To ensure that the ultimate ownership and control of banking firms are well diversified, the Reserve Bank of India (RBI), on January 16, 2023, published the “Directions - Acquisition and Holding of Shares or Voting Rights in Banking Companies”. Sections 12, 12B, and 35A of the Banking Regulation Act of 1949, have been used to exercise the authority granted to them in making this decision. These guidelines mandate a prior approval from RBI for every person, who intends to acquire shares or voting rights and intends to be a major shareholder of a banking company. The RBI then will undertake due diligence to assess the ‘fit and proper’ status of the applicant.

The guidelines allow the promoters to hold 26% of paid-up share capital or voting rights of a banking company after the completion of 15 years from the commencement of business of such banking company. Further, the RBI may permit higher shareholding on a case-to-case basis under the circumstances such as supervisory intervention including Prompt Corrective Action, or any other action in the interest of the banking company.

Further, in case of a person permitted by the RBI to have a shareholding of 10% or more of the paid-up equity share capital of the banking company but less than 40% of the paid-up equity share capital, the shares acquired shall remain under lock-in for first five years from the date of completion of the acquisition.

Also, in case of any person permitted to have a shareholding of 40% or more of the paid-up equity share capital of the banking company, only 40% of paid-up equity share capital shall remain under lock-in for the first five years from the date of completion of the acquisition.

A banking company shall continuously monitor on an ongoing basis: (a) its major shareholders who have completed the approved acquisition; (b) those applicants for whom comments have been provided by the concerned banking company to the Reserve Bank for approval to have major shareholding; and (c) those applicants who have been approved by the Reserve Bank to have major shareholding but are yet to complete the approved acquisition, are ‘fit and proper’.

The RBI may also permit higher shareholding on a case-to-case basis under the circumstances such as relinquishment by existing promoters, supervisory intervention, reconstruction or restructuring of banks, the entrenchment of existing promoters or any other action in the interest of the banking company and its depositors or in the interest of consolidation in the banking sector.

Please find a copy of the guidelines, here.

This update has been contributed by Prakash Panjabi (Senior Partner) and Aanchal Gujrani (Associate).

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