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

Q.318. Please elaborate and clarify on the meaning of ‘indirect’ shareholding of a non-resident shareholder in the Bank. +

A. Indirect shareholding would be 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. [Paragraph 2 (F) of the guidelines]

Q.319. Where an existing company in which non-resident shareholding is more than 50 per cent promotes a NOFHC, will RBI allow any transition time for the non-resident shareholding to go below 50 per cent to meet the condition 2(A) (i)? +

A. 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 (A) (B) and (C) (iii) of the guidelines within a period of 18 months.

Q.320. Para 2 (F) limits the aggregate non-resident holding at 49%. We believe that only direct shareholding will be taken into consideration for computing the foreign shareholding. Please confirm. +

A. The foreign shareholding in the bank will be calculated as per the Department of Industrial Policy and Promotion (DIPP) Press Notes 2, 3 and 4 of 2009 / FEMA Regulations as amended from time to time. Therefore, the indirect foreign shareholding will be calculated as per the methodology enumerated in DIPP Press Notes 2, 3 and 4 of 2009 / FEMA Regulations as amended from time to time. [Paragraph 2(F) of the guidelines]. As the Promoter Group companies that would set up the NOFHC would be ‘owned and controlled by residents’, their downstream investment in the NOFHC and further in the bank will not be counted towards foreign indirect investment.

Q.321. Whether any foreign company, which is controlled by foreign bank or foreign bank have significant influence in such company, shall be allowed to hold shares in the private Indian bank? Further, whether there would be any difference in opinion if such foreign bank also has its branches in India? +

A. Yes. A foreign company, which is controlled by a foreign bank or a foreign bank having significant influence in such a company, can hold shares in a private Indian bank. Further, there would be no difference, if such foreign bank also has its branches in India. However, 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 (Paragraph 2(F) of the guidelines). The equity holding of the foreign bank in the new bank would also be subject to extant guidelines on cross-holding among banks.

Q.322. Under clause 2(F) of the guidelines, no non-resident shareholder directly or indirectly will be permitted to hold 5 percent or more of the paid up voting equity capital of bank. In computing the threshold of 5%, whether proportionate theory needs to be adopted (similar to the basis followed for insurance sector) or would it be governed by extant FDI policy? +

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 percent or more of the paid-up voting equity capital of the bank for a period of 5 years from the date of commencement of the business of the bank. For the purpose of computing this limit, proportionate theory will not be adopted. [Paragraph 2(F) of the guidelines]

Q.323. As per clause (A)(i) of the Guidelines, eligible promoters must be entities/ groups in the private sector that are owned and controlled by residents as per DIPP guidelines. As per the DIPP guidelines, once an entity is ‘owned and controlled by a resident, any foreign holdings in such entity are not required to be counted for the purposes of computing FDI in an investee company. Further, as per clause (F) of the Guidelines, FDI in a banking company must be determined after considering both direct and indirect ownership. Would it be correct to read the above provisions to mean that the NOFHC’s ownership in the new bank will be considered as being held by residents and any FDI/ FII investment in the Promoter Group entities (especially where such entities are listed entities) which meet with the owned and controlled test as per DIPP guidelines, will not be considered in computing the overall 49% FDI / FII limits for the new bank. +

As the NOFHC will be wholly owned by entities/Groups that are ‘owned and controlled by residents’ [as defined in the Department of Industrial Policy and Promotion (DIPP) Press Notes 2, 3 and 4 of 2009/FEMA Regulations as emended from time to time], the foreign investment through these companies would not be considered for computation of foreign investment in the bank held under the NOFHC. [Paragraph 2(F) of the guidelines]

Q.324. We understand that since the Promoter Group entities would be ‘owned and controlled by residents’ as per DIPP guidelines, any FDI/ FII investment in the Promoter Group entities will not be considered in computing the overall 49 percent FDI/ FII limit for the new bank. Should our understanding be incorrect, would the indirect foreign investment in the bank, be counted on a proportionate basis mentioned above? +

Q.325. Is NRI investment under schedule 4 of FEMA 20 (on a non-repatriation basis) counted towards the 49 per cent cap? +

A. Yes. NRI investment under schedule 4 of FEMA 20 (on a non-repatriation basis) is counted towards the 49 per cent cap.

Q.326. Can the NOFHC and bank Board consist of eligible individuals who are non resident Indians or foreign nationals? +

A. There is no bar on having eligible individuals who are non resident Indians or foreign nationals on the Boards of the NOFHC and the bank. [Paragraph 2 (G) (vii) of the guidelines]

Q.327. Can NOFHC be managed by a person who is a director in any entity which is the Promoter / Shareholder of NOFHC? +

The NOFHC has to be managed by a person who is in whole-time employment and he / she cannot be a director in any other company (other than the bank or a subsidiary of the NOFHC or a Section 25 company) and is not engaged in any other business or vocation. [Paragraph 2(G)(ii)(a) and (b) of the guidelines]. Ownership and management shall be separate and distinct in the NOFHC, the bank and entities regulated by RBI. [Paragraph 2(G) (vii) of the guidelines]

Q.328. Please clarify whether this provision will be applicable to Promoter groups which are promoted by financial sector professionals and where such professionals are the owners as well as managers of various financial services entities by virtue of their past experience and expertise. +

Q.329. Can the NOFHC and bank management (Chairman, Vice Chairman, MD/CEO, COO, CFO, CRO, etc.) be non resident Indians or foreign nationals? +

A. There is no bar on having eligible individuals who are non resident Indians or foreign nationals as executives of the NOFHC and the bank. However, executives such as MD / CEO, COO, CFO & CRO, etc. who are full time employees will have to be resident in India. Appointment of Chairman and MD/CEO of the bank will have to be with the prior approval of RBI as per section 35B of the Banking Regulation Act, 1949. [Paragraph 2 (G) (vii) of the guidelines] and RBI Press Release 2005-2006/142 dated August 2, 2005.

Q.330. As per para 2(G) (ii), no NOFHC shall be managed by any person, (a) who is a Director in any other company not being a subsidiary of the NOFHC or a company registered under Section 25 of the Companies Act, 1956 (1 of 1956) or (b) who is engaged in any other business or vocation. Whether these restrictions would apply to Key Managerial Person (as defined in proposed Companies Bill 2012)? +

Person in this clause refers to a person who is the Chief Executive Officer or whatever name called, of the NOFHC, who manages the NOFHC on a whole time basis and is not a director in any other company (other than the bank or a subsidiary of the NOFHC or a Section 25 company) and is not engaged in any other business or vocation.

Q.331. Para 2 (G) (ii) of the guidelines indicate that – No NOFHC shall be managed by any person- (a) who is a Director in any other company not being a subsidiary of the NOFHC or a company registered under Section 25 of the Companies Act, 1956 (1 of 1956) or (b) who is engaged in any other business or vocation RBI may clarify that these restrictions would apply to Key Managerial Person (as proposed in the Companies Bill 2012). +

Q.332. Currently, various sectoral regulators have a simple formula for capital requirement. Is there a distinct formula / mechanism followed by RBI for computation of risk weighted assets in financial services entities regulated by other regulators? +

A. NOFHC should maintain capital adequacy and other requirements on a consolidated basis based on the prudential guidelines on Capital Adequacy and Market Discipline – New Capital Adequacy Framework (NCAF) issued under Basel II framework and Guidelines on Implementation of Basel III Capital Regulations in India [Paragraph 2(H)(iii) (a) of the guidelines].

Q.333. Can the borrowings/ leverage of NOFHC be sourced from entities other than the promoter group? +

A. Yes. Subject to a leverage of 1.25 times of paid up equity capital and free reserves, NOFHC can have borrowings from entities both within the Promoter Group and outside the Group [Paragraph 2(H)(i)(g) of the guidelines] .

Q.334. What is the nature of the business plan submission (excel model / word file / any other format)? +

A. The business plan can be submitted in any format. [Paragraph 2 (J) of the guidelines]

Q.335. Further, will the approval be required when a shareholder of NOFHC crosses 5% holding threshold for the first time or will it be required every time such shareholder crosses 5% threshold? This scenario could arise when a shareholder holding less than 5% acquires shares to cross 5% in 1st round, gets diluted to less than 5% in 2nd round of capitalisation and again acquires shares to cross 5% in 3rd round of capitalization. +

A. RBI approval will be required for acquisitions / transfers every time the shareholding reaches 5 per cent threshold or above. [Paragraph 2 (K) (ii) of the guidelines]

Q.336. In clause 2(K)(ii) of the guidelines, would ‘acquisition of shares’ mean ‘direct’ acquisition of shares of Bank or does it also include acquisition of shares of any entity above the Bank which will effectively / indirectly result in acquisition of 5% or more of voting equity of the Bank? +

No. For the purpose of paragraphs 2(K)(ii) and 2 (K)(iii) of the guidelines, both direct and indirect shareholding will be considered. The indirect shareholding would mean the shareholding in the bank through entities in which a person holds ‘significant influence’ or ‘control’ as defined in Accounting Standard 23.

Q.337. If yes, how would such ‘indirect’ acquisition of shareholding in the Bank be calculated for the purpose of 5% limit? +