Money & Banking

RBI panel comes up with suggestions on corporate structure, pledging of shares

Our Bureau Mumbai | Updated on November 21, 2020

The group also suggested a 26% cap on promoters’ stake

The internal working group of the Reserve Bank of India to review extant ownership guidelines and corporate structure for Indian private sector banks has come out with a slew of suggestions on issues including corporate structure, pledging of shares by promoters, and initial capital required for licensing new banks.

Significantly, the report has said that well-run large Non-banking Finance Companies (NBFCs), with an asset size of ₹50,000 crore and above, including those that are owned by a corporate house, may be considered for conversion into banks, subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard.

It has, however, noted that there may be a need for a stricter set of criteria if NBFCs owned by large industrial houses are to be considered for conversion into banks. “Depending on experience gained after say five years, with conversion of NBFCs into banks, the Reserve Bank may review the policies in this regard to either tighten or relax policy,” it has said.

Seeks comments

The RBI has sought comments on the report by January 15, 2021. “The RBI will examine the comments and suggestions before taking a view in the matter,” it said.

The working group has called for continuing with Non-operative Financial Holding Company (NOFHC) as the preferred structure for all new licences to be issued for universal banks. “However, it should be mandatory only in cases where the individual promoters, promoting entities converting entities have other group entities,” it said.

While banks licensed before 2013 may move to an NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status, all banks licensed before 2013 shall move to the NOFHC structure within five years from announcement of tax-neutrality, it has further said.

Noting that the concerns with regard to banks undertaking different activities through subsidiaries, joint ventures, associates need to be addressed through suitable regulations till the NOFHC structure is made feasible and operational, the working group has suggested that a bank and its existing subsidiaries, JVs, associates should not be allowed to engage in similar activity that a bank is permitted to undertake departmentally.

“However, banks may be permitted to make total investments in financial or non-financial services company, which is not a subsidiary, JV, associate up to 20 per cent of the bank’s paid up share capital and reserves.

The panel has further called for disallowing pledge of shares by promoters during the lock-in period, which amounts to bringing the unencumbered promoters’ shares below the prescribed minimum threshold.

“The Reserve Bank may introduce a reporting mechanism for pledging of shares by promoters of private sector banks,” it has said.

The minimum initial capital requirement for licensing new banks should be doubled to ₹1,000 crore from ₹500 crore for universal banks, and to ₹300 crore for small finance banks from the current ₹200 crore.

For Payments Banks that plan to convert to a Small Finance Bank with a track record of three years of experience as Payments Bank, may be considered as sufficient, it has said.

Further, SFBs and Payments Banks may be listed within ‘six years from the date of reaching net worth equivalent to prevalent entry capital requirement prescribed for universal banks’ or ‘10 years from the date of commencement of operations’, whichever is earlier.

Published on November 20, 2020

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