RBI's Acquisition and Holding of Shares or Voting Rights in Banking Companies Directions, 2023

Introduction

The Reserve Bank of India (RBI) has recently issued the 'Directions - Acquisition and Holding of Shares or Voting Rights in Banking Companies' in order to ensure 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 continual basis. This move has been taken in the exercise of its powers conferred by Sections 12, 12B, and 35A of the Banking Regulation Act, 1949.

The Directions have been issued with the intent of ensuring that the shareholders of banking companies are fit and proper to remain in control of the banking companies. The Directions have been issued in accordance with the Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies issued by the RBI. The RBI has specified certain criteria to assess the 'fit and proper' status of the shareholders of banking companies. These criteria include the financial soundness, experience, character and reputation of the shareholders.

This direction will apply to all banking companies, including Local Area Banks (LABs), Small Finance Banks (SFBs) and Payments Banks (PBs) operating in India. The directions aim to ensure the safety and soundness of the banking sector in India by providing clear guidelines for the acquisition and holding of shares or voting rights in banking companies.

PROCEDURE FOR PRIOR APPROVAL

1. Any person intending to acquire major shareholding in a banking company must submit an application to the Reserve Bank seeking prior approval.

2. On receipt of the application, the Reserve Bank will seek comments from the banking company on the proposed acquisition.

3. The board of directors (the board) of the banking company will assess the 'fit and proper' status of the person, based on the information provided as well as due diligence undertaken, and furnish its comments along with a copy of the relevant board resolution and information in Form A1 to the Reserve Bank within 30 days.

4. The Reserve Bank will undertake due diligence to assess the 'fit and proper' status of the applicant and may impose conditions on both the applicant and the banking company.

5. Persons from FATF-Financial Action Task Force non-compliant jurisdictions will not be permitted to acquire major shareholding in a banking company. Existing major shareholders from such FATF non-compliant jurisdictions will be allowed to continue with their investment, but without any further acquisition without prior approval from the Reserve Bank.

6. If at any point in time the aggregate holding falls below five percent, the person will be required to seek fresh approval from the Reserve bank if the person intends to again raise the aggregate holding to five percent or more of the paid-up share capital or total voting rights of the banking company.

CONTINUOUS MONITORING

Banking companies are required to continuously monitor the 'fit and proper' status of their

1. Major shareholders,

2. Applicants for major shareholding, and

3. Those who have been approved by the Reserve Bank of India but have yet to complete the approved acquisition.

To do this, they must have a mechanism to obtain information on any changes in the information provided in Form A, any concerns or information regarding the major shareholders/applicants, and any changes in Significant Beneficial Owners or acquisition by a person to the extent of 10 per cent or more of paid-up equity share capital of the major shareholder. Banking companies must also assess the 'fit and proper' status of the major shareholders/applicants and submit a report with a board note and resolution to the Department of Regulation, Reserve Bank of India, within 30 days of receipt of the information.

Banking companies are required to establish a continuous monitoring mechanism to ensure that major shareholders obtain prior approval from the Reserve Bank for their shareholding/voting rights in accordance with Section 12B (1) of the B R Act, 1949.

If it is suspected that the methods adopted to acquire or aggregate the holding is to circumvent the statutory requirements, the banking company must make a reference to the Reserve Bank along with the necessary documents and a copy of the board resolution.

The banking company must also submit periodical reports on the continuous monitoring arrangements to its board, assessing whether it complies with Section 12B (5) of the B R Act, 1949.

Banking companies must submit a plan for diluting their shareholding to comply with the Guidelines within six months from the date of issue of the Directions. Payments Banks are excluded.

Banking companies are required to report the details of issue and allotment of shares in Form A2 within 14 days of completion of the allotment process. They must also ensure that the limits approved by the Reserve Bank for a person are not breached. Additionally, they must report the details on encumbrance of shares reported by promoters and promoter group in Form B to the Department of Supervision within one working day and submit a report to the Department of Regulation, Reserve Bank of India within 30 days.

Three Master Directions have been consolidated into Master Direction - Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023, thus the same are repealed from the date of issue of these directions.

CONCLUSION

In conclusion, these directions provide clear guidelines for the acquisition and holding of shares or voting rights in banking companies, including Local Area Banks (LABs), Small Finance Banks (SFBs) and Payments Banks (PBs) operating in India. Banks are required to obtain prior approval from the Reserve Bank for any proposed acquisition and continuously monitor the 'fit and proper' status of major shareholders and applicants. Banks must also submit reports and a plan for diluting their shareholding to comply with the Guidelines. Additionally, they must report the details of issue and allotment of shares in Form A2 and the details on encumbrance of shares reported by promoters and promoter group in Form B. These measures aim to ensure the safety and soundness of the banking sector in India.

The author can be reached at fcsasharma@gmail.com

Disclaimer: The purpose of this article is to provide informational material only. It is not intended to form a contractual agreement of any kind or serve as a substitute for professional advice. Fcs Amit Kumar Sharma has taken all necessary precautions to ensure the accuracy of the information provided herein at the time of publication. We will not be liable for any direct, indirect or consequential damages that may arise as a result of the use of this article or the information contained therein.