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

Q.278. If yes, how would such ‘indirect’ shareholding in the bank be calculated for the purpose of 10% limit? +

No. Shareholding in Promoter Group entity holding shares in NOFHC will not be treated as ‘indirect’ shareholding in the bank. It may be mentioned here that the Promoters / Promoter Group entities / individuals associated with Promoter Group shall hold equity investment in the bank and other financial entities held by the NOFHC, only through the NOFHC [Paragraph 2 (C) (viii) of the guidelines]

Q.279. We presume that only domestic financial entities of the Group are required to be brought under NOFHC. Accordingly, overseas financial entities belonging to promoter group would be outside of NOFHC. Please confirm. +

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, including the overseas financial entities. However, this would not preclude the bank or any other financial services entity held under the NOFHC from having a subsidiary or joint venture or associate where it is legally required or specifically permitted by RBI and other financial sector regulators. [Paragraph 2 (C) (iii) of the guidelines]

Q.280. In case of listed NBFC desiring to promote the bank, it would be economically disadvantageous to have the two layered structure of the listed NBFC taking stake in the Banking entity through a wholly owned NOFHC. Hence, please let us know whether the listed NBFC can itself be considered / converted as the NOFHC and hence be permitted to directly promote the banking entity. In such a case, due to the fact of the NBFC being a listed entity, there is a need to provide exemption to the NOFHC being a wholly owned entity. +

A. The requirement is that the NOFHC has to be wholly owned by the Promoters/Promoter Group. [Paragraph 2 (C) (i) of the guidelines] Further, at least 51 percent of the voting equity shares of the NOFHC have to be held by companies in the Promoter Group in which public hold not less than 51 percent of the voting equity of those companies. [Paragraph 2(C)(i) & (ii) of the guidelines] Therefore, the listed NBFC cannot be converted into an NOFHC and promote the bank. No exemption can be granted for the purpose.

Q.281. Most banks and NBFCs have a staffing subsidiary. The employees in this company perform transactional activities for the bank / NBFC. Since such staffing subsidiaries are integral in nature to the banking business we presume that the banks/NOFHC would be continued to be allowed to hold such subsidiaries. Please confirm. +

A. The NOFHC will be required to hold only regulated financial services entities. The bank will be permitted to have a subsidiary or joint venture or associate, only where it is legally required or specifically permitted by RBI [Paragraph 2(C)(vi) of the guidelines]. Banks however, are not permitted to have staffing subsidiaries.

Q.282. A Financial Institution is set up under an Act of Parliament and its equity is held by public sector banks and insurance companies, owned or controlled by Government of India. Given this background, would it be a limiting factor for these promoters of the FI for carrying out their ongoing financial services? +

A. The Promoters/ Promoter Group would be permitted to set up a bank only through a wholly owned NOFHC as per the corporate structure envisaged in paragraph 2(C) of the guidelines. 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 which the Promoters/ Promoter Group have ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) [Paragraph 2(C)(iii) of the guidelines]. Further, 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 [Paragraph 2(C)(iv) of the guidelines]. It is clarified that all lending activities in the group must be conducted from inside the bank.

Q.283. Whether FI would be under the obligation to transfer its shareholdings in its associates, subsidiaries and joint ventures (rating company, venture capital company, asset reconstruction company, etc) to the NOFHC? It may be added that some of these subsidiaries amongst themselves have cross holdings with each other. +

If the FI is a private sector entity, then it has to comply with the corporate structure prescribed at paragraph 2(C)(ii) of the guidelines. If the FI is a public sector entity, provisions of the paragraph 2(C)(ii) of the guidelines will not be applicable, though the entity has to set up a NOFHC for holding the bank. In either case, the activities that can be conducted by a bank have to be transferred to the bank and the regulated financial services activities which a bank cannot undertake have to be transferred to a separate subsidiary or subsidiaries under the NOFHC.[para 2 (C) (iii) of the guidelines]

Q.284. Can the FI still continue to do refinance activity along with other developmental activities like cluster development programme, entrepreneurship development programme. It is submitted that these being specialized activities permitted by the statute to specified institutions, may not be construed as normal financial services activity for the purpose of the above definition. +

Q.285. Can the venture capital company, presently a wholly owned subsidiary of the FI, be allowed as a separate arm under the NOFHC, in line with guidelines permitting infrastructure debt funds to be carried out by a separate subsidiary under NOFHC? Or can it be allowed to carry on the activity outside the NOFHC as wholly owned subsidiary of FI ? +

Q.286. The FI is presently extending direct finance to eligible entities (which are in the priority sector category) as permitted by the statute, to supplement efforts of the banks by introducing new and innovating products for adoption by other lenders in due course. In addition, the FI also extends equity/quasi equity assistance to the eligible entities as permitted by the statute and supported by the Government through special dispensation, also approved by the regulator. These being permitted activities under statute, can the same be continued by the FI? +

Q.287. Where shares of a NOFHC are held by public charitable trusts, whose trustees are the promoters of financial services companies, whether the shareholding of such public charitable trusts be considered as meeting the condition 2(C)(ii)(b)? +

The shares of NOFHC can be held by individuals, corporate entities and companies belonging to the Promoter Group. A trust does not fall under either of these categories. Therefore, a public charitable trust or an employee welfare trust cannot hold voting equity shares directly in the NOFHC but can hold indirectly through a company which holds equity shares of the NOFHC. If the Promoters have control over the trust, the trusts will not be treated as ‘public’ for the purpose of computing ‘public shareholding’ in companies which would hold not less than 51 per cent of the voting equity of the NOFHC. [Paragraph 2(C)(ii)(b) of the guidelines]

Q.288. Where shares of a NOFHC are held by employee welfare trust, whether the shareholding of such trust be considered as meeting the condition 2(C)(ii)(b)? +

Q.289. Will RBI consider employee welfare trusts as being held by public, in order to comply with NOFHC requirements for promoter group? +

Q.290. Where a group is engaged in financial services sector and has investments in various companies / SPVs/ joint ventures through holding company which is typically Core Investment Company (CIC) or Systemically important non-deposit taking CICs (CIC-ND-SI), will they have to undergo the rigour of dismantling the CIC / CIC-ND-SI structure in view of new concept of NOFHC? +

A CIC of the Promoter Group will be eligible to hold the voting equity shares of NOFHC. Alternately, a CIC of the Promoter Group may also become a NOFHC. However, under both the options, the corporate structure of the NOFHC must comply with requirements at para 2 (C) of the guidelines, and the new bank and the regulated financial sector entities in which Promoter Groups have ‘significant influence’ and ‘control’ (as defined in Accounting Standard 23) have to be held under the NOFHC. [Paragraph 2(C)(iii) & (vii) of the guidelines]

Q.291. Can the CIC registered with RBI be eligible to act as NOFHC? +

Q.292. Post setting up the bank, if the promoters wish to enter into new financial businesses such as insurance, asset management, do they set up a new subsidiary under the NOFHC or under the bank? +

A. Post setting up the bank, if the promoters wish to enter into new financial business such as insurance, asset management, they have to set up new subsidiaries under the NOFHC; not under the bank. This would not preclude the bank from setting up a subsidiary, if there is a legal requirement or requirement of the concerned financial sector regulator, subject to RBI approval. However, 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 its business. [para 2(C)(vi) of the guidelines]

Q.293. Existing guidelines for Infrastructure Debt Funds (IDFs), cap the ownership stake of potential bank sponsors of an IDF (NBFC structure) to a maximum of 30 percent, and that of potential IFC-NBFC sponsor at 49 percent. Could the NOFHC holding the bank also have an ownership share of more than 49 percent in a separate IDF subsidiary? +

A. The NOFHC shall hold the bank as well as other financial services entities of the Promoter Group regulated by RBI or other financial sector regulators [para 2(C)(iii) of the guidelines]. Accordingly, the NOFHC will replace bank/NBFC as sponsor of IDF and contribute a minimum equity of 30 percent and maximum equity of 49 percent of the IDF-NBFC. (Please refer RBI circulars DBOD.FSD BC No 57/24.01.006 dated November 21, 2011 and DNBS. PD. CC. No 249/03.02.089 dated November 21, 2011).

Q.294. Company A, a 50:50 Joint Venture between Company S & Company B (non resident), is an NBFC classified as an Asset Finance Company. Company A is engaged in the business of equipment financing. Investment in Company A (50%) is proposed (i) to be transferred to Non Operative Financial Holding Company (“NOFHC”) (a newly incorporated WOS of Company S) by Company S or (ii) to be transferred to NOFHC by Company S and then to Bank (a newly incorporated WOS of NOFHC) by NOFHC. a) Whether investment in Company A (50%) can be held by bank? b) If answer to the question (a) is negative, whether investment in Company A can be held by NOFHC? +

A. (a & b) Since the NOFHC shall hold the bank as well as other financial services entities of the Promoter Group, regulated by RBI or other financial sector regulators [Paragraph 2 (C) (iii) of the guidelines], the bank held under NOFHC will not be permitted to hold the equity shares of an Asset Finance Company (AFC) held under the same NOFHC. Therefore, the bank cannot have 50 per cent equity investment in Company A, unless required by law or specially permitted by RBI and concerned financial sector regulator. Subject to the above, the investment in Company A has to be held by the NOFHC.

Q.295. Will it be mandatory to transfer any financial services activity which is currently not regulated but which will be regulated by the sectoral regulators in future, under the NOFHC? +

A. Yes, all regulated financial services activities, in which a Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23), whether presently regulated or regulated in the future, will need to be under the NOFHC, when so regulated. [Paragraph 2(C)(vii) of the guidelines]

Q.296. If an existing NBFC is converted into a bank or an existing business is transferred to the bank to be carried out by it “departmentally”, then will the same be permitted to be valued at fair value for the purpose of issuance of voting capital? +

A. The assets and liabilities for the purpose of transfer from one entity to another under restructuring of the existing business may be valued as per the relevant provisions of the applicable laws.

Q.297. Will this mean that any restructuring of existing businesses held by NOFHC which may give rise to forming new entities or transfer of existing business to new entities by way of merger, demerger, internal restructuring etc. is also prevented for a period of 3 years from the commencement of business of NOFHC? If the sector regulator says SEBI or IRDA are to specify new norms regulating sector specific entities entailing setting up of new entities, will this require prior approval of RBI? +

A. No. The restriction on setting up of new financial services entity within the first three years would not apply to restructuring of the existing business / demergers or any other restructuring of existing business mandated by the sectoral regulators. This will have to be undertaken with RBI’s approval.

Q.298. Can the shareholders of a listed company (which is a promoter of NOFHC and the bank) become shareholders of the bank? +

A. The public shareholders (i.e. other than the Promoters/Promoter Group entities/individuals associated with the Promoter Group) of the company promoting the NOFHC are permitted to hold equity investments in the bank and other financial entities held by the NOFHC directly. [Paragraph 2(C)(viii) of the guidelines]

Q.299. Please clarify whether % voting equity shares of NOFHC would be calculated on a fully diluted basis (i.e. including outstanding convertible instruments and warrants) +

For the purpose of ensuring that minimum 51 per cent voting equity shareholding in the NOFHC are held by the companies in which public hold not less than 51 per cent, any convertible instruments held by the promoters, whether compulsorily or optionally convertible into voting equity shares, will be considered as voting equity shares.

Q.300. Is the percentage shareholding to be computed on fully diluted basis (taking into account any issue of convertible instruments and assuming complete conversion)? +

Q.301. How will Non-Voting Capital be treated in the context of shareholding pattern of NOFHC and Bank for the purpose of meeting prudential norms as well as for calculation of promoter shareholding? +

A. Non-voting capital will not be reckoned for the purposes of calculation of promoter shareholding in the NOFHC. The non-voting capital in the NOFHC will be counted towards meeting prudential norms if it meets the eligibility criteria for inclusion in the regulatory capital as laid down in the guidelines on Basel III Capital Regulation issued vide circular DBOD.No.BP.BC.98/21/06.201/2011-12 dated May 2, 2012. [Paragraph 2 (D) of the guidelines]

Q.302. What is the minimum capital / networth required for NOFHC? +

A. The minimum capital required for the bank is ` 5 billion, and the NOFHC is initially required to have atleast 40 per cent shareholding in the bank. The minimum capital of the NOFHC should be such as to meet the above requirements as well as the requirement of holding prescribed capital in other financial sector entities held by the NOFHC as per the norms laid down by the financial sector regulators.[Paragraph 2(D) of the guidelines]

Q.303. Can more funds be infused into the bank, over and above the business plan submitted to the RBI? Would any specific approval be required for this? +

A. As stated in Paragraph 2 (D) (i), the initial minimum paid up voting equity capital for a bank shall be ` 5 billion. Any additional voting equity capital to be brought in will depend on the business plan of the Promoters. They can bring in any amount of capital over and above the minimum required to support the business plan and the capital raising programmes would be subject to approvals as indicated in RBI circular dated April 20, 2010 on issue and pricing of shares by private sector banks. Further, the capital raising programmes should be in compliance with stipulations mentioned in Paragraphs 2 (D) (ii) to (v), 2 (F), 2 (K) (ii), (iii) and (x) of the guidelines.

Q.304. If the voting equity shares of the bank are issued at a premium, can the ` 500 crore threshold be achieved via Networth instead of paid up capital? +

A. No. The initial minimum capitalization of the bank should be paid-up voting equity capital of ` 5 billion.

Q.305. Apart from public issue and private placement, would any other methodologies be available to the bank / NOFHC to effect dilution in the bank. +

A. Yes, apart from public issue and private placement, other methodologies, such as sale of shares can also be resorted to for achieving dilution of shareholding in the bank. [Paragraph 2 (D) of the guidelines]

Q.306. Will the NOFHC require RBI permission for infusing funds / capital in any financial services entity which is regulated by other sectoral regulators and which is held by the NOFHC? +

A. The capital requirements for the regulated financial services entities held by the NOFHC shall be as prescribed by the respective sectoral regulators. Prior permission from RBI would be required for the NOFHC to infuse funds/capital in any financial services entity held under it, which is regulated by any other financial sectoral regulator. The objective of such approval from RBI would be to ensure that all the entities including the bank on stand-alone basis as well as the consolidated bank meet the minimum capital adequacy requirement.

Q.307. Whether secondary sale of NOFHC shareholding in the bank will be permissible? If yes, would it require RBI permission? +

A. Yes, subject to compliance with paragraph 2(D)(iii) and (iv) of the guidelines. However, sale of NOFHC shares in the bank resulting in the acquisition of shares at 5 per cent or more of the bank by any person directly or indirectly would require prior approval of RBI.

Q.308. Can shares of the bank be offered as ESOPs to employees of NOFHC? +

A. Yes, provided the minimum shareholding by the NOFHC in the bank as prescribed is maintained at all times.

Q.309. To what extent ESOPs can be provided to the employees of the bank? +

A. The bank may issue ESOPs to its employees as per its own policy and in compliance with guidelines issued by SEBI.

Q.310. In the context of listing, we understand that the capital market regulator has taken a stance that non-voting capital is not permissible but capital with differential voting right is permissible. Given this background, how will RBI’s requirement be met in this regard? +

Non-voting shares are outside the purview of the guidelines, but subject to relevant laws and SEBI regulations wherever applicable.

Q.311. Is shareholding by way of non-voting equity shares in the bank envisaged or permitted? +

Non-voting shares are outside the purview of the guidelines, but subject to relevant laws and SEBI regulations wherever applicable.

Q.312. Please specify the timeline for issuance of separate directions for NOFHC. +