3 August, 2016
Guidelines for Ownership in Private Sector Banks
RBI has, by the master direction dated May 12, 2016 (‘Directions’), issued guidelines re- garding ownership and voting rights in private sector banks in India. The Directions prescribe shareholding investment limits in a bank’s paid-up capital by various types of shareholders as follows:
Promoters – limits will be as per the prevalent guidelines and in case of existing banks, will be in line with the earlier guidelines issued by RBI, i.e., 15%;
Natural persons and non-financial entities (other than promoters/ promoter group) – limit is 10%;
Financial institutions (which are non-regulated/ non-diversified and non-listed) – limit is 15%; and
Financial institutions (which are regulated, well diversified, and listed entities, su- pranational institutions or public sector undertaking or government) – limit is 40%.
In certain circumstances, higher stake or strategic investment by promoters or non-pro- moters through capital infusion by domestic or foreign entities/ institution, may be permitted under circumstances such as relinquishment by existing promoters, rehabilitation or restructuring of weak banks, entrenchment of existing promoters or in the interest of the bank or for consolidation in the banking sector.
Other key principles under the Directions include the following: (a) voting rights will be limited to a ceiling of 15%, regardless of the shareholding limit; (b) any acquisition of share- holding/ voting rights of 5% or more of the paid-up capital or total voting rights of the bank will be subject to prior RBI approval; and (c) no bank in India will acquire an equity stake in an- other bank, if it results in the investing bank holding 10% or more in the investee bank’s equity capital, other than in case of exceptional circumstances such as restructuring of weak banks or in the interest of consolidation in the banking sector, etc.
Scheme for Sustainable Structuring of Stressed Assets
RBI has, by its circular dated June 13, 2016, introduced a scheme for resolution of large ac- counts referred to as the ‘Scheme for Sustainable Structuring of Stressed Assets’, which is an op- tional framework and involves lenders determining the level of sustainable debt for a stressed borrower, and bifurcating the outstanding debt into sustainable debt (being a level of debt whose principal value can be serviced over the same tenor as that of the existing facilities even if future cash flows of the borrower remain at their current level and including new funding required to be sanctioned in the next six months). The remaining debt will be converted into equity or quasi-equity instruments issued to the lender (subject to the pricing guidelines and other conditions outlined in the circular).
For an account to be eligible to avail of this scheme: (i) the project must have commenced commercial operations; (ii) the aggregate exposure of all institutional lenders (including for- eign currency lenders) in the account must be more than ¤500 crores (approximately US$73 million); and (iii) at least 50% of the current funded liabilities of the borrower should constitute ‘sustainable debt’. The resolution plan will be reviewed by an overseeing committee, set up by the Indian Banks Association, in consultation with RBI and comprising eminent experts. Post- resolution, the borrower’s ownership pattern may reflect a change in control of the borrower with either the lenders or a new promoter acquiring a majority stake in the company; or the ex- isting promoters continuing to hold the majority shareholding/ controlling interest in the com- pany, and in either case additional conditions may be imposed by the lenders on the promoters with respect to manner of dilution of shareholding, issuance of guarantee, etc. The resolution plan and control rights are to be structured to ensure that the promoters are not allowed to sell the shares of the borrower without the prior approval of lenders and without sharing the up- side, if any, with the lenders towards loss in residual (converted) debt.
Draft Guidelines for ‘On Tap’ Licensing of Universal Banks in the Private Sector
RBI has released draft guidelines for on-tap licensing of universal banks in the private sec- tor (‘Draft Guidelines’) on May 5, 2016 (for comments and suggestions) which will allow appli- cations for bank licenses to be submitted to RBI at any point in time. While the Draft Guidelines follow the earlier 2013 guidelines on bank licensing in many respects, notable changes include: (i) a new category of eligible promoters being resident individuals/ professionals having ten years of experience in banking and finance; (ii) large industrial houses being barred from hav- ing a controlling interest in new banks; and (iii) relaxation of the requirement of establishing a bank through a non-operative financial holding company where the applicant is an individual or stand-alone entity not having group entities.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
