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

Q.178. What will be the financial criteria (e.g. networth, paid up capital, etc.) applicable to NOFHC? +

A. The minimum capital required for the bank is `5 billion, and the NOFHC is initially required to have atleast 40% 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.179. Can an NBFC divest the activities which the banks are not allowed to do to another NBFC of the group? +

The general principle for activities that have to be conducted from within the bank and by NBFCs in the group 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]. Within these principles, the NBFC converting into the bank is required to divest the activities which the banks are not allowed to undertake departmentally and such activities can be migrated to and conducted from another NBFC/entity. However, lending activities that are not permitted to a bank, or are subject to restrictions, but are not prohibited to NBFCs, such as promoter financing, loans for purchase of land etc. would have to be wound up. 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.180. Section (2) (L) deals with conditions for converting NBFC into a bank. In such a case for activities that are not allowed to be undertaken by the bank, whether such activities can be transferred to another NBFC within the Group. (ii) Further, for existing branches of the NBFC which are not allowed to be converted into a bank branch, can these branches be transferred to another NBFC within the Group. +

Q.181. Section (2) (L) deals with conditions for converting NBFC into a bank. In such a case for activities that are not allowed to be undertaken by the bank, whether such activities can be transferred to another NBFC within the Group. Further, for existing branches of the NBFC which are not allowed to be converted into a bank branch, can these branches be transferred to another NBFC within the Group. +

A. (179 to 181) The general principle for activities that have to be conducted from within the bank and by NBFCs in the group 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].

Within these principles, the NBFC converting into the bank is required to divest the activities which the banks are not allowed to undertake departmentally and such activities can be migrated to and conducted from another NBFC/entity. However, lending activities that are not permitted to a bank, or are subject to restrictions, but are not prohibited to NBFCs, such as promoter financing, loans for purchase of land etc. would have to be wound up. 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.182. For the purpose of furnishing information, we understand that the promoter entity(ies) have to furnish information only with regard to the entities of the group making investment in the NOFHC and their owner entities. If only one entity is used as a ‘promoter’, does information with regard to the Group (as defined) still need to be submitted beyond the organogram: or would the above information only be required for other group companies as well? +

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 Income Tax 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.183. If an existing NBFC in the Group provides loans against shares which while complying with prevailing NBFC regulations, which in instances exceed the maximum amount that may be advanced by a bank. In such a case, could such lending activities continue to be undertaken through the NBFC if it is ensured that the overall capital market exposure on a consolidated basis is at all times maintained to comply with the caps prescribed by the RBI in this regard? +

A. The general principle for activities that have to be conducted from within the bank and by NBFCs in the group 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]. Within these principles, the activities that are permitted to be undertaken by the bank, such as loans against shares, have to be undertaken by the bank to the extent permitted. Lending activities that are not permitted to a bank or subject to restrictions to a bank cannot be carried out through an NBFC.

Q.184. Where a Group holds an equity interest in one or more financial entities, and such financial services entities undertake activities that can be undertaken by a bank departmentally, the Group can transfer its equity holdings in such financial entities to the NOFHC, but cannot transfer the business to the bank since there are other external, unconnected shareholders holding equity interests in such financial entities. Please confirm that the requirements of the RBI’s Licensing Guidelines will be regarded as fulfilled so long as the Group transfers its equity holdings in any such financial entities to the NOFHC. +

A. The transfer of equity holdings by the Promoters/Promoter Group entities in such regulated financial sector entities to the NOFHC, without the transfer of these business of the financial entities to the bank i.e. activities which have to be undertaken by the bank only, will not be in compliance with the provisions at para 2(C) (iv) of the guidelines.

Q.185. Paragraph 2(I)(ii)(b) provides that the NOFHC’s investments in capital instruments issued by unconsolidated financial and insurance entities within the Group should not exceed 10 percent of its consolidated capital funds. In this regard, please could you clarify: (i) How is the term “consolidated capital funds” to be interpreted? (ii) If the Group has relatively capital intensive financial service activities other than the bank e.g. insurance activities, to whom consolidation requirements do not apply, the 10 percent limit appears to be constraining given that the NOFHC structure is itself a construct imposed by the Guidelines. Is this RBI’s intent? +

A. (185 & 186) Consolidated capital funds means the Capital, Reserves and Surplus of the NOFHC determined on the consolidation of its subsidiaries, associates and joint ventures in accordance with the applicable Accounting Standards.

Consolidated capital funds for regulatory purpose means the consolidated regulatory capital of the NOFHC under the regulatory scope of consolidation. (Please refer to the ‘scope of Application’ under Section B of Annex 1 of circular DBOD.No.BP.BC.98 /21.06.201/2011-12 on guidelines on ‘Implementation of Basel III Capital Regulations in India’ dated May 2, 2012 for details on regulatory scope of consolidation. Please also refer to the guidelines for ‘consolidated accounting and other quantitative methods to facilitate consolidated supervision’ contained in circular DBOD.No.BP.BC.72 /21.04.018/2001-02 dated February 25, 2003 in terms of which the NOFHC will have to prepare consolidated financial statements and other consolidated prudential reports.)

This is a cross holding limit in the capital instruments on unconsolidated financial entities which applies on a consolidated basis. The limit ensures that the NOFHC has the continued ability to provide capital support to banking business.

However, since the investment of the NOFHC in the insurance subsidiary is fully deducted from its consolidated capital for prudential purposes such as consolidated capital adequacy, exposure norms etc., the investment of the NOFHC in the capital of its insurance subsidiary is not considered for the purpose of cross holding limit of 10 per cent.

Q.186. 2 (I) (ii) (b) provides that the NOFHC’s investments in capital instruments issued by unconsolidated financial and insurance entities within the Group should not exceed 10 percent of its consolidated financials and insurance entities within the Group should not exceed 10 percent of its consolidated capital funds. In this regard, please could you clarify how is the term “consolidated capital funds” to be interpreted? +

Q.187. (i) An Indian company, listed on Indian stock exchange(s), has foreign investment of less than 50 per cent. Its public holding is 51 per cent and promoter group holds 49 per cent. Of the 49 percent of the promoter group’s holding, 2/3rd is held by a ‘non-resident promoter’. The ‘non-resident promoter’ does not have right to nominate director on Board. The company is ‘controlled’ by ‘resident promoter group’. The said company, in terms of paragraph (C)(ii)(b) of the extant Guidelines (i.e., Corporate Structure of the NOFHC) is eligible to promote a NOFHC. The NOFHC, in turn, intends to hold 100 per cent of the new bank initially. In terms of the aforesaid foreign investment guidelines, would the RBI consider that the new bank does not have any indirect foreign investment? ii) Though more than 50 percent shareholding of the promoter group is held by non-resident shareholder, would the RBI consider the Indian company as resident? iii) Whether an unlisted company in which the non-promoter group shareholders hold more than 51 percent of the voting equity shares is eligible to promote a NOFHC? +

A. (i & ii) If two third of the Promoter Group’s holding in the Indian company is held by a “non-resident promoter”, the company is not controlled by a resident. So long as the non-resident holds two third of the voting equity shares held by the Promoter Group, he controls the Promoter Group’s investment in the Indian company and the fact that he does not have right to appoint a nominee director is irrelevant. The Indian company is therefore not eligible to promote a NOFHC. (iii) It is essential that not less than 51 per cent of the voting equity shares of the NOFHC are to be held by Promoter Group companies in which the public hold not less than 51 per cent of the voting equity shares. A company in which public holds 51 per cent or more of the voting equity shares need not necessarily be listed. 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.188. Where a non-financial services company is a listed company and the promoter holding therein is not more than 49 per cent, can this be regarded as compliance with condition at 2(C)(ii)(b)? +

A. It is essential that clause (b) of para 2(C)(ii) (i.e. not less than 51 per cent of the voting equity shares of the NOFHC to be held by companies in which the public hold not less than 51 per cent of the voting equity shares) is satisfied in all cases. 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.If these conditions are satisfied, then the listed non financial services company would comply with the conditions at 2 (C) (ii)(b) of the guidelines.

Q.189. Is it mandatory to have a public company as a part of the Promoter Group? +

Yes. It is essential that not less than 51 per cent of the voting equity shares of the NOFHC have to be held by companies in the Promoter Group in which the public hold not less than 51 per cent of the voting equity shares. [para 2(C)(ii)(b) of the guidelines]

Q.190. With reference to condition 2(C)(ii)(b), is it mandatory to have a public company which has more than 51 per cent shareholding in the NOFHC as part of the promoter group? +

Q.191. An existing NBFC has a joint venture (‘JV’) with a foreign partner on 50:50 basis. As per paragraph (C)(vii) of the extant guidelines, only those regulated financial sector entities in which a promoter group has significant influence or control are required to be held under the NOFHC. In such circumstances, would the RBI allow the promoters of the JV NBFC to continue its business on ‘as is where is’ basis because: i) The promoters do not have controlling interest in the said JV though they have management rights in the said JV; ii) The 50:50 JV is an Asset Finance Company (‘AFC’) and even though it does hypothecation loans / leases etc., it does not finance any consumable assets (like cars, trucks, etc.) but equipments (like mining machines, loader, cranes, dumpers, infrastructure construction equipment) supporting productive/ economic activity’? +

A. (i & ii) The JV NBFC has to be brought under the NOFHC, as it is a regulated financial sector entity, and the Promoters of the NBFC through the 50 per cent equity holding by the NBFC in the JV NBFC have 50 percent ownership and management rights in the JV NBFC. Hence, the Promoters would be deemed to have ‘significant influence’ or ‘control’ (as defined in Accounting Standard-23) over the JV NBFC. [para 2(C)(iv) and(vii) of the guidelines]

Q.192. An existing NBFC is classified as Infrastructure Finance Company (‘IFC’) and has a Public Finance Institution (‘PFI’) status. In such circumstances, would the RBI allow the promoters of the ‘IFC-PFI’ to continue its business on ‘as is where is’ basis under the NOFHC? +

A. Infrastructure financing through Infrastructure Development Fund (IDF) sponsored by the bank has to remain outside the bank, under the NOFHC. The infrastructure financing activities of the Promoters/Promoter Group through the IFC have to be conducted from within the new bank held by the NOFHC.

Q.193. Annex I of the Guidelines defines various terms used in the Guidelines and provides that the term ‘promoter group’ includes relatives of the promoter. The definition of the term ‘relative’ is as per Section 6 of the Companies Act, 1956. Annex II of the Guidelines requires submission of financial statements and credit information of promoters / promoter entities and promoters’ direct and indirect interests in various entities / companies and industries. i) Are the financial statements and credit information required to be submitted even in relation to a married daughter, her husband and relatives of married daughter’s husband? (ii) Whether promoters’ direct and indirect interest in various entities / companies and industries would include investment made by promoters in venture capital / private equity fund/s. Further, whether information about the investment made by such venture capital / private equity funds also needs to be submitted? +

A. (i) Yes. The relatives (as defined in Section 6 of the Companies Act, 1956) of the individuals (belonging to the Promoter Group) who would participate in the voting equity shares of the NOFHC, have to provide the financial statements for past ten years and Income Tax returns for last three years, as appropriate, at the time of submission of their application. The details of their 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. 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.[para 3 of Annex II to the guidelines] (ii) Yes. The details of the Promoter/ Promoter Group’s direct and indirect interest in various entities/ companies/ industries and details of credit/other facilities availed by them would be required of all entities. While the details of investments made by the Promoters/Promoter Group in the venture capital/ private equity fund/funds need be submitted, information about the investment made by such venture capital / private equity funds need not be submitted.[ para 3 of Annex II to the guidelines]

Q.194. In cases where there is transfer of ownership of promoters’ company investments in other regulated entities such as insurance etc. to the NOFHC, will the promoter companies have to take up the issue of change in nominal ownership with the concerned regulators or will this be a deemed approval and it would suffice to keep the other regulators informed of the change in nominal ownership structure. +

A. The Promoters/Promoter Group will have to obtain prior approval from the sectoral regulators, required under respective statutes/regulations.

Q.195. Company D, a subsidiary (51%) of a joint venture Company, is a composite insurance broker, licensed by the Insurance Regulatory Development Authority (“IRDA”), to act as a Direct Broker and a Reinsurance Broker in both the Life and Non Life Insurance sectors. As per banking guidelines, investment in Company D held by Company S, needs to be transferred to NOFHC. Further, in terms of banking license, RBI shall issue separate set of directions for governing NOFHC. NOFHC shall be a NBFC-CIC as NOFHC shall hold investments in group companies (i.e., regulated financial services entities of the group) more than 90% of its net assets. Whether NOFHC shall be allowed to hold investments in Company D? +

A. Yes.Since all regulated financial sector entities in which a Promoter Group has ‘significant influence’ or ‘control’ will be held under the NOFHC, Company D in the example will be held under NOFHC, if it is a Group company of the Promoters. [Paragraph 2(C)(vii) of the guidelines]

Q.196. The guidelines require that Insurance Companies (General / Life) of the Group be brought under NOFHC. As IRDA does not permit a subsidiary to own Insurance Companies, this requirement would need to await appropriate modification from IRDA. +

The general principle is that the regulated financial services sector entities in which a Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) will be held under the NOFHC. While this is a preferred structure, these requirements are subject to the regulations of the respective regulators. The applicants may approach IRDA in this regard. The decision of IRDA will prevail.

Q.197. Currently the IRDA does not allow a subsidiary of a company to hold stake in an insurance company. Since the NOFHC would be a subsidiary of the promoter group entity holding it, it (the NOFHC) would not qualify as a promoter of an insurance company. In such a case would an exception be made for insurance companies under clause 2 C (iii) above, or would a specific approval from the IRDA be available enabling the NOFHC to qualify as a promoter of an Insurance company? +

Q.198. On holding structure, IRDA guidelines currently require the Insurance Company to be directly held by the Promoting entity, and also prohibits changes in shareholding for five years since the grant of license. Will the RBI enable the movement of insurance company under NOFHC? +

Q.199. Under the extant Insurance law, the promoter is required to hold a stake in the insurance company directly. How will this converge/ align with the requirement that the NOFHC should hold all regulated financial services of the Group including the insurance companies? Exemptions from the provisions of guidelines can be considered depending upon the statutory prescriptions as well as the regulatory requirements of different sectoral regulators. +

Q.200. The Insurance Regulatory and Development Authority (Registration of Indian Insurance Companies) Regulation 2000, state that an Indian Promoter of an Indian Insurance Company cannot be a subsidiary of another company. It is further stated in the Guidelines that each financial services entity will be governed by its respective regulator. Since NOFHC is permitted to be wholly owned by Promoter/ Promoter Group and it is mandatory to bring the insurance entities under the NOFHC. IRDA will have to issue suitable amendments to the aforementioned regulations to enable the consolidation of the insurance companies without breach of the aforementioned condition, unless the RBI is able to relax the requirement for consolidation under the NOFHC I the context of insurance companies. +

Q.201. On holding structure, SEBI currently requires that an AMC be held by a SEBI registered entity; Will there be an exemption granted to move the AMC under the NOFHC? +

A. The general principle is that the regulated financial services sector entities in which a Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) will be held under the NOFHC. While this is a preferred structure, these requirements are subject to the regulations of the respective regulators. The matter has been examined in consultation with SEBI. The applicants may approach SEBI in this regard. The decision of SEBI will prevail.

Q.202. 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. However, this would not preclude the bank from having a subsidiary or joint venture or associate, where it is legally required or specifically permitted by RBI. 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 say, 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. 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 reorganization 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 entity. In fact, this process will have to be completed within a period of 18 months from the date of in-principle approval or before the commencement of the banking business, whichever is earlier. If the sectoral regulators viz. SEBI or IRDA, are to specify new norms, the applicants may approach SEBI/IRDA for their approval.

Q.203. Will the NOFHC be permitted to hold a stake greater than 50 per cent in the Insurance ventures of the Group. +

A. The capital requirements for the regulated financial services entities held by the NOFHC shall be as prescribed by the respective sectoral regulators.

Q.204. In case the promoter company is a listed NBFC and the investments in regulated entities are transferred to the NOFHC, the businesses which can be done by the bank are transferred to the proposed bank; after such transfers, the NBFC will have investments and residual borrowings. Will the residual NBFC be classified as CIC and continue to have a certificate of registration from the RBI? +

A NBFC (Investment Company) will not be brought under the NOFHC. It has to be registered with Reserve Bank of India as a CIC or as a NBFC (Investment Company), as appropriate.

Q.205. Promoter group has an investment holding company “A”. The said Company “A” is registered with RBI as a non-deposit taking systemically important NBFC (NBFC-ND-SI), Listed entity with majority public shareholding, has no public funds, holds equity investments in few promoter group companies, Has surplus funds (created out of ploughed back profits & out of dividend and investment income) meant for investment in group companies as and when required by them. As the underlying group companies, at present do not require funds, in order to maximize the return for its stakeholders, the said surplus funds are invested in money market instruments, Government securities, mutual funds, listed debentures and equities as a temporary measure. The said investments are for long term and the company does not trade in its investments. Other than the above said investments of its owned funds, Company A does not undertake any other activity and in essence a CIC with surplus funds. Whether Company A can be held outside the NOFHC? +

A NBFC (Investment Company) will not be brought under the NOFHC. It has to be registered with Reserve Bank of India as a CIC or as a NBFC (Investment Company), as appropriate.

Q.206. (i) Can the liabilities like debentures and bank borrowings associated with these asset businesses be transferred wherever possible, to the new bank? (ii) In cases where there is transfer of businesses from the promoter company , say an NBFC to the proposed bank; will the RBI give any separate guidelines for the methodology of valuing such businesses or the current provisions will be applicable? +

A.(i) Yes. As transfer of assets and liabilities to the new bank would be a part of the re-organization of the business of the group entities to comply with the provision of our guidelines, more particularly to comply with the NOFHC structure, it will be permitted. However, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank, in order to protect the interests of the deposi

(ii) 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/ regulations. No separate guidelines will be issued by RBI in this regard.

tors.

Q.207. Will the RBI consider permitting FDI investment from a single strategic investor (foreign bank / foreign development bank) who fulfils all “Fit and Proper” norms to hold greater than 4.99 per cent and less than 20 per cent in the proposed Bank. +

A. No. 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.

Q.208. Will it be required to indicate the names of the Board members and key management personnel of the proposed Bank at the time of application or post obtaining the in principle approval? +

If a CEO/Management Team has not been identified at the application stage, names of management team including the CEO would be required to be furnished to the Reserve Bank after grant of in-principle approval.

Q.209. Are the applicants expected to state the details of the key managerial personnel of NOFHC as part of the application? +

Q.210. Are the Applicants expected to list out the Board of Directors of NOFHC as part of the application? +

A. The names of the Board of Directors of the NOFHC would be required to be furnished to the Reserve Bank after grant of in-principle approval. [Paragraph 2 (G) (vii) of the guidelines]

Q.211. (i) Is there a need to provide details of all the areas / centres (population, demographics, agriculture & mining activity, import, export etc) where branches will be opened by the bank at the time of the application? (ii) Does the applicant need to provide a one year or a five year business plan as part of the application? +

A. (i) & (ii)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.212. Will the RBI take up with the Government to waive off tax related issues if any, arising from shifting of investments from promoter company to the NOFHC and from the NBFC to the bank? +

A. Taxation will be as per the laws/rules of the tax authorities.

Q.213. Will the proposed new bank be a direct member of clearing from day one or will they have to act as sub members? +

A. This would depend upon completion of certain formalities such as opening of current account with RBI, eligibility norms of the clearing houses, etc. for a member or a sub member.

Q.215. The requirement for ‘public’ shareholding will be satisfied as long as the shareholders that are proposed to be considered ‘public’ do not come within the definition of the term ‘Promoter’ or ‘Promoter Group’, as defined in Annexure I of the Guidelines- in other words, all shareholders that are not promoters or a part of the promoter group will be considered as public shareholders for the purpose of the Guidelines. +

A. For the purpose of these guidelines, ‘public shareholders’ would mean individuals/entities not belonging to the promoter group. ‘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. Such companies will hold not less than 51 per cent of the voting equity of the NOFHC. [para 2 (C) (ii) of the guidelines]

Q.216. Globally, automotive companies often have captive financial companies. Some of these financing companies operate as banks in geographies that permit them to operate as such. These entities are registered with and regulated by the RBI as NBFCs, and are required to comply with prudential norms prescribed by RBI on income recognition , asset classification, provisioning, capital adequacy, etc. As these entities are already under the direct supervision of RBI and these entities are critical and an integral part of the business operations of the industrial enterprises (s) they support, we request RBI to clarify that captive financing company/(ies) which are unlisted subsidiary/(ies) of a listed (overseas and / or domestically) automotive company in which Promoter/ Promoter Group hold less than 49 per cent, is not required to be brought under the NOFHC. We would alternatively request RBI to include a provision for granting case by case relaxation based on specific fact pattern of the applicant. +

A. All regulated financial sector entities, in which a Promoter has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) will be held under the NOFHC[ para 2(C)(vii) of the guidelines]. No exemption can be granted to auto-finance companies in the Promoter Group in this regard. Further, 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 activities that could be carried outside the bank are as mentioned in paragraph 2 (C) (iv) of the guidelines.

Q.217. Paragraph 2 (k) (vi) of the Guidelines provided that the bank should ‘build’ its priority sector lending portfolio from the commencement of its operations. We request a clarification from RBI on whether the current practice applicable to banks will be applicable to new banks also i.e. Priority Sector targets being set based on closing balance of advances of the previous financial year. Consequently, if a new bank commences on or after April 1, 201X, the advances at the end of the previous financial year will be nil, and hence priority sector targets will be set based upon the advances at March 31, 201X + 1 and this will need to be achieved by March 31, 201X + 2. +

A. The priority sector lending targets/achievements for a bank for the current year ending 31st March, will be based on the adjusted net bank credit (ANBC) outstanding as on 31st March of the previous year. The above example states the position correctly.

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 +

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].

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.

Q.258. Paragraph 2 (H) (i) (d) provides that the NOFHC shall create a reserve fund by transferring not less than 25 percent of the NOFHC’s annual profit to such reserve fund. As required under the Companies Act, the NOFHC will also need to transfer profits to reserves prior to distribution of dividends. Would the reserve in paragraph 2 (H) (i) (d) need to be created over and above the reserve that would be required to be created by the NOFHC under the Companies Act ? +

A. The reserves created under the Companies Act can be considered as part of the 25 per cent of the NOFHC’s annual profits transferred to the Reserve Fund. [Paragraph 2 (H)(i) (d) of the guidelines].

Q.259. Can the promoter group entities (other than the NOFHC of the financial entities held by the NOFHC), advance funds to the bank or place deposits with the bank? Can such entities advance funds to other financial entities held by the NOFHC ? +

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 [Paragraph 2 (C) viii of the guidelines]. However, there is no bar on the Promoter Group entities advancing funds (other than equity) to the bank. The Promoter Group entities would have to follow the guidelines / instructions of the respective regulators in order to advance funds to the financial entities held by the NOFHC. As far as Promoter Group entities placing deposits with the bank or extending advances to it is concerned, the bank shall maintain arm’s length relationship with Promoters / Promoter Group entities [Paragraph 2 (K) (iv) of the guidelines].

Q.260. Will the promoter/ promoter entities be entitled to own shares directly in the banking company on the listing of the bank? +

Q.261. Paragraph 2(I)(iv) (b) provides that a financial entity held by the NOFHC shall not make investments in equity / debt capital instruments issued by any other financial entity held by the same NOFHC. Can financial entities held by the NOFHC have credit exposure inter-se? +

A. The bank’s credit and investment (other than equity / debt capital instruments of the NOFHC and financial sector entities held under the NOFHC, on which exposure cannot be taken) exposure to financial entities under the NOFHC will be subject to intra group transactions and exposure (ITE) norms [para 2(I)(iii)(c) of the guidelines]. As regards exposure of entities regulated by other financial sector regulators, to the bank and other entities held under NOFHC, such exposures would be in accordance with the rules/regulations of the respective sectoral regulators.

Q.262. Does an NOFHC have to be incorporated and capitalized at least to the extent of ` 2 Crore at the time of submission of the application for a banking licence ? +

A. At the time of submission of application for the bank licence, the Promoters have to indicate the source of funds. After obtaining the in-principle approval from RBI, the NOFHC may be incorporated and the capital may be mobilised, as required within 18 months from the date of in principle approval and before the commencement of banking business, whichever is earlier.

Q.263. There is a need to specify: a. the yardstick / criteria for assessing the ‘financial soundness’ of a promoter / promoter group. b. the yardstick / criteria for assessing ‘successful track record’ of a promoter / promoter group. +

The assessment of the ‘financial soundness’ and ‘successful track record’ is a matter of judgment, and will have to be determined both on quantitative and qualitative basis; and no specific yardstick/criteria can be spelt out. In making this judgment, consideration will also have to be given to information obtained from the regulators, and enforcement and investigative agencies like Income Tax, CBI, Enforcement Directorate, etc. wherever considered appropriate. Further, the applications received will be subjected to a multi-layered evaluation process, including the High Level Advisory Committee (HLAC). [Paragraph 2(B) of the guidelines]

Q.264. Promoters/ Promoter Groups should be financially sound and have a successful track record of running their business for at least 10 years. What are the yardsticks to measure ‘financially sound’ and ‘successful track record’? +

Q.265. For applying the yardstick / criteria of ‘financial soundness’ and ‘successful track record’, would RBI consider all the businesses / activities of Promoters / Promoter Group or only the ones which are linked to financial services or are likely to be part of entities within the NOFHC framework? +

A. For applying the yardstick / criteria of ‘financial soundness’ and ‘successful track record’, RBI would consider all the businesses / activities of the Promoters / Promoter Group as considered appropriate. [Paragraph 2(B) of the guidelines]

Q.266. Would RBI consider a promoter group to be meeting ‘fit and proper’ criteria if such promoter group commits to reduce, below the threshold advised by RBI, the quantum of businesses / activities considered to be speculative in nature or subject to high asset price volatility? +

A. The ‘Fit and Proper criteria’, as stipulated at paragraph 2(A) & (B) of the guidelines will be determined based upon the past record and the future plan. No threshold has been prescribed for business misaligned with the banking model.

Q.267. Is the requirement of NOFHC applicable only in cases of corporate with a mix of both non –financial and financial services businesses? +

A. The requirement of the NOFHC is for both financial groups and for corporate groups having a mix of both non–financial and financial services businesses. [Paragraph 2 (C) of the guidelines]

Q.268. It appears that the provisions related to capital structure of NOFHC are not applicable to entities in the public sector. Please clarify if any other provisions related to NOFHC are also not applicable to public sector entities. +

A. The provisions of para 2 (C) (ii) of the guidelines will not apply to entities in the public sector. All the other provisions of the guidelines will apply to the entities in the public sector that promote the NOFHC / bank.

Q.269. How would the provisions apply for a Bank promoted jointly by one public sector and one private sector entity? +

A. Two or more different Promoter groups cannot jointly promote a bank. The NOFHC setting up a bank has to be wholly-owned by a single Promoter Group. Entities other than the Promoters / Promoter Group can hold voting shares in the bank subject to the limitations indicated in Paragraph 2 (K) (ii) and (iii) of the guidelines.

Q.270. Is it mandatory for promoter Groups engaged solely in the financial services business and already having a core investment company to have another NOFHC for promoting a bank? +

The corporate structure of the NOFHC as given in paragraphs 2 (C) (i), (ii) & (iii) will have to be fully met. The requirement is that the NOFHC has to be wholly owned by the Promoters/Promoter Group. 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] If an existing Promoter Group company including a core investment company of the Group satisfies the above criteria, it can be the NOFHC.

Q.271. Is the Promoter required to ‘set up’ a new company to be classified as NOFHC or can a Promoter Group identify and reclassify one of its existing group companies as NOFHC? +

Q.272. Please clarify which of the following types of shareholders would qualify as ‘public’ in an unlisted / listed entity: a. India domiciled institutional investors b. Employees holding ESOPs c. Private Equity Funds d. FIIs e. Other non promoter group investors +

A. All the shareholders mentioned above will be treated as ‘public’ shareholders in both unlisted and listed entities, provided that no individual shareholder 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, or acting in concert with other shareholders exercises ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) over the company. [Paragraph 2(C)(ii)(b) of the guidelines]

Q.273. Please confirm our understanding that (i) listed companies where public shareholding is atleast 51% or (ii) unlisted companies where 51% is held by investors, not being part of the Promoters/ Promoter Group, can both qualify as companies forming part of the Promoter Group allowed to hold not less than 51% of the total voting equity shares of the NOFHC. +

A. Companies belonging to the Promoter Group in which the public shareholding is not less than 51 per cent must hold not less than 51 per cent of the voting equity shares of the NOFHC. These companies can be listed or unlisted, but in either case, ‘public shareholding’ requires 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, or acting in concert with other shareholders exercises ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) over the company. [Paragraph 2(C)(ii)(b) of the guidelines]

Q.274. Can an entity (currently carrying out regulated financial services activity) which commits to discontinue its regulated financial services activities post receipt of banking licence, be kept outside the purview of NOFHC? +

A. The requirement is that the NOFHC shall hold the bank as well as all the other existing regulated financial services entities of the Group in which the Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23). [Paragraph 2(C)(iii) & (vii) of the guidelines]. If the entity in the Promoter Group carrying out regulated financial services activity discontinues such activity it will have to be necessarily outside the purview of the NOFHC. However, it has to discontinue the regulated financial sector activity within a period of 18 months from the date of grant of in-principle approval to set up the bank or before the date of issue of licence, whichever is earlier.

Q.275. Please clarify that prohibition on NOFHC setting-up a new financial services entity does not include: i) setting up a foreign subsidiary by a financial services entity already under the NOFHC framework, for carrying out its business activity in a foreign jurisdiction; ii) the formation of a new entity under NOFHC as part of a group restructuring to comply with the RBI Banking Guidelines; iii) the formation of any new financial services entity required to be established after the commencement of business of the NOFHC by a specific regulatory requirement. +

A. (i)A foreign subsidiary can be set up by a financial services entity already under the NOFHC framework provided the setting up of such an entity is necessary under the regulation in that foreign jurisdiction. (ii) The setting up of a new entity under the NOFHC as a part of the restructuring of the business of the Promoter group would be permitted subject to compliance with the guidelines at paragraph 2C (vii) of the guidelines. (iii) A new financial services entity can be set up under the NOFHC if required by a specific regulatory requirement. Prior permission of the RBI will be necessary for setting up of such new entities, under the NOFHC.

Q.276. Will RBI approval be required for gross acquisitions exceeding 5% voting equity of NOFHC or for net shareholding (net of dilutions / sales) crossing 5% of voting equity capital? +

A. Shares of the NOFHC shall not be transferred to any entity outside the Promoter Group. Any change in shareholding (by the Promoter Group) 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 be with the prior approval of RBI. [Paragraph 2 (C) (ix) of the guidelines] RBI approval will be required for any acquisitions / transfers of voting equity capital resulting in shareholding of 5 per cent or above by an individual / entity / group / Persons acting in concert.

Q.277. Would shareholding in any Promoter Group entity holding shares in NOFHC be treated as ‘indirect’ shareholding in the bank? +

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]