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RBI relaxes norms on promoter stake, listing guidelines for SFBs

The RBI has accepted some recommendations of the Internal Working Group (IWG) regarding the extant ownership guidelines and the corporate structure of Indian private banks, including small finance banks (SFBs) and payment banks. However, it is yet to decide on key recommendations related to allowing NBFCs to promote or convert into banks, allowing corporates to promote banks and ADR/GDR. Here are the key highlights and notable changes from the new guidelines:

* The norm to maintain a minimum (floor) of 40% of paid-up voting equity share capital by the promoter for the first five years has been retained, but there is no cap on the promoters’ holdings in the initial five years. That said, the cap on the promoter’s stake over 15 years has been raised from 15% to 26%. It has already been implemented in the case of Kotak Mahindra Bank.

* The RBI has also clarified that the banks whose promoters have reduced their holdings to below 26% (say 15%) and if the promoters intend to increase them back to 26%, they will be entertained by the RBI. This could be beneficial to IndusInd Bank (if the RBI does not have issues related to promoters). The promoter will have a choice to bring down the promoter holding below 26% after the initial locking period is over.

* Intermediate sub-targets during 5-15 years (30% by end of 10 yrs, 15% by end of 15 yrs) may not be required, but promoters need to submit a dilution plan when they are issued a license, which will be approved and periodically reviewed by the RBI.

* Non-promoter shareholding will be capped at 10% of the paid-up voting equity share capital of the bank for natural persons and non-financial institutions/entities and at 15% for all categories of financial institutions/entities, supranational institutions, public sector undertaking or Government. If this was allowed, then possible HDFC may not had to bring its stake in Bandhan to 10%. In the case of invoking pledged shares of a bank, the pledgee’s voting rights will be restricted to 5% till the time the pledgee obtains permission from the RBI for the regularization of the acquisition of these shares.

* As part of the framework for scale-based regulation of NBFCs, the RBI may consider a tighter, bank-like regulatory framework for large NBFCs. More clarity on this front will be awaited.

* The RBI has not diluted the five-year seasoning requirement for payment banks to convert into SFB (vs. demand for 3 years).

* The RBI has retained non-operative financial holding company (NOFHC) as the preferred structure for all new licences to be issued for Universal Banks (similar to IDFCB), but it will be mandatory only in cases where the individual promoters / promoting entities / converting entities have other group entities. But banks currently under NOFHC (IDFCB/Bandhan) may be allowed to exit such a structure if they do not have any other group entities in their fold. The RBI has given in-principle approval to IDFC First Bank/Bandhan Bank, but IDFC will have to divest stake in MF/Tech businesses for a reverse merger with IDFC First Bank, while Bandhan Bank is not keen on diluting the structure as of now.

* The RBI has relaxed listing norms for future small finance banks (SFBs). Now it can be done within eight years from the date of commencement of operations vs. the earlier condition of within three years of reaching a net worth of Rs5bn (vs. demand for 10 years). Since listing guidelines have been diluted for future SFBs, existing SFBs in queue, including Utkarsh, Fincare, Jana and ESAF, may not get any relief. Similarly, the recentlyformed Unity SFB (BharatPe + Centrum) venture too may also not get any such relief, unless they have different terms, given the potential acquisition of beleaguered PMC Bank. For universal banks, the listing requirement remains the same (after 6 years of commencement of operations).

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