An Internal Working Group (IWG) was constituted by Reserve Bank on June 12, 2020 to review the guidelines on ownership and corporate structure for Indian private sector banks. The report submitted by the IWG was placed on the RBI website on November 20, 2020 inviting comments of stakeholders and members of the public by January 15, 2021. We have got their 21 recommendations available from RBI website. Let us discuss.
Recommendations of the Internal Working Group to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks
We shall discuss all the recommendations finally arrived at by the RBI internal working group. (numbers indicate recommendation serials). These recommendations stand accepted. Modified ones are also indicated. Obviously, the numbers may be as ordained by RBI. Not serially placed.
Recommendation No. 1
No change may be required in the extant instructions related to initial lock-in requirements, which may continue as minimum 40 per cent of the paid-up voting equity share capital of the bank for first five years.
Our view:
This was hotly contested by many arguing for continuity while some went for a change.
2. No cap on promotor’s initial holding for first 5 years.
This is essential for the promoter or his group to grow the bank as per their vision.
3. The cap on promoters’ stake in long run of 15 years may be raised from the current levels of 15 per cent to 26 per cent of the paid-up voting equity share capital of the bank.
This also enables those who have brought down their share below 26% may again increase it to the permitted level. Perhaps it gives certain benefits/satisfaction to the promoter who initiated the bank, guide it to grow, and later prosper. As a share- holder of public sector banks for decades not much return was given to its loyal investors. Rather, some of the values of the stocks have gone down causing concern to its stock- holders. A welcome move from private sector banking point of view.
4. No intermediate sub-targets between 5-15 years may be required. However, at the time of issue of licences, the promoters may submit a dilution schedule which may be examined and approved by the Reserve Bank.
It is expected that agreed upon milestones will be periodically reviewed by RBI for monitoring purposes. It is visualized that RBI will continue to play a leading role on supervision of governance standards being maintained by the promoters of the newly growing banks.
Some of the recent happenings in newly promoted banks have given anxious moments to banking investors like us. Some promoters recently tried to move away from agreed upon dilution standards. I join others to request RBI not to dilute its role on supervision.
5. “As regards non-promoter shareholding, current long-run shareholding guidelines may be replaced by a simple cap of 15 per cent of the paid-up voting equity share capital of the bank for all types of non-promoter shareholders.”
The accepted modification is
“Accepted with following modifications:
Non-promoter shareholding will be capped at 10 per cent of the paid-up voting equity share capital of the bank in case of natural persons and non-financial institutions/entities and at 15 per cent of the paid-up voting equity share capital of the bank in case of all categories of financial institutions/entities, supranational institutions, public sector undertaking or Government.
It has been amply made clear that RBI prior approval may be required for enhancement from 10% to 15%.
6. A monitoring mechanism to ensure that major shareholder is a fit and proper person in terms of companies act 2013. RBI will ensure at the stage of giving the approval. The board of directors to continue to monitor at their level too.
8. Unencumbered promoters share- holding not to fall below the accepted level during lock in period by pledge of shares.
It is very emphatic that promoter cannot have the holding of the shares as a major share- holder and do raise more money by raising loans against them which may result in their holding below the prescribed limit
9. If the shares have been pledged beyond 5% and the pledgee has not moved to RBI for regularization, the voting rights of those will be restricted to 5%.
10. RBI may introduce a reporting system for pledging of shares by promoters of private sector banks.
16. RBI will introduce for large NBFCs a tighter bank like regulatory frame- work.
18. What is experience requirement of promoting entity for a private sector bank?
Prescriptions made by RBI were modified as under.
Accepted with the modification that for a Payments Bank (PB) intending to convert into an SFB, requirement of 5 years of experience as PB may continue, along with other requirements as laid down in para 3(a) of “Guidelines for ‘on tap’ Licensing of Small Finance Banks in the Private Sector -December 5, 2019”.
19. Recommendations made earlier:
- For Universal Banks: The initial paid-up voting equity share capital/ net worth required to set up a new universal bank₹1000 crore (from present ₹500 crore).
- For SFBs: The initial paid-up voting equity share capital/ net worth required to set up a new SFBe increased to ₹300 crore (from present ₹200 crore).
- For UCBs transiting to SFBs: The initial paid-up voting equity share capital/ net worth should be ₹150 crore (from present ₹100 crore) which will be increased to ₹300 crore in five years (from present ₹200 crore).
- Accepted all terms for new ones but already floated ones will continue to have terms fixed earlier.
21. The IWG also recommends uniform usage of the term ‘paid-up voting equity share capital’ in all guidelines and instructions of Reserve Bank.
Corporate Structure – Non-operative Financial Holding Company (NOFHC) Recommendation No. 22:
NOFHCs should continue to be the preferred structure for all new licenses to be issued for Universal Bankssubject to the promoters/promoting entities being eligible to set-up a Universal Bank/Small Finance Bank.
23: Banks currently under NOFHC structurecan exit from such a structure if they do not have other group entities in their fold.
27: SFBs to be set up in future: : Such banks are to be listed within ‘eight years from the date of commencement of operations’.
30: The criteria to assess ‘fit and proper’ status of promoters/major shareholders as prescribed in the ‘Guidelines for on tap Licensing of Universal Banks in the Private Sector – 2016’ and other latest guidelines should be followed. In future, harmonization of licensing guidelines will be issued.
31: Whenever a new licensing guideline is issued, the existing banks to get the benefits immediately.
32: As and when the changes in certain norms, as recommended by the IWG in this report are accepted by Reserve Bank, the existing banks to get the benefits immediately.
33: As the licensing is now on-tap, Reserve Bank may prepare a comprehensive document, immediately containing the complete instructions. This will help any applicant groups to prepare their documents, function with ready guidelines, and a business-friendly step.
Conclusion
The main purpose RBI notification is to bring the changes previously proposed, those accepted, and those which were accepted with modifications. This article clearly emphasizes vast and immediate instructions from RBI which would usher in promotion of new banks, extension of current ones with the best benefits, and RBI’s ever ready mode to make banking a pleasure and expand the best banking to India’s vast population. I do appreciate RBI’s willingness to change with times. It is for the private sector to get the best benefits.
The above working group recommendations and other details are available in Reserve Bank of India website.
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