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Clarifications to Queries on Guidelines for Licensing of New Banks in the Private Sector
A. For the purpose of these guidelines, ‘public shareholders’ would mean individuals/entities not belonging to the promoter group. ‘Public Shareholding’ implies that no person 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 per cent of the voting equity shares, by virtue of his shareholding or otherwise, exercises ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) over the company. Such companies will hold not less than 51 per cent of the voting equity of the NOFHC. [para 2 (C) (ii) of the guidelines]
A. All regulated financial sector entities, in which a Promoter has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) will be held under the NOFHC[ para 2(C)(vii) of the guidelines]. No exemption can be granted to auto-finance companies in the Promoter Group in this regard. Further, no financial services entity held by the NOFHC would be allowed to engage in any activity that a bank is permitted to undertake departmentally. The activities that could be carried outside the bank are as mentioned in paragraph 2 (C) (iv) of the guidelines.
A. The priority sector lending targets/achievements for a bank for the current year ending 31st March, will be based on the adjusted net bank credit (ANBC) outstanding as on 31st March of the previous year. The above example states the position correctly.
A. The exposure norms stipulated at paragraph 2 (I) (ii) (a) of the guidelines refer to third party exposures and capital market exposures of the consolidated NOFHC as defined in circular DBOD.No. BP.BC.72/21.04.018/2001-02 dated February 25, 2003. As regards the stand alone NOFHC, its exposure to the entities held under it are not subject to single and group borrower exposure limits. The overarching exposure norms of the insurance companies and mutual funds under the NOFHC have been indicated in Paragraph 2 (I) (iv) (a) to (c). Their exposure norms would be as prescribed by IRDA and SEBI respectively.
A. All regulated financial sector entities in which a Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) will be held under the NOFHC. If any activity is required to be carried on outside the bank, it is for the Promoters/Promoter Group to decide in which entity such activity would be carried on. The Promoters/Promoter Group may undertake transfer of business activities from one entity to another in the Group (after obtaining the approval of the concerned regulators and authorities, as required), for the purpose of compliance with the requirements of these guidelines only after obtaining ‘in-principle’ approval from the RBI for conversion of a NBFC into a bank or for setting up of a new bank. This may be completed within a period of 18 months from the date of in-principle approval of before commencement of the banking business, whichever is earlier.
A. The entities/individuals belonging to the Promoters/Promoter Groups, which would participate in the voting equity shares of the NOFHC, would have to provide the Memorandum and Articles of Association, financial statements for past ten years and IT returns for last three years, as appropriate, at the time of submission of their application. The last available financial statements in respect of other Group entities, which do not participate in the voting equity shares of the NOFHC will also have to be furnished. The details of the Promoters’ direct and indirect interest in various entities/companies/industries and details of credit/other facilities availed by the Promoters/Promoter Group would be required of all entities. [ para 3 of Annex II to the guidelines]
A. (i)Yes. The business plan can provide for share capital which is beyond the minimum prescribed.
(ii) It is essential that at least 40 per cent of the initial voting equity capital of the bank is held by the NOFHC and the NOFHC continues to hold at least 40 per cent of the voting equity capital during the first five years from the commencement of the business of the bank.
(iii) No single entity or the group of the related entities, other than the NOFHC shall have the 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.
(iv) It is therefore essential that the full details to be furnished of all the individuals/ entities/ groups who will hold voting equity capital in the bank at its inception.
(v) The applicants should furnish the detailed information about the persons/entities who would subscribe to the voting equity capital of the proposed NOFHC and the bank including foreign equity participation in the proposed bank.
A. The NOFHC has to be wholly owned by the Promoters/Promoter Groups. Therefore, no investor (domestic or foreign) not being part of the Promoter Group can hold voting equity shares in the NOFHC. At least 51 per cent of the voting equity shares of the NOFHC have to be held by entity/entities in which public shareholding is not less than 51 per cent. A person 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 per cent of the voting equity shares can hold shares in excess of 10 per cent provided by virtue of his shareholding or otherwise, is not in a position to exercise ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) over the company
A. For the purpose of computing the 10 per cent limit for an individual belonging to the Promoter Group in the voting equity shares of the NOFHC, the voting equity shares to be held by 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 per cent of the voting equity shares will be aggregated.[ para 2 (C)(ii)(a) of the guidelines]
If an individual belonging to the Promoter Group holds a minority stake (i.e. <49 per cent) in one or more entities that also hold voting equity shares in the NOFHC, the shares holdings of those company/ies will not count towards the 10 per cent limit stipulated in terms of para 2C (ii)(a) of the guidelines.
The individual shareholding referred to in para 2(C)(ii)(a) and (b) of the guidelines are not correlated.
A. (i) & (ii) The NOFHC is required to be wholly owned by entities ‘owned and controlled’ by residents and individuals belonging to the Promoter Group. Therefore, if the investment vehicles of the Promoter Groups are ‘owned and controlled’ by residents, the indirect foreign investment through these entities will not be counted as foreign investments in the bank. [para 2(A)(i) and para 2(F) of the guidelines]
A. No non-resident shareholder, directly or indirectly, individually or in groups, or through subsidiary, associate or joint venture will be permitted to hold 5 per cent or more of the paid-up voting equity capital of the bank for a period of 5 years from the date of commencement of business of the bank. After the expiry of 5 years from the date of commencement of business of the bank, the aggregate foreign shareholding would be as per the extant FDI policy. [para 2(F) of the guidelines]
A. The voting equity shares are those that confer voting rights to the shareholders. The ownership restrictions specified in the guidelines apply only to voting equity shares.
A. The initial minimum paid-up voting equity capital for the bank is ` 5 billion. Depending upon the business plan, additional capital can be brought in. The bank will be able to issue preference shares permissible under the Banking Regulation Act, 1949, and other Tier I and Tier II capital instruments etc. as per RBI guidelines contained in circular DBOD.No.BP.BC.98/21.06.201/2012-13 dated May 2, 2012.
A. (i) Yes. A new bank can adopt FOS model for the purpose of financial inclusion.
(ii) No. The bank cannot have a subsidiary under it.
(iii) Yes. The new bank can appoint Business Correspondents for the purpose of financial inclusion.
A. No, the FII shareholding forming part of the public shareholding at the listed promoter company level will not be considered for the purpose of arriving at 5% holding limit in the new bank.
A. A public company need not necessarily be a listed company. At the time of making applications, the Promoters/Promoter Group will have to furnish a road map and methodologies they would adopt to comply with all the requirements of the corporate structure indicated in para 2 (C)(ii) and (iii) of the guidelines within a period of 18 months. After the ‘in-principle approval’ is accorded by RBI for setting up of a bank, the Promoters/Promoter Group will have to comply with all the requirements and the proposed bank has to start operations within this period.
A. The NOFHC has to be wholly owned by a 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 paragraph 2(C)(ii) & (iii) of the guidelines. The existing foreign funding institution / Indian Investment Institution who hold shares in the promoting entity of the NOFHC, not being Promoter or belonging to the Promoter Group cannot hold shares in the NOFHC. As regards shareholding in the bank by foreign funding institutions, it should be in consonance with paragraph 2 (F) of the guidelines. Further, no single entity or group of related entities, other than the NOFHC, shall have shareholding or control, directly or indirectly, in excess of 10 percent of the paid-up equity capital of the bank and any such acquisition of 5 per cent or more of the paid up equity capital of the bank will require prior approval of RBI. [Paragraph 2 (K) (ii) and (iii)]
A. Public shareholding would mean, at least 51 percent of the shareholding is widely dispersed among shareholders other than the Promoters and none of such shareholders 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. Therefore, GDRs / ADRs and their underlying shares would be counted as public shareholding, provided that, by virtue of their shareholding, the holders or their custodians do not have ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) and there are no agreements or other arrangements whereby the GDR / ADR holders or their custodian have undertaken to exercise their voting rights in accordance with the Promoters/management.
A. The stipulation that the NOFHC shall not be permitted to set up any new financial services entity for at least three years from the date of commencement of business of NOFHC means that the NOFHC cannot undertake a new financial service activity [para banking activities as defined in Master circular DBOD.No.FSD.BC.24/24.01.001/2012-13 dated July 2, 2012 and those financial services activities that must be undertaken from outside the bank [para 2 (C) (iv) (a) of the guidelines] and set up a new financial services entity for this purpose during the specified period.
However, adding a new business line within existing business line would be as per the rules and regulations laid down by the concerned financial sector regulator.
A.Yes, but the NOFHC shall not be permitted to set up any new financial services entity for at least three years from the date of commencement of business of the NOFHC. [para 2 (C) (vi) of the guidelines].
A. Yes, subject to RBI approval and subject to the regulations / approvals of the concerned financial sector regulators.
A. Yes, the shareholding of the NOFHC in the bank can be brought down by a stake sale or dilution or a combination thereof subject to complying with the requirement at para 2(K)(ii) and (iii) of the guidelines.
A. No. Debt mutual funds are not covered under money market instruments. [Para 2(H)(i)(c) of the guidelines].
A. Paragraph 2 (I) (iv) (a) and (b) of the guidelines lay down the overarching principles for the financial entities held by the NOFHC. These entities cannot have any credit and investments (including investments in the equity/debt capital instruments) exposure to the Promoters / Promoter Group entities or individuals associated with the Promoter Group or the NOFHC. These entities cannot make investments in the equity and debt Capital instruments amongst themselves. Apart from these, the exposure norms laid down by the other financial sector regulators will be applicable.
The period of business plan is left to the applicants. The business plan should be realistic and viable. It should address how the bank proposes to achieve financial inclusion. It would be desirable to give business plan covering three to five years.
The period of business plan is left to the applicants. The business plan should be realistic and viable. It should address how the bank proposes to achieve financial inclusion. It would be desirable to give business plan covering three to five years.
The period of business plan is left to the applicants. The business plan should be realistic and viable. It should address how the bank proposes to achieve financial inclusion. It would be desirable to give business plan covering three to five years.
The Promoter Group would be as per the definition provided in the Annex I of the guidelines.
It is not necessary for all the individuals belonging to the promoter group and all group entities to participate in the voting equity shares of the NOFHC. The guidelines provide that a NOFHC should be wholly owned by the Promoters/Promoter Group i.e., by individuals belonging to the Promoter Group and entities in the Promoter Group in which the Promoter/Promoter Group are in effective control. Within such shareholding, not less than 51 percent of the voting equity shareholding of the NOFHC must be held by companies in which the public hold not less than 51 percent of the voting equity shareholding. The remaining 49 per cent of voting equity shareholding in such publicly held companies [para 2(C)(ii)(b) of the guidelines] will be held by promoter group individuals/ entities who have ‘significant influence’ and ‘control’ (as defined in Accounting Standard 23) over such companies.
The Promoter Group would be as per the definition provided in the Annex I of the guidelines.
It is not necessary for all the individuals belonging to the promoter group and all group entities to participate in the voting equity shares of the NOFHC. The guidelines provide that a NOFHC should be wholly owned by the Promoters/Promoter Group i.e., by individuals belonging to the Promoter Group and entities in the Promoter Group in which the Promoter/Promoter Group are in effective control. Within such shareholding, not less than 51 percent of the voting equity shareholding of the NOFHC must be held by companies in which the public hold not less than 51 percent of the voting equity shareholding. The remaining 49 per cent of voting equity shareholding in such publicly held companies [para 2(C)(ii)(b) of the guidelines] will be held by promoter group individuals/ entities who have ‘significant influence’ and ‘control’ (as defined in Accounting Standard 23) over such companies.
A. Yes. Please refer to the Annex I to the Guidelines.
A. (i)The NOFHC shall directly hold the bank as well as all the other regulated financial services entities of the Group in which a Promoter Group has significant influence or control (As defined in Accounting Standard 23). [Paragraph 2 (C) (iii) & (vii) of the guidelines]. In the above cited example, all the three companies, i.e. Company A, Company B and Company C will have to directly come under the NOFHC and Company A, Company B and Company C cannot make investment in equity / debt capital instruments amongst themselves. [Paragraph 2 (I) (iv) (b) of the guidelines]. The guidelines also provide that while this is the requirement, banks would not be precluded from having a subsidiary or joint venture or Associate where it is legally required or specifically permitted by RBI [para 2 (C) (vi)]. As regards other financial sector entities held by the NOFHC, those would not be precluded, with RBI’s approval, from setting up similar structures where it is legally required or specifically required by the concerned financial sector regulators.
(ii) For the purpose of these guidelines, entities registered as brokers with the Forward Markets Commission will not be treated as financial services entities regulated by a financial sector regulator, and therefore would not be required to be held by the NOFHC.
A.(i) & (ii) 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 asset management, 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 Promoter/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].
(iii) Investment advisory services, could be conducted both from within the bank or outside the bank, by any financial services company in the group (which is held under the NOFHC) that is eligible to register with SEBI as an investment advisor. Regarding portfolio management services, these activities could be carried out by a bank departmentally subject to prior approval of RBI or by any financial services company (which is held under the NOFHC) eligible to provide PMS under SEBI PMS regulations.
A. The general principle 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 management, 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 Promoter/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].
The merchant banking activities can be conducted from within the bank or outside the bank under the NOFHC. [para 2 (C) (iv) of the guidelines].
A. The NBFCs must transfer their existing business to the bank if the bank can undertake such activities [Paragraph 2 (C) (iv) of the guidelines] and retain with itself the activities which the bank cannot undertake from within. Both the bank and the NBFC, if required to retain with itself the activities which the bank cannot undertake, will have to come under the NOFHC. The reorganisation of business should be done within a period of 18 months from the date of in-principle approval or before commencement of the banking business, whichever is earlier.
The stipulation that the NOFHC shall not be permitted to set up any new financial services entity for at least three years from the date of commencement of business of NOFHC means that the NOFHC cannot undertake a new financial service activity [para banking activities as defined in Master circular DBOD.No.FSD.BC.24/24.01.001/2012-13 dated July 2, 2012 and those financial services activities that must be undertaken from outside the bank (para 2 (C) (iv) (a)] and set up a new financial services entity for this purpose during the specified period. For the purpose of reorganisation of existing business of the Promoter Group to bring all regulated financial services under the NOFHC and to carry out existing business through separate financial entities under the NOFHC as r
The stipulation that the NOFHC shall not be permitted to set up any new financial services entity for at least three years from the date of commencement of business of NOFHC means that the NOFHC cannot undertake a new financial service activity [para banking activities as defined in Master circular DBOD.No.FSD.BC.24/24.01.001/2012-13 dated July 2, 2012 and those financial services activities that must be undertaken from outside the bank (para 2 (C) (iv) (a)] and set up a new financial services entity for this purpose during the specified period. For the purpose of reorganisation of existing business of the Promoter Group to bring all regulated financial services under the NOFHC and to carry out existing business through separate financial entities under the NOFHC as required under the guidelines, [Paragraph 2 (C) (iv) (a) & (b) of the guidelines], the NOFHC would be free to establish new financial services entities. In fact this process will have to be completed within a period of 18 month from the date of in-principle approval or before commencement of the banking business, whichever is earlier.
The stipulation at paragraph 2 (C) (vi) of the guidelines pertains to new financial services entities that are intended to be set up and these guidelines would be applicable to all acquisitions.
A. (i) & (ii) No. It would not be possible to list the NOFHC as it would have to be wholly owned by the Promoters / Promoter Group. Further, any change in shareholding (by the Promoter Group) within the NOFHC as a result of which a shareholder (within the Promoter Group) acquires 5 per cent or more of the voting equity capital of the NOFHC shall be with the prior approval of RBI. [paragraph 2 (C) (ix) of the guidelines]
No. Shares of the NOFHC shall not be transferred to any entity outside the Promoter Group. Any change in shareholding (by the Promoter Group) with in the NOFHC as a result of which a shareholder acquires 5 per cent or more of the voting equity capital of the NOFHC shall be with the prior approval of RBI. [para 2(C)(ix) of the guidelines ]
No. Shares of the NOFHC shall not be transferred to any entity outside the Promoter Group. Any change in shareholding (by the Promoter Group) with in the NOFHC as a result of which a shareholder acquires 5 per cent or more of the voting equity capital of the NOFHC shall be with the prior approval of RBI. [para 2(C)(ix) of the guidelines ]
A. Yes. The NOFHC shall hold the bank as well as all the other regulated financial services entities of the Group in which a Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23). [para 2(C)(iii) & (vii)]. However, this does not preclude the bank from having a subsidiary or joint venture or associate where it is legally required or specifically permitted by RBI [para 2(C)(vi) of the guidelines].
A. (i),(ii) & (iii) There could be common directors in the NOFHC and the bank. [para 2(G)(i) of the guidelines]. A director of the NOFHC being also a director on the Board of the bank held by it cannot be considered as independent director of the bank. Whether the other financial entities held by the NOFHC have common independent directors with the NOFHC and the bank will depend upon the circumstances of each case and the rules / regulations of the concerned regulators.
A full time executive of the non-operating holding company cannot be a CEO, MD or Executive Director of either the bank or the NOFHC. As per Section 10(1) (c) of the Banking Regulation Act, 1949, the CEO / MD of the bank has to be in full time employment of the bank. However, a full time executive of the non-operating holding company can be a director of both the NOFHC and the bank but such director will not be treated as an independent director of the bank or the NOFHC.
No. [Paragraph 2 (G) (ii) of the guidelines].
No. [Section 10(1) (c) of the Banking Regulation Act, 1949]
No. [Please see (a) & (b) above]
Yes.
Yes. [Subject to compliance with Banking Regulation Act, 1949 provisions and RBI regulations].
Yes. [Please see (e) above].
A. The stipulation with regard to major customers / suppliers in paragraph 2(G)(iv) of the guidelines, as explained in the footnote therein, refers to 10 per cent or more of the annual purchases or sales of goods and services or both taken together.
A. Foreign shareholding in the new banks, as far the FDI cap is concerned, should be in compliance with paragraph 2 (F) of the guidelines. The manner in which the foreign shareholding in the bank will be calculated would be as per the extant GOI guidelines indicated in the Press Notes and DIPP guidelines/ FEMA regulations, as and when issued.
A. The reserves created under the Companies Act can be considered as part of the 25 per cent of the NOFHC’s annual profits transferred to the Reserve Fund. [Paragraph 2 (H)(i) (d) of the guidelines].
The Promoter / Promoter Group entities / individuals associated with Promoter Group shall hold equity investment in the bank and other financial entities held by it, only through the NOFHC [Paragraph 2 (C) viii of the guidelines]. However, there is no bar on the Promoter Group entities advancing funds (other than equity) to the bank. The Promoter Group entities would have to follow the guidelines / instructions of the respective regulators in order to advance funds to the financial entities held by the NOFHC.
As far as Promoter Group entities placing deposits with the bank or extending advances to it is concerned, the bank shall maintain arm’s length relationship with Promoters / Promoter Group entities [Paragraph 2 (K) (iv) of the guidelines].
The Promoter / Promoter Group entities / individuals associated with Promoter Group shall hold equity investment in the bank and other financial entities held by it, only through the NOFHC [Paragraph 2 (C) viii of the guidelines]. However, there is no bar on the Promoter Group entities advancing funds (other than equity) to the bank. The Promoter Group entities would have to follow the guidelines / instructions of the respective regulators in order to advance funds to the financial entities held by the NOFHC.
As far as Promoter Group entities placing deposits with the bank or extending advances to it is concerned, the bank shall maintain arm’s length relationship with Promoters / Promoter Group entities [Paragraph 2 (K) (iv) of the guidelines].
A. The bank’s credit and investment (other than equity / debt capital instruments of the NOFHC and financial sector entities held under the NOFHC, on which exposure cannot be taken) exposure to financial entities under the NOFHC will be subject to intra group transactions and exposure (ITE) norms [para 2(I)(iii)(c) of the guidelines]. As regards exposure of entities regulated by other financial sector regulators, to the bank and other entities held under NOFHC, such exposures would be in accordance with the rules/regulations of the respective sectoral regulators.
A. At the time of submission of application for the bank licence, the Promoters have to indicate the source of funds. After obtaining the in-principle approval from RBI, the NOFHC may be incorporated and the capital may be mobilised, as required within 18 months from the date of in principle approval and before the commencement of banking business, whichever is earlier.
The assessment of the ‘financial soundness’ and ‘successful track record’ is a matter of judgment, and will have to be determined both on quantitative and qualitative basis; and no specific yardstick/criteria can be spelt out. In making this judgment, consideration will also have to be given to information obtained from the regulators, and enforcement and investigative agencies like Income Tax, CBI, Enforcement Directorate, etc. wherever considered appropriate. Further, the applications received will be subjected to a multi-layered evaluation process, including the High Level Advisory Committee (HLAC). [Paragraph 2(B) of the guidelines]
The assessment of the ‘financial soundness’ and ‘successful track record’ is a matter of judgment, and will have to be determined both on quantitative and qualitative basis; and no specific yardstick/criteria can be spelt out. In making this judgment, consideration will also have to be given to information obtained from the regulators, and enforcement and investigative agencies like Income Tax, CBI, Enforcement Directorate, etc. wherever considered appropriate. Further, the applications received will be subjected to a multi-layered evaluation process, including the High Level Advisory Committee (HLAC). [Paragraph 2(B) of the guidelines]
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