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Clarifications to Queries on Guidelines for Licensing of New Banks in the Private Sector

Q.92. Clause 2D(iv) of the Guidelines envisages an increase in voting capital in first 5 years by way of public issue or private placements. Can funds be raised by way of rights issue? +

A. Yes, subject to regulations relating to rights issues. The shareholding of the NOFHC will be a minimum of 40 per cent of the paid up voting equity capital of the bank which shall be locked in for a period of five years from the date of commencement of the business of the bank. The shareholding in excess of 40 per cent of the total paid up voting equity capital should be brought down to 40 per cent within three years from the date of commencement of business of the bank. [para 2 (D) (ii) and (iii) of the guidelines]

Q.93. Are the bank and the NOFHC permitted to have common directors? Can they therefore also have some and/or all common independent directors? Similarly, can the NOFHC have some and/or all common independent directors as other regulated financial services entities held by the NOFHC? +

A. There could be common directors in the NOFHC and the bank. [para 2(G)(i) of the guidelines]. A director of the NOFHC cannot be considered as independent director of the bank. The common directorship between the NOFHC and other regulated financial services entities would be as per the regulations of the sectoral regulators concerned. [para 2 G (iv) of the guidelines]

Q.94. Whether a bank is to be incorporated prior to making an application to the RBI for a licence? Is the bank to be incorporated as a public or private limited company? +

A. No. The bank cannot be incorporated without obtaining ‘in-principle approval’ from the Reserve Bank. The bank will be incorporated as a public limited company.

Q.95. Is the banking company required to be incorporated before submitting the application? If not, how should form III, which seeks details of the date of incorporation etc. be completed ? +

A. No. The bank cannot be incorporated without obtaining ‘in-principle approval’ from the Reserve Bank. In case in-principle approval is given by the Reserve Bank, the bank should be set up within a period of 18 months from the date of in-principle approval. The same may be mentioned in the Form III.

Q.96. For a listed NBFC (which has individual promoter holding more than 10 percent shares in individual capacity), that desires to form a bank - the ownership of listed NBFC needs to be moved to NOFHC as per paragraph 2(C) (iii). This can be achieved by swap of shares in which NOFHC will acquire shares of listed NBFC from the existing shareholders and will in turn issue NOFHC shares to the shareholders. In such a scenario, the limit of 10 percent holding by individual promoter in NOFHC as mentioned in paragraph 2(C) (ii)(a) may not be met on the day one as the shareholding of NOFHC will be the mirror image of that of the listed NBFC. However, since NOFHC will have to bring its holding in the bank to 40 percent within three years, the individual promoter’s holding will be automatically reduced to below 10 percent, although it may be more than 10 percent in NOFHC to begin with. Will there be any dispensation / relaxation for condition of paragraph 2(C)(ii)(a)? Will individual promoters be allowed to divest their holding over a period of time – say 2-3 years to get reduced to 10 percent? +

A. This model is not possible for the following reasons:

(i) The NOFHC should be wholly owned by the Promoters/Promoter Group [para 2(A) of the guidelines].

(ii) If as a result of the share swap, any part of the shareholding of the NOFHC is held by the public, which holds shares in the listed NBFC, then the NOFHC cannot be wholly owned by the Promoters/Promoter Group.

Q.97. The capital structure of the wholly-owned NOFHC set up by Promoter / Promoter Groups in Private Sector shall consist of: a) voting equity shares not exceeding 10 percent of the total voting equity shares of the NOFHC held by any individual belonging to the Promoter Group, along with his relatives (as defined in Section 6 of the Companies Act 1956) and along with entities in which he and / or his relatives hold not less than 50 percent of the voting equity shares, and b) companies forming part of the Promoter Group whereof companies in which the public hold not less than 51 percent of the voting equity shares shall hold not less than 51 percent of the total voting equity shares of the NOFHC.” Our query is: - “How to bring rest 90 percent voting equity shares in NOFHC to make it fully owned” assuming promoters do not have any listed company, in which public is substantially interested? +

A. The requirement is that the NOFHC has to be wholly owned by the Promoters/Promoter Group. Further, at least 51 percent of the voting equity shares of the NOFHC have to be held by companies in the Promoter Group in which public hold not less than 51 percent of the voting equity of those companies. A company in which public holds 51 per cent need not necessarily be listed.[para 2 (C) (i) & (ii) of the guidelines]

Q.98. Whether a CIC listed on a Stock Exchange, either registered with RBI or not, can be a 100 percent promoter of an NOFHC to promote a bank? +

A. Yes. A listed CIC in the Promoter Group can have a 100 percent shareholding in the NOFHC, provided the public hold not less than 51 percent of the voting equity shares in the CIC. [para 2 (C) (ii)(b) and 2 C (iii) of the guidelines]

Q.99. Are both conditions at paragraph 2 (c) 2 (a) and (b) necessary. Will a promoter group company where the public holding is greater than 51% allowed to hold 100% of the voting equity shares of the NOFHC. +

A. A promoter group company where the public holding is greater than 51 per cent can have a 100 percent shareholding in the NOFHC. [para 2 (C) (ii) (a) and (b) of the guidelines]

Q.100. Whether a multi-layered, non-operative company i.e. Promoting company Holding only investments, while the one on top of it involved in Financial Sector, can be a 100 percent promoter of an NOFHC to promote a bank, if the promoter company meets public holding criteria of at least 51 percent ? +

A. The guidelines require that:

all regulated financial services entities of the Promoters/Promoter Group in which the Promoters/Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) should be carried on only through entities held by the NOFHC.
no entity in which the NOFHC has a shareholding can hold shares in the NOFHC.

Therefore, there cannot be a company involved in the financial sector which is on top of the NOFHC and is a 100 percent promoter of the NOFHC.

Q.101. Will a Housing Finance Company (HFC) or Housing Finance Activities of the promoting company will necessarily have to be brought under NOFHC ? In case the HFC is substantially held by a Financial Sector Regulated entity will RBI insist on the investing company (financial sector entity) to come under NOFHC? +

Lending activities must be conducted from inside the bank. Therefore, the housing finance activity of the HFC should be transferred to the bank under the NOFHC. The financial sector regulated entity which holds the HFC substantially will have to come under the NOFHC.[para 2(C)(iii) of the guidelines]

Q.102. If the Group presently provides housing finance through an entity established for this purpose, please could you clarify whether these activities could continue to be undertaken by the housing finance entity under the NOFHC? Alternately, could the bank hold the housing finance entity as its subsidiary, a structure which some other banks appear to have adopted ? +

Q.103. Can an entity incorporated under Companies Act which is listed on stock exchanges, regulated by one of the financial sector regulator and engaged primarily in retail mortgage lending, promote the NOFHC? +

A. No. Such an entity cannot promote a NOFHC because lending activities must be conducted from inside the bank. Therefore, the retail mortgage lending activity of the entity should be transferred to the bank under the NOFHC. Further, all regulated financial services entities of the Group in which the Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) have to be held by a NOFHC. [para 2 (C)(iii) and (vii) of the guidelines]

Q.104. Will the applicant be treated as a private sector entity if the total Government /Public Sector Undertaking / Government companies’ shareholding in the applicant is less than 50 percent? +

A. Entities, in which the Government / Public Sector Undertaking / Government Companies’ shareholding is less than 50 percent, would be treated as private sector entities, provided there are no explicit or implicit agreements or arrangements through which Government can exercise control. [para 2 (A) (i) of the guidelines]

Q.105. If 40 percent of the applicant is held by a regulated public financial institution incorporated under an Act of Parliament and wholly owned by the Government of India, by virtue of the applicant’s shareholding by a public financial institution incorporated under an Act of the Parliament, will such financial institution be treated as an entity not belonging to the Promoter Group ? Further, due to the proviso to Clause II of Annexure I of the guidelines, can it be interpreted that this financial institution will not be part of the Promoter Group? +

Whether a public financial institution is part of the Promoter Group will depend upon whether it is in effective control of the NOFHC to the exclusion of any other person.

Q.106. In the event of the FI floating a new bank under the NOFHC structure, which entities would be deemed as the promoter group for the purpose of the new bank licence guidelines? A reference is also invited to the clarification provided in Annexure to the RBI guidelines wherein it is stated that FIs and banks holding 10% or more equity in the corporate who promotes NOFHC, would not be treated as promoter group. +

Whether a public financial institution is part of the Promoter Group will depend upon whether it is in effective control of the NOFHC to the exclusion of any other person.

Q.107. Please clarify whether it is compulsory to transfer the existing mortgage lending business of the promoter Company to the new Bank and whether any dispensation would be given to permit the existing mortgage business to be continued within the existing company outside the bank ? +

The general principle in this regard is that para-banking activities, such as credit cards, primary dealer, leasing, hire purchase, factoring etc., can be conducted either inside the bank departmentally or outside the bank through subsidiary/ joint venture /associate. Activities such as insurance, stock broking, asset reconstruction, venture capital funding and infrastructure financing through Infrastructure Development Fund (IDF) sponsored by the bank can be undertaken only outside the bank. Lending activities must be conducted from inside the bank. However, other regulated financial services entities (excluding entities engaged in credit rating and commodity broking) in which the Promoters/Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) have to be held under the NOFHC and not under the bank unless it is legally required or specifically permitted by RBI. [para 2 (C) (iv) of the guidelines]

Q.108. NBFC-IFC framework was given shape to meet the increasing financing needs of the Infrastructure sector which could not be met by banks within the regulatory framework for banks. Now that the promoters/promoter entities are required to bring all their financial sector activities under the NOFHC promoting the bank, does RBI require that the Infrastructure lending activity currently being undertaken by the promoter be necessarily folded into the bank or it can be undertaken by a separate NBFC-IFC under the NOFHC? +

Q.109. Can a Promoter Group having existing NBFC operations continue the NBFC operations (of loan business) even after setting up of the Bank especially since they finance to niche areas and also since the financial investors of the NBFCs may be uncomfortable migrating to a–banking system - Para 2 C (iv) (b) seems to permit this. +

Q.110. From the paragraph 2 (C) (iv) (b) of the guidelines, it is clear that hire purchase / leasing activities / factoring activities are permitted to be carried on. Hence, the objective appears to be, to allow activities which a Bank can operate concurrently with another entity / NBFC alongside. However, the term "loan business" has not been specifically mentioned. Whether the term "etc" can include loan companies also? There does not seem to be any rationale for exclusion only for loan companies while permitting hire purchase & leasing companies. It may be noted that all NBFC activities are essentially in the nature of hire purchase / leasing transactions and the nomenclature / migration to that of a loan agreement was done (about 5-6 years back) only due to the imposition of additional costs like service tax. For NBFCs, the hire purchase and lease is only a financing transaction and not an operating lease etc. The objective in all 3 transactions (Hire purchase, Lease and Loan) is only to lend money and recover the same with interest over a fixed period. Can a Promoter Group having existing NBFC operations continue the NBFC operations (of loan business) even after setting–up of the Bank - Para 2 C (iv) (b) seems to permit this. +

Q.111. Infrastructure Lending is perceived riskier than some other types of lending, within an Infrastructure Finance Company framework, the investors / debtors are well aware of the use of their funds. However under a bank set-up since the liabilities are fungible, the risk (of lending to infra projects) is passed on to the depositor. We therefore believe that the infra business should be allowed to be kept outside a new bank considering the risks and difficulties in initial integration, and therefore request the RBI to make an exception. +

Q.112. We believe that Infrastructure Financing should be considered as a specialized activity to be conducted through a separate financial entity outside the bank but under the NOFHC. RBI has frequently expressed its concerns on the increasing share of bank lending to the Infrastructure sector, given its long term liability profile and higher weighted risks. Therefore, it is our submission that it would be better to allow Infrastructure Financing to be carried out in an IFC format, with its more stringent and appropriate regulatory compliances. +

Q.113. Whenever an activity can be undertaken both by a bank and by an NBFC (e.g. Housing Finance) we understand that Promoter would be allowed to exercise either of the options, at his discretion. Please confirm. +

Q.114. (i) Is it possible to form a ‘consortium’ of business entities/groups that creates a NOFHC to promote a new bank? (ii) Alternatively, if a strategic partner were to acquire a stake (below 26 percent) in one of the companies holding the NOFHC promoted by an existing group, would that partner also be construed as a promoter? (iii) Would the strategic partner be required to bring its existing financial services businesses also under the NOFHC set-up by the promoters? +

A. (i) No. The NOFHC has to be wholly owned by a single Promoter/Promoter Group (as per the definition given in Annex I to the guidelines) and the pattern of shareholding would be as per the provisions laid down at par 2(C)(ii) & (iii) of the guidelines. Two or more separate groups cannot combine together to set up a NOFHC.

(ii) & (iii) A strategic shareholder not being a part of the Promoter Group, can be a shareholder in a company belonging to the Promoter Group (as per definition in Annex I to the guidelines), which holds shares in the NOFHC. If the strategic partner is in control of the company and is not a resident, then the company cannot hold shares in the NOFHC, as NOFHC has to be owned and controlled by residents. The strategic partner cannot be considered as part of the public shareholding, if he, by virtue of his shareholding or otherwise, exercises significant influence and control over the company.

Q.115. Where a listed/ unlisted public company/ private company is a promoter, can a strategic investor of such listed/ unlisted public company / private company who is not a promoter/ promoter group, hold shares directly in the banking company? +

A. Yes. However, no single entity or group of related entities, other than the NOFHC, shall have shareholding or control, directly or indirectly, in excess of 10 per cent of the paid-up voting equity capital of the bank and any acquisition of shares which will take the aggregate holding of an individual / entity / group to the equivalent of 5 per cent or more of the paid-up voting equity capital of the bank, will require prior approval of RBI. [ para 2 (K)(ii)(iii) of the guidelines ]

Q.116. Can an NOFHC be set up jointly by 2 different promoter groups each satisfying the conditions laid out in 2(A) of the guidelines? +

A. No. The NOFHC has to be wholly owned by a single Promoter/Promoter Group (as per the definition given in Annex I to the guidelines and the pattern of shareholding would be as per the provisions laid down at para 2(C)(ii) & (iii) of the guidelines. Two or more different promoter groups cannot combine together to set up an NOFHC.

Q.117. What would be construed as ‘misaligned with the banking model?’ Would pure agency business, though market- linked, be construed as speculative? (e.g. broking) If so, then if the overall contribution is less than 15 percent of the revenues and/or assets, then would it still be substantial enough to be construed as misaligned. +

‘Misaligned with the banking model’ would mean business model and business culture which potentially puts the bank and the banking system at risk on account of group activities such as those which are speculative in nature or subject to high asset price volatility [para (2) (B) (c) of the guidelines]. It is not possible to exactly define substantial contribution in terms of percentage, but it will be seen in the overall context of business activities.

Q.118. Promoter / Promoter Groups’ business model and business culture should not be misaligned with the banking model and their business should not potentially put the bank and the banking system at risk on account of group activities such as those which are speculative in nature or subject to high asset price volatility. Businesses / activities that are being considered as speculative or having high asset price volatility may be explicitly clarified. +

Q.119. Please elaborate and provide parameters for / specific description / examples of : a. business model and business culture considered by RBI to be misaligned with banking model b. businesses / activities which RBI considers to be speculative in nature or subject to high asset price volatility. These clarifications will be helpful in appreciating RBI’s expectations and for planning future business. +

Q.120. On ownership of the NOFHC, Can the company (with > 51 percent public holding) be a Core Investment Company? +

A. If the core investment company belonging to the promoter group has more than 51 percent public holding, then it can set up the NOFHC, and have upto 100 percent voting equity shares of the NOFHC.

Q.121. Does public holding mean (i) Listing is necessary? (ii) Absence of any other large shareholders? (e.g. 2-3 others owning 5-10 percent each) +

A. Public shareholding does not necessarily imply that the company is listed. What is required is that at least 51 percent of the shareholding is widely dispersed among shareholders other than the Promoters and none of such shareholder along with his relatives (as defined in Section 6 of the Companies Act, 1956) and entities in which he and / or his relatives hold not less than 50 percent of voting equity shares exercise ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) by virtue of his shareholding or otherwise.

Q.122. On holding structure, will the transfers of shares to NOFHC be tax exempt? +