2.

Guidelines

(i)

The initial minimum paid-up capital for a new bank shall be Rs. 200 crore. The initial capital will be raised to Rs. 300 crore within three years of commencement of business. The overall capital structure of the proposed bank including the authorised capital shall be approved by the RBI.

(ii)

The promoters' contribution shall be a minimum of 40 per cent of the paid-up capital of the bank at any point of time. The initial capital, other than the promoters' contribution, could be raised through public issue or private placement. In case the promoters' contribution to the initial capital is in excess of the minimum proportion of 40 per cent, they shall dilute their excess stake after one year of the bank's operations. (In case divestment after one year is proposed to be spread over a period of time, this would require specific approval of the RBI) Promoters' contribution of 40 per cent of the intial capital shall be locked in for a period of five years from the date of licensing of the bank.

(iii)

While augmenting capital to Rs. 300 crore within three years of commencement of business, the promoters will have to bring in additional capital, which would be at least 40 per cent of the fresh capital raised. The remaining portion could be raised through public issue or private placement. The promoters' contribution of a minimum of 40 per cent of additional capital will also be locked in for a minimum period of 5 years from the date of receipt of capital by the bank.

(iv)

NRI participation in the primary equity of a new bank shall be to the maximum extent of 40 per cent. In the case of a foreign banking company or finance company (including multilateral institutions) as a technical collaborator or a co-promoter, equity participation shall be restricted to 20 per cent within the above ceiling of 40 per cent. In cases of shortfall in foreign equity contributions by NRIs, designated multilateral institutions would be allowed to contribute foreign equity to the extent of the shortfall in NRI contribution to the equity. The proposed bank shall obtain necessary approval of Foreign Investment Promotion Board of the Government of India and Exchange Control Department of the RBI.

(v)

The new bank should not be promoted by a large industrial house. However, individual companies, directly or indirectly connected with large industrial houses may be permitted to participate in the equity of a new private sector bank up to a maximum of 10 per cent but will not have controlling interest in the bank. The 10 per cent limit would apply to all inter-connected companies belonging to the concerned large industrial houses. In taking a view on whether the companies, either as promoters or investors, belong to a large industrial house or to a company connectecd to a large industrial house, the decision of the RBI will be final.

(vi)

The Proposed bank shall maintain an arms length relationship with business entities in the promoter group and the individual company/ies investing upto 10 per cent of the equity as stipulated above. It shall not extend any credit facilities to the promoters and company/ies investing up to 10 per cent of the equity. The relationship between business entities in the promoter group and the proposed bank shall be of a similar nature as between two independent and unconnected entities. In taking view on whether a company belongs to a particular Promoter Group or not, the decision of the RBI shall be final.

(vii)

Conversion of NBFCs into Private Sector Banks

3.

Other Requirements

(i)

The bank shall be required to maintain a minimum capital adequacy ratio of 10 per cent on a continuous basis from the commencement of its operations.

(ii)

In order to ensure level playing field,

a) the new bank will have to observe priority sector lending target of 40 per cent of net bank credit as applicable to other domestic banks, and

b) the new bank will be required to open 25 per cent of its branches in rural and semi-urban areas to avoid over concentration of their branches in metropolitan areas and cities on the same lines as new private sector banks established under guidelines laid down by the RBI in January 1993,

(iii)

The promoters, their group companies and the proposed bank shall accept the system of consolidated supervision by the Reserve Bank of India.

(iv)

The new bank shall not be allowed to set up a subsidiary or mutual fund for at least three years from the date of commencement of business.

(v)

The headquarters of the proposed new bank could be in any location in India as decided by the promoters.

(vi)

The new bank shall make full use of modern infrastructural facilities in office equipments, computer, telecommunications, etc. in order to provide cost-effective customer service. It should have a high powered Customer Grievances Cell to handle customer complaints.

(vii)

The new bank will be governed by the provisions of the Banking Regulation Act, 1949, Reserve Bank of India Act, 1934, other relevant Statutes and the Directives, Prudential regulations and other Guidelines/Instructions issued by the RBI and the regulations of SEBI regarding public issues and other guidelines applicable to listed banking companies.

4.

Procedure for Applications

i)

In terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949 applications shall be submitted in the prescribed form (Form III). In addition, the applications should furnish a project report covering business potential and viability of the proposed bank, the business focus, the product lines, proposed regional or locational spread, level of information technology capability and any other information that they consider relevant. The project report should give as much concrete details as feasible, based on adequate ground level information and avoid unrealistic or unduly ambitious projections. Applications should also be supported by detailed information on the background of promoters, their expertise, track record of business and financial worth, details of promoters' direct and indirect interests in various companies/industries, details of credit/other facilities availed by the promoters/promoter company(ies)/other Group company(ies) with banks/ financial institutions, and details of proposed participation by foreign banks/ NRI/OCBs.

ii)

Applications for setting up new banks in the private sector, along with other details as mentioned above, should reach the following address before March 31, 2001.

The Chief General Manager-in-Charge, Department of Banking Operations and Development, Reserve Bank of India, World Trade Centre, Centre I, Cuffe Parade, Colaba, Mumbai 400 005.

5.

Procedure for the RBI Decisions

i)

In view of the increasing emphasis on stringent prudential norms, transparency, disclosure requirements and modern technology, the new banks need to have strength and effeciency to work profitably in a highly competitive environment. As a number of banks are already functioning, licences will be issued on a very selective basis to those who conform to the above requirements and who are likely to conform to the best international and domestic standards of customer service and efficiency. Preference will, however, be given to promoters with expertise of financing priority areas and in setting up banks specialising in the financing of rural and agro-based industries. The number of licences to be issued in the next three years may be restricted to two or three of the best acceptable proposals. This number would also include permission granted to any NBFC for conversion into bank. [If the number of acceptable proposals of the highest standards are more than three, this limit may be relaxed on recommendation of the Advisory Committee (see below). In that case the period for issuing new licences may be stretched to four or five years].

ii)

At the first stage, the applications will be screened by the RBI to ensure prima facie eligibility of the applicants.Thereafter, the applications will be referred to a high-level Advisory Committee to be set up by the RBI comprising

Dr. I.G. Patel, - Chairman

former Governor of the Reserve Bank of India

Shri C.G. Somiah, - Member

former Comptroller and Auditor General of India

Shri Dipankar Basu,- Member

former Chairman of State Bank of India

(iii)

The Committee will set up its own procedures for screening the applications. The Committee will reserve the right to call for more information as well as have discussions with any applicant/s and seek clarification on any issue as required by it. The Committee will submit its recommendations to the RBI for consideration within three months after the last date of receipt of applications by the RBI (i.e. June 30, 2001). The decision to issue an in-principle approval for setting up of a bank will be taken by the RBI. The RBI's decision will be final.

(iv)

The validity of the in-principle approval issued by the RBI will be one year from the date of granting in-principle approval and would thereafter lapse automatically.

v)

After issue of the in-principle approval for setting up of a bank in the private sector, if any adverse features are noticed subsequently regarding the promoters or the companies/firms with which the promoters are associated and the group in which they have interest, the Reserve Bank of India may impose additional conditions and if warranted, it may withdraw the in-principle approval.

(i)

Taking into account the three years' average of revenue receipts and capital expenditure for fiscal years 1997-98, 1998-99 and 1999-2000 and applying to this base a ratio of 2.4 per cent for non special category States and 2.9 per cent for special category States, the total normal WMA limits work out to Rs. 5,296 crore.

(ii)

The special WMA continues to be linked to the investments made by State Governments in the Government of India Securities, i.e. Dated Securities and Treasury Bills.

(iii)

Overdraft Regulation Scheme which will be applicable to the State Governments with effect from February 1, 2001 is as under :

a)

The RBI will allow a State to run an overdraft for 12 consecutive working days instead of 10 days at present. In case the overdraft appears in the State's account and remains beyond 12 consecutive working days as per the current practice, the RBI and its agencies shall stop payments on behalf of the concerned State Governments. This is an ad hoc measure subject to review.

b)

The overdraft shall not exceed 100 per cent of normal WMA limit. On the first occasion that this is exceeded in a financial year, the RBI shall advise the State that the overdraft amount should not exceed 100 per cent of normal WMA limit on any subsequent occasion.

c)

Without prejudice to clause (a) above, if during the financial year, the amount of overdraft exceeds 100 per cent of WMA limit on a second or any subsequent occasion, the State shall be given five working days' notice instead of the present notice period of three working days to bring down the overdraft amount within the level of 100 per cent of normal WMA limit. If this is not adhered to, payments will be stopped.