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

Q.238. In respect of exposure norms for financial entities held by the NOFHC, are investments made by these entities, that are permissible under extant regulations formed by their respective regulators under the ambit of these guidelines. Eg. Equity investments by AMCs and Life insurers. +

A. Paragraph 2 (I) (iv) (a) and (b) of the guidelines lay down the overarching principles for the financial entities held by the NOFHC. These entities cannot have any credit and investments (including investments in the equity/debt capital instruments) exposure to the Promoters / Promoter Group entities or individuals associated with the Promoter Group or the NOFHC. These entities cannot make investments in the equity and debt Capital instruments amongst themselves. Apart from these, the exposure norms laid down by the other financial sector regulators will be applicable.

Q.239. What should be the duration covered by the business plan submitted by the applicant, i.e. how many years should be covered from the date of business commencement in the business plan? +

The period of business plan is left to the applicants. The business plan should be realistic and viable. It should address how the bank proposes to achieve financial inclusion. It would be desirable to give business plan covering three to five years.

Q.240. Applicants for new bank licenses will be required to furnish their business plans for the banks along with their applications. The business plan will have to address how the bank proposes to achieve financial inclusion. What should be the period for the business plan (3, 5 or 10 years) to be submitted as a part of the application? +

Q.241. What should be the period for the business plan (3, 5 or 10 years) to be submitted as a part of the application? +

Q.242. In the case of a single promoter group company investing in the NOFHC, would that company be reckoned as the promoter of the NOFHC or would the promoter group holding the investing company be reckoned as the promoter group for the basis of ultimate ownership of the NOFHC or the Bank +

The Promoter Group would be as per the definition provided in the Annex I of the guidelines. It is not necessary for all the individuals belonging to the promoter group and all group entities to participate in the voting equity shares of the NOFHC. 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.243. Is it necessary for the promoter to be an individual or can a body corporate that belongs to the promoter group also be regarded as a promoter? +

Q.244. In the case of entities under the promoter group that share a common brand name and a common logo. Whether sharing a brand name and common logo be covered under this definition? +

A. Yes. Please refer to the Annex I to the Guidelines.

Q.245. Paragraph 2 ( c )(iii) provides that “the NOFHC shall hold the bank as well as all the other financial services entities of the Group regulated by RBI or other financial sector regulators.” In this regard, please could you clarify the following : (i) Where a financial services entity (say Company A) has one or more subsidiary entities (say Company B and Company C) which also undertake financial services activities, will the condition prescribed in paragraph 2 (C)(iii) be satisfied if the NOFHC holds the equity of Company A (and therefore indirectly holds the equity of Company B and Company C)? How should the requirement at paragraph 2 (I)(iv)(b) be interpreted in this regard ? (ii) Annexure 1 of the Master Circular – Para Banking Activities dated July 2, 2012 contains a definition of “financial services companies”. This definition does not appear to include an entity which is a commodities broker registered with the Forward Markets Commission. Under the circumstances, would entities registered as brokers with the Forward Markets Commission be regarded as financial services entities regulated by a financial sector regulator, and therefore required to be held by the NOFHC ? +

A. (i)The NOFHC shall directly hold the bank as well as all the other regulated financial services entities of the Group in which a Promoter Group has significant influence or control (As defined in Accounting Standard 23). [Paragraph 2 (C) (iii) & (vii) of the guidelines]. In the above cited example, all the three companies, i.e. Company A, Company B and Company C will have to directly come under the NOFHC and Company A, Company B and Company C cannot make investment in equity / debt capital instruments amongst themselves. [Paragraph 2 (I) (iv) (b) of the guidelines]. The guidelines also provide that while this is the requirement, banks would not be precluded from having a subsidiary or joint venture or Associate where it is legally required or specifically permitted by RBI [para 2 (C) (vi)]. As regards other financial sector entities held by the NOFHC, those would not be precluded, with RBI’s approval, from setting up similar structures where it is legally required or specifically required by the concerned financial sector regulators. (ii) For the purpose of these guidelines, entities registered as brokers with the Forward Markets Commission will not be treated as financial services entities regulated by a financial sector regulator, and therefore would not be required to be held by the NOFHC.

Q.246. Paragraph 2(C) (iv) states that “the general principle is that no financial services entity held by the NOFHC would be allowed to engage in any activity that a bank is permitted to undertake departmentally.” The paragraph clarifies that this general principle is subject to two exceptions summarized in sub-paragraphs (a) and (b), In this regard, please could you clarify the following : Will the activities in sub-paragraph (b) cover all (and only those) activities described in RBI’s Maser Circular – Para Banking Activities date July 2, 2012? How should the specific scope of activities covered by sub-paragraph (b) be identified? The concluding sentence states “Accordingly, the activities at (a) above and activities at (b) above which are to be carried outside the bank will have to be carried out through separate financial entities under the NOFHC”. Activities at (b) above could be undertaken by a bank. Is it obligatory that such activities must necessarily be undertaken through a separate financial entity under the NOFHC or would it also be possible to undertake such activities through the bank at the Group’s option ? Where the Group provides non-discretionary investment advisory services (which are regulated by SEBI but may be provided by a bank) as well as discretionary investment management services eg portfolio management services (which are also regulated by SEBI but cannot be provided by a bank), will it be obligatory to shift the non-discretionary investment advisory services to the bank ? +

A.(i) & (ii) The general principle in this regard 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]. (iii) Investment advisory services, could be conducted both from within the bank or outside the bank, by any financial services company in the group (which is held under the NOFHC) that is eligible to register with SEBI as an investment advisor. Regarding portfolio management services, these activities could be carried out by a bank departmentally subject to prior approval of RBI or by any financial services company (which is held under the NOFHC) eligible to provide PMS under SEBI PMS regulations.

Q.247. There are certain businesses, for e.g. merchant banking, which are regulated by other financial sector regulators and which can be carried on by a bank departmentally as well as through a separate entity. Can such businesses be carried out outside the bank but under the NOFHC framework? +

A. The general principle 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 insurance, stock broking, asset management, 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 merchant banking activities can be conducted from within the bank or outside the bank under the NOFHC. [para 2 (C) (iv) of the guidelines].

Q.248. Where a group has one or more existing non-deposit taking NBFCs, can the non-deposit taking NBFCs continue to exist until their existing book of business has been wound down, or is it obligatory that all the activities of the non-deposit taking NBFC must necessarily be transferred immediately to the bank? +

A. The NBFCs must transfer their existing business to the bank if the bank can undertake such activities [Paragraph 2 (C) (iv) of the guidelines] and retain with itself the activities which the bank cannot undertake from within. Both the bank and the NBFC, if required to retain with itself the activities which the bank cannot undertake, will have to come under the NOFHC. The reorganisation of business should be done within a period of 18 months from the date of in-principle approval or before commencement of the banking business, whichever is earlier.

Q.249. Paragraph 2 (C) (vi) states that “the NOFHC shall not be permitted to set up any new financial services entity for at least three years..” The paragraph further provides that “this would not preclude the bank from having a subsidiary or joint venture or associate, where it is legally required or specifically permitted by the RBI”. Paragraph 2 (C) (iv) suggests that activities of the kind referred to in paragraph 2 (C) (vi) should be conducted in entities under the NOFHC. If so, the requirements of paragraph 2 (C) (iv), which requires certain activities to be undertaken through separate financial entities established under the NOFHC, and paragraph 2 (C)(vi), which stipulates that an NOFHC cannot establish a new entity to undertake such activities for the first three years but the bank can, appear to be contradictory. Should the requirement of paragraph 2(C)(vi) therefore be interpreted to mean that an NOFHC cannot establish any new financial entity for a three year period, except where such an entity is required to be so set up by the RBI or is otherwise specifically approved by the RBI? +

Q.250. With reference to paragraph 2 (C) (vi), is the condition applicable to demergers within existing businesses and acquisition of new businesses from third parties +

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)] and set up a new financial services entity for this purpose during the specified period. For the purpose of reorganisation of existing business of the Promoter Group to bring all regulated financial services under the NOFHC and to carry out existing business through separate financial entities under the NOFHC as required under the guidelines, [Paragraph 2 (C) (iv) (a) & (b) of the guidelines], the NOFHC would be free to establish new financial services entities. In fact this process will have to be completed within a period of 18 month from the date of in-principle approval or before commencement of the banking business, whichever is earlier. The stipulation at paragraph 2 (C) (vi) of the guidelines pertains to new financial services entities that are intended to be set up and these guidelines would be applicable to all acquisitions.

Q.251. Paragraph 2 (C) (ix) provides that “Shares of the NOFHC shall not be transferred to any entity outside the Promoter Group.” The paragraph also provides that any change in shareholding within the NOFHC as a result of which a shareholder acquires 5 per cent or more of the voting equity capital of the NOFHC shall require prior RBI approval. In this regard, please could you clarify the following : Would it be possible to list the NOFHC at some stage ? Would transfers of NOFHC shares between promoter group entities require prior RBI approval if the shareholding of an entity will, as a result of such transfer, reach 5 per cent or more of the NOFHC’s voting equity capital ? +

A. (i) & (ii) No. It would not be possible to list the NOFHC as it would have to be wholly owned by the Promoters / Promoter Group. Further, any change in shareholding (by the Promoter Group) within the NOFHC as a result of which a shareholder (within the Promoter Group) acquires 5 per cent or more of the voting equity capital of the NOFHC shall be with the prior approval of RBI. [paragraph 2 (C) (ix) of the guidelines]

Q.252. Can a promoter pledge its shares of NOFHC in any manner? If the pledge is invoked can the lender register the shares of NOFHC in its name without prior approval of RBI? +

No. Shares of the NOFHC shall not be transferred to any entity outside the Promoter Group. Any change in shareholding (by the Promoter Group) with in the NOFHC as a result of which a shareholder acquires 5 per cent or more of the voting equity capital of the NOFHC shall be with the prior approval of RBI. [para 2(C)(ix) of the guidelines ]

Q.253. Can the shares of NOFHC be transferred by transmission, Will or by operation of law to a non-promoter entity without prior approval of RBI? ? +

Q.254. If the Group has established one or more overseas subsidiaries which undertake financial services activities, do such subsidiaries need to be brought under the NOFHC? +

A. Yes. The NOFHC shall hold the bank as well as all the other regulated financial services entities of the Group in which a Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23). [para 2(C)(iii) & (vii)]. However, this does not preclude the bank from having a subsidiary or joint venture or associate where it is legally required or specifically permitted by RBI [para 2(C)(vi) of the guidelines].

Q.255. Paragraph 2(G)(ii) suggests that an NOFHC may be managed by a person who is also a Director on a subsidiary of the NOFHC. Paragraph 2(G)(vii) provides that the ownership and management of the NOFHC, the bank and other financial entities regulated by the RBI will be separate and distinct. The position in paragraph 2 (G)(ii) appears to contradict that prescribed in paragraph 2 (G)(vii). In this regard, please could you clarify the following : (i) Can the NOFHC, the bank and other financial entities held by the NOFHC have any common independent directors ? (ii) If the NOFHC is held by a listed, non-operating holding company which will be registered with the RBI as a CIC, would an individual who is the CEO, MD or Executive Director of such holding company also be permitted to serve as : A CEO, MD or Executive Director of the NOFHC? A CEO, MD or Executive Director of the bank? A CEO, MD or Executive Director of both (i.e. the NOFHC and the bank)? A director on the Board of the NOFHC? A director on the Board of the bank? A director on the Board of both (i.e. the NOFHC and the bank)? (iii) If the NOFHC is held by a listed, non-operating holding company which will be registered with the RBI as a CIC, would an individual who is a non-executive, non-independent director on the Board of such holding company also be permitted to serve as : A CEO, MD or Executive Director of the NOFHC? A CEO, MD or Executive Director of the bank? A CEO, MD or Executive Director of both (i.e. the NOFHC and the bank)? A non-executive, non-independent director on the Board of the NOFHC? A non-executive, non-independent director on the Board of the bank? A non-executive, non-independent director on the Board of both (i.e. the NOFHC and the bank) ? +

A. (i),(ii) & (iii) There could be common directors in the NOFHC and the bank. [para 2(G)(i) of the guidelines]. A director of the NOFHC being also a director on the Board of the bank held by it cannot be considered as independent director of the bank. Whether the other financial entities held by the NOFHC have common independent directors with the NOFHC and the bank will depend upon the circumstances of each case and the rules / regulations of the concerned regulators. A full time executive of the non-operating holding company cannot be a CEO, MD or Executive Director of either the bank or the NOFHC. As per Section 10(1) (c) of the Banking Regulation Act, 1949, the CEO / MD of the bank has to be in full time employment of the bank. However, a full time executive of the non-operating holding company can be a director of both the NOFHC and the bank but such director will not be treated as an independent director of the bank or the NOFHC. No. [Paragraph 2 (G) (ii) of the guidelines]. No. [Section 10(1) (c) of the Banking Regulation Act, 1949] No. [Please see (a) & (b) above] Yes. Yes. [Subject to compliance with Banking Regulation Act, 1949 provisions and RBI regulations]. Yes. [Please see (e) above].

Q.256. Paragraph 2 (G) (iv) provides that 50 percent of the Directors of the NOFHC shall be totally independent of, inter alia, major customers and major suppliers of the promoter group entities. How should major customers and suppliers be determined in the context of a Group engaged predominantly in financial services activities? +

A. The stipulation with regard to major customers / suppliers in paragraph 2(G)(iv) of the guidelines, as explained in the footnote therein, refers to 10 per cent or more of the annual purchases or sales of goods and services or both taken together.

Q.257. Paragraph 2 (A) clarifies that an eligible promoter must be an entity that is owned and controlled by residents as defined in Press Notes 2, 3 and 4 of 2009 issued by the DIPP. Will the same norms apply for computing the foreign shareholding in banks (which must be capped at 49 percent / 74 percent as per paragraph 2 (F)? +

A. Foreign shareholding in the new banks, as far the FDI cap is concerned, should be in compliance with paragraph 2 (F) of the guidelines. The manner in which the foreign shareholding in the bank will be calculated would be as per the extant GOI guidelines indicated in the Press Notes and DIPP guidelines/ FEMA regulations, as and when issued.