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 below:
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 statutes);
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 be obtained;
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.
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