India’s central bank, the Reserve Bank of India, on Monday tweaked norms related to acquiring shares in banks in a bid to ensure ownership is well diversified and shareholders are “fit and proper.”
In the ‘Master Direction – Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023’ issued on January 16, the RBI said that it requires major acquisitions in banks to go through it first.
“These directions are issued with the intent of ensuring that the ultimate ownership and control of banking companies are well diversified and the major shareholders of banking companies are ‘fit and proper’ on a continuing basis,” the RBI said.
To own a major shareholding in a banking company, the person making the acquisition will have to submit an application to the central bank.
“The decision of the Reserve Bank to (a) accord or deny permission or (b) accord permission for acquisition of a lower quantum of aggregate holding than that has been applied for, shall be binding on the applicant and the concerned banking company,” the fresh directives read.
The central bank has set the floor at 5%, meaning any aggregate holding that falls below the floor will have to re-apply for approval, in the event that they plan to up their stake to 5% or more of the paid-up share capital or total voting rights.
The RBI further said the banking companies have been asked to put in place a mechanism to obtain information on any change in significant beneficial owner or acquisition by a person to the extent of 10% or more of paid-up equity share capital of the major shareholder.
Also, a banking company will have to establish a continuous monitoring mechanism to ascertain that a major shareholder has obtained prior approval of the Reserve Bank for the shareholding/voting rights.
It further said permission of the Reserve Bank to acquire shares or voting rights in a banking company for non-promoter will be limited to 10% in case of individuals, non-financial institutions, and financial institutions connected with large industrial houses. The limit is 15% in case of financial institutions, public sector undertakings and the government.
In case of promoter, the limit has set at 26% of the paid-up share capital or voting rights after the completion of 15 years from commencement of business of the banking company.
The directions are applicable to all banking companies, including Local Area Banks (LABs), Small Finance Banks (SFBs) and Payments Banks (PBs) operating in India.