RBI just dashed hopes of India Inc to add banking to their empire

The Reserve Bank on Friday accepted most of the recommendations of its working group on corporate ownership of private sector banks, by allowing unrestrained promoter shareholding in the first five years of operations and hiking the same to 26 per cent after 15 years from the extant 15 per cent and also the new capital requirements.

The move will benefit leading banks like Kotak Mahindra Bank and IndusInd Bank, among others, which have been seeking more time from the regulator to divest their stakes for many years now.

Accepting 21 of the 33 recommendations of the internal working group, the central bank said the remaining suggestions are under its consideration.

The RBI constituted the working group on June 12, 2020, and the panel submitted the report on November 20, 2020, inviting comments of stakeholders and members of the public by January 15, 2021.

The RBI accepted the recommendation that no changes be made to the extant instructions related to the initial lock-in requirements of holding a minimum 40 per cent of the paid-up voting equity share capital of the bank for the first five years but said no cap on the promoters holding during the same period.

The report favours continuation of the 40 per cent minimum holding for the first five years to ensure that promoters maintain their skin in the game and also to ensure credibility of the control of the promoter group till the business is properly established and stabilised.

It will also ensure that the promoter remain committed to the bank in the formative years, providing it necessary strategic direction.

There is no need to fix any cap on the promoters' holding in the initial five years as the existing licensing guidelines have not mandated any cap on promoter's shareholding in the first five years as initially it may be challenging for a new bank to raise capital from external sources or investors.

So allowing them to hold higher stake will enable the promoter to infuse additional capital, as and when required, the RBI said, accepting the report.

More importantly, the RBI also accepted suggestion to increase the cap on the 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.

Another key change is promoters will have to bring in more money to begin a bank as the RBI has accepted all the recommendations on the minimum initial capital requirement for licensing new banks, saying for universal banks the initial paid-up voting equity share capital/ networth required for a new bank, may be increased to Rs 1,000 crore from present Rs 500 crore; for SFBs to Rs 300 crore from Rs 200 crore and for UCBs transiting to SFBs to Rs 150 crore from Rs 100 crore and the same has to be upped to Rs 300 crore in five years from Rs 200 crore.

However, the RBI said this stipulation should be uniform for all types of promoters and would not mean that promoters, who have already diluted their holdings to below 26 per cent, will not be permitted to raise it to 26 per cent of the paid-up voting equity share capital of the bank.

The promoter if  desires, can choose to bring down holding to even below 26 per cent, any time after the lock-in of five years.

Though the report favoured that there is no need to set any intermediate sub-targets between 5 and 15 years on bringing down the promoter holding the central bank said at the time of issue of licences, the promoters will have to submit a dilution schedule to it and that the progress in achieving these agreed milestones must be periodically reported and shall be monitored by the central bank.

It also accepted the recommendation that non-promoter shareholding, current long-run shareholding guidelines should 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.

While accepting this, the RBI clarified that non-promoter shareholding will be capped at 10 per cent of the paid-up voting equity share capital 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.

The RBI also maintained that any stake holding or voting rights of 5 per cent or more of the paid-up share capital/ total voting rights of the concerned bank will require its prior nod.

On not allowing share pledge by promoters during the lock-in period, which amounts to bringing the unencumbered promoters' shares below the prescribed minimum threshold, the central bank said in case the invoking the pledge results in purchase/transfer of shares beyond 5 per cent of total shareholding without prior RBI approval may restrict the voting rights of such pledgee till the pledgee get the RBI nod.

On recommendation for converting a large NBFC or SFB or PB into a commercial bank, the central bank said the minimum requirement on track record of experience of promoting entity, including for a converting NBFC, may continue to be 10 years for banks and five years for small finance banks.

However, for payments banks intending to convert into an SFB, the requirement of five years of experience as PB will continue.

For existing banks and the banks to be set up under the existing on-tap licensing guidelines, a road map for adherence with the new norms will be announced separately in due course.

The RBI also accepted recommendation of continuing with the NOFHCs (non-operating financial holding company) structure for all new bank licences.