will also be considered for the purpose of arriving at 5% holding limit in the new bank? +

A. No, the FII shareholding forming part of the public shareholding at the listed promoter company level will not be considered for the purpose of arriving at 5% holding limit in the new bank.

Q.230. In case an applicant, in order to comply with the NOFHC requirements, needs to convert a small public company into a listed one, will any relaxation be provided for the timelines to comply to the takeover code? +

A. A public company need not necessarily be a listed company. At the time of making applications, the Promoters/Promoter Group will have to furnish a road map and methodologies they would adopt to comply with all the requirements of the corporate structure indicated in para 2 (C)(ii) and (iii) of the guidelines within a period of 18 months. After the ‘in-principle approval’ is accorded by RBI for setting up of a bank, the Promoters/Promoter Group will have to comply with all the requirements and the proposed bank has to start operations within this period.

Q.231. If there are existing Foreign Funding Institution / Indian Investment Institution as equity holder, how they may be accommodated as equity partners in the proposed NOFHC / and or the Bank. +

A. The NOFHC has to be wholly owned by a Promoter/Promoter Group (as per the definition given in Annex I to the guidelines) and the pattern of shareholding would be as per the provisions laid down at paragraph 2(C)(ii) & (iii) of the guidelines. The existing foreign funding institution / Indian Investment Institution who hold shares in the promoting entity of the NOFHC, not being Promoter or belonging to the Promoter Group cannot hold shares in the NOFHC. As regards shareholding in the bank by foreign funding institutions, it should be in consonance with paragraph 2 (F) of the guidelines. Further, no single entity or group of related entities, other than the NOFHC, shall have shareholding or control, directly or indirectly, in excess of 10 percent of the paid-up equity capital of the bank and any such acquisition of 5 per cent or more of the paid up equity capital of the bank will require prior approval of RBI. [Paragraph 2 (K) (ii) and (iii)]

Q.232. In case the promoter group company that is envisaged to hold voting equity shares of the NOFHC has issued GDRs or ADRs (i.e. equity instruments that do not have attached voting rights). How would the public holding in these companies be calculated? Would the GDRs / ADRs (and their underlying shares) be excluded or will the public holding be calculated notwithstanding the nature (voting / non-voting) of the shares issued. +

A. Public shareholding would mean, at least 51 percent of the shareholding is widely dispersed among shareholders other than the Promoters and none of such shareholders 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 percent of voting equity shares exercise ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) by virtue of his shareholding or otherwise. Therefore, GDRs / ADRs and their underlying shares would be counted as public shareholding, provided that, by virtue of their shareholding, the holders or their custodians do not have ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) and there are no agreements or other arrangements whereby the GDR / ADR holders or their custodian have undertaken to exercise their voting rights in accordance with the Promoters/management.

Q.233. With reference to paragraph 2 (C) (vi), is the condition applicable for setting up new business lines even within existing businesses eg. Health Insurance (where a regulatory approval is required) as part of the existing Life insurance businesses +

A. The stipulation that the NOFHC shall not be permitted to set up any new financial services entity for at least three years from the date of commencement of business of NOFHC means that the NOFHC cannot undertake a new financial service activity [para banking activities as defined in Master circular DBOD.No.FSD.BC.24/24.01.001/2012-13 dated July 2, 2012 and those financial services activities that must be undertaken from outside the bank [para 2 (C) (iv) (a) of the guidelines] and set up a new financial services entity for this purpose during the specified period. However, adding a new business line within existing business line would be as per the rules and regulations laid down by the concerned financial sector regulator.

Q.234. Whether NOFHC, being NBFC-CIC, shall be allowed to sponsor Company C (a newly incorporated IDF-NBFC) in compliance with the Banking Guidelines? +

A.Yes, but the NOFHC shall not be permitted to set up any new financial services entity for at least three years from the date of commencement of business of the NOFHC. [para 2 (C) (vi) of the guidelines].

Q.235. While the RBI has made an exception for bank’s setting up subsidiaries where it is legally required, would the same be applicable for other businesses under the NOFHC where it is legally required for that business to set up a subsidiary / joint venture to undertake certain businesses. +

A. Yes, subject to RBI approval and subject to the regulations / approvals of the concerned financial sector regulators.

Q.236. Can the NOFHC shareholding in the bank be brought down by a stake sale, dilution or a combination thereof. +

A. Yes, the shareholding of the NOFHC in the bank can be brought down by a stake sale or dilution or a combination thereof subject to complying with the requirement at para 2(K)(ii) and (iii) of the guidelines.

Q.237. Would investments in debt mutual funds be covered under money market instruments for the purpose of the Clause 2 H (i) (c) of the guidelines? +

A. No. Debt mutual funds are not covered under money market instruments. [Para 2(H)(i)(c) of the guidelines].