New Private Sector Banks
The guidelines for “Licensing of New Banks in the Private Sector” have now been released by RBI and the salient features are:
Eligible Promoters: Entities/groups in the private sector, entities in public sector and Non-Banking Financial Companies (NBFCs) shall be eligible to set up a bank through a wholly-owned Non-Operative Financial Holding Company (NOFHC).
ii) ‘Fit and Proper’ criteria: Entities/groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years. For this purpose, RBI may seek feedback from other regulators and enforcement and investigative agencies.
Corporate structure of the NOFHC: The NOFHC shall be wholly owned by the Promoter/Promoter Group. The NOFHC shall hold the bank as well as all the other financial services entities of the group.
iv) Minimum Voting Equity capital requirements for banks and shareholding by NOFHC: The initial minimum paid-up voting equity capital for a bank shall be Rs.5 billion. The NOFHC shall initially hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked in for a period of five years and which shall be brought down to 15 per cent within 12 years. The bank shall get its shares listed on the stock exchanges within 3 years of the commencement of business by the bank.
v) Regulatory framework: The bank will be governed by the provisions of the relevant Acts, Statutes, Directives, Prudential regulations and other Guidelines / Instructions issued by RBI and other regulators. The NOFHC shall be registered as a non-banking finance company (NBFC) with the RBI and will be governed by a separate set of directions issued by RBI.
vi) Foreign shareholding in the bank: The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy.
vii) Corporate governance of NOFHC: At least 50% of the Directors of the NOFHC should be independent directors. The corporate structure should not impede effective supervision of the bank and the NOFHC on a consolidated basis by RBI.
viii) Prudential norms for the NOFHC: The prudential norms will be applied to NOFHC both on stand-alone as well as on a consolidated basis and the norms would be on similar lines as that of the bank.
ix) Exposure norms: The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank shall not invest in the equity/debt capital instruments of any financial entities held by the NOFHC.
x) Business Plan for the bank: The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion.
xi) Other conditions for the bank:
- The bank shall open at least 25 per cent of its branches in unbanked rural centres (population up to 9,999 as per the latest census)
- The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks.
- Banks promoted by groups having 40 per cent or more assets/income from non-financial business will require RBI’s prior approval for raising paid-up voting equity capital beyond Rs.10 billion for every block of Rs.5 billion.
- Any non-compliance of terms and conditions will attract penal measures including cancellation of licence of the bank.
xii) Additional conditions for NBFCs promoting/converting into a bank: Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.
Procedure for RBI decisions: At the first stage, the applications will be screened by RBI and thereafter, the applications will be referred to a High Level Advisory Committee. Based on committee recommendations RBI issues in-principle approvals. The validity of the in-principle approval will be one year. In order to ensure transparency, the names of the applicants will be placed on the Reserve Bank website after the last date of receipt of applications.
Banking Laws (Amendment) Act 2012 has been passed in the Lok Sabha on 18th December 2012 and the salient features of the bill are as under:
Forward Market’s Contract: The passage of the bill was facilitated by the removal of a controversial Forward Market’s Contract clause that would have allowed banks to enter into future trading of commodities. Very few banks were keen on trading in commodities and some felt that the clause had been incorporated to provide banks a level playing field with corporate giants.
Control: The amendments empower RBI to inspect books of conglomerates, make board and top management appointments in banks and control transfer of large chunks of shares.
Voting Rights: The bill also allows investors to have voting rights with a higher cap of to 26% from the existing 10% in case of private sector banks and 10% from 1% at present in case of public sector banks. Existing banks will gain as their strategic shareholders will be encouraged by the move to increase voting rights.
Issuance of Rights/Bonus shares: The amendment will facilitate issuance of Rights/Bonus shares making nationalized banks on par with private sector banks in serving the shareholders.
v) Mergers & Acquisitions (M&A): The increased voting rights to investors, commensurate with their shareholding in existing banks, would help both private and public sector banks to get more foreign investors and help in expanding their capital base. The bill also seeks to exempt certain M&As, such as peer group mergers, from the purview of the Competition Commission of India (CCI). However, it was clarified that the banking sector will not be outside the CCI’s purview.