On November 19, 2015, the Reserve Bank of India
("RBI") has issued the RBI (Prior approval for
acquisition of shares or voting rights in private sector banks)
Directions, 2015 ("Directions"). These Directions come
into effect immediately, on publication on the official website of
the RBI. Salient features of the Directions are summarised
1. The Directions apply to all existing and proposed "major
shareholders" of private sector banks, including local area
banks, licensed to operate in India by the RBI (excluding urban
co-operative banks, foreign banks and banks licensed under specific
2. A major shareholder has been defined to mean a shareholder
who has is likely to have an "aggregate holding" of 5%
(five percent) or more of the paid-up share capital of the
bank or the total voting rights of the concerned bank. The term
"aggregate holding" means the total holding including
acquisition of shares (equity or compulsorily convertible
preference shares/ debentures/ bonds) or voting rights, or
conversion of optionally convertible preference shares/ debentures/
bonds, or a combination of the above, either through purchase or
transfer, held by the applicant, his relatives, associate
enterprises and persons acting in concert with him in the concerned
bank. The aggregate holding will also include optionally
convertible preference shares/ debentures/ bonds if the option of
conversion is proposed to be exercised.
3. Any person desirous of making an acquisition, which would
take the aggregate holding of such person along with his relatives,
associate enterprises and persons acting in concert with it to 5%
(five percent) or more of the paid up share capital in the
private sector bank or voting rights, will require prior approval
from the RBI in the manner prescribed in the Directions. The
procedure along with the prescribed form for making such an
application has been set out in the Directions;
4. Prior approval from the RBI will not be required for fresh
acquisitions by existing major shareholders of private sector
banks, which consequently would lead for the aggregate holding of
such a shareholder, be up to 10% (ten percent) of shares
or voting rights in the concerned private bank, subject to details
of the source of funds, for such incremental acquisition are
furnished to the concerned bank before such acquisition and a
'no objection' from the concerned bank has been obtained
prior to such incremental acquisition. However, if the incremental
acquisition results in excess of 10% (ten percent) of shares or
voting rights in the private bank, then prior approval will have to
5. The private banks will be responsible for making disclosures
in the prescribed form to the RBI and continuous monitoring
arrangements in relation to existing major shareholders, to ensure
that such major shareholders continue to be "fit and
proper", in accordance with the Directions.
The Directions could be a major turning point in the
investment environment relating to private sector banking, with the
prospects of larger and more experienced market players being
involved in the banking sector.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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