5 August 2016 EY Regulatory Alert Reserve Bank of India releases final guidelines for on tap licensing of Universal Banks in the private sector Executive summary In 2013, the Reserve Bank of India (RBI) came out with a policy discussion paper on Banking Structure in India The Way Forward, primarily pursuant to recognising the need for having an explicit policy on banking structure in India and thereby making a case (i) to review the current stop and go licensing policy, and (ii) considering a continuous authorisation policy, on the ground that such policy would increase the level of competition and bring new ideas in the system. Further to the above and based on the experience of licensing of Universal Banks and granting in-principle approval for Small Finance Banks and Payments Banks, the RBI, on 5 May 2016, had released the draft guidelines for granting licenses to Universal Banks on a continuous basis. Suggestions and comments on the draft guidelines were to be provided by 30 June 2016. On examination of the comments/ suggestions received, the RBI has, on 1 August 2016, issued the final guidelines for on-tap licensing of Universal Banks in the private sector (Final Guidelines). This alert summarizes the key features of the Final Guidelines.
Background The Reserve Bank of India (RBI) issued guidelines for licensing of new banks in the private sector on 22 February 2013. Subsequently, on recognising the need for having an explicit policy on banking structure in India and with an intention to review the extant Indian banking structure, the RBI released a Discussion Paper Banking Structure In India - The Way Forward on 27 August 2013 (Discussion Paper). Based on the comments and suggestions received, the RBI, on 1 August 2016 released the guidelines for on tap licensing of Universal Banks in the private sector (Final Guidelines). The key provisions of the Final Guidelines are discussed below. Salient Provisions of the Final Guidelines Eligible Promoters Of the various building blocks identified under the Discussion Paper for the revised banking structure, the Discussion Paper made a case for reviewing the current Stop and Go licensing policy and considering a continuous authorisation policy for entry of new banks. While stating that such a policy would increase the level of competition and bring in new ideas in the system, the Discussion Paper highlighted that the entry norms under such a policy should be stringent. Further, the first Bi-monthly Monetary Policy announced by the RBI on 1 April 2014, inter alia, indicated that the RBI will commence working on the framework for on-tap licensing as well as differentiated banking licenses. In view of the above, the RBI had, on 5 May 2016, issued draft guidelines for granting licenses for Universal Banks on a continuous basis (Draft Guidelines). The Draft Guidelines have been worked out based on the experience of licensing two Universal Banks, and granting in-principle approvals for Small Finance Banks and Payments Banks. Comments were invited on the Draft Guidelines by 30 June 2016. Individuals/ professionals who are residents 1, and have 10 years of experience in banking and finance at a senior level 2. Entities/ groups in the private sector that are owned and controlled by residents 1 and have a successful track record for atleast 10 years. However, where such entity/ group has total assets of INR 50 billion or more, the non-financial business of the group should not account for 40% or more in terms of total assets/ gross income. Existing non-banking financial companies (NBFCs) that are controlled by residents 1 and have a successful track record for atleast 10 years. It has now been clarified in the Final Guidelines that NBFCs which are a part of a group having assets of INR 50 billion or more and the non-financial business of the group accounts for 40% or more in terms of total assets/ in terms of gross income, 1 Resident as defined in Foreign Exchange Management Act, 1999 (FEMA). 2 The requirement that individuals and professionals must be at a senior level is adopted in the Final Guidelines.
would not be eligible to act as promoters. Additional conditions for NOFHC The promoters/ promoter group 3 should meet the fit and proper criteria i.e. it should have a past record of sound financials, credentials, integrity and have minimum 10 years of successful track record. The NOFHC shall be registered as a NBFC and shall be owned by the promoter/ promoter group to the extent of not less than 51% of the total paid-up equity capital. Corporate structure Non-Operative Financial Holding Company (NOFHC) is not mandatory in case of promoters being individuals or standalone promoting/ converting entities, who/ which do not have other group entities. However, in a case where other group companies are proposed to be established after the bank is incorporated, the bank should move to the NOFHC structure. Any change in 5% or more of the voting equity capital of the promoting/ converting entity, from the date of application to the RBI, shall be reported to the RBI 4. Where promoters/ promoting entities/ converting entities have other group entities, the bank shall be set up only through a NOFHC satisfying prescribed conditions (discussed subsequently). To ring fence the regulated financial services entities of the group, the NOFHC shall hold the bank as well as other financial services of the group regulated by the RBI or other financial sector regulators 5. The financial services entities whose shares are held by the NOFHC cannot be shareholders of the NOFHC. Apart from setting up the bank, 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 NOFHC. However, this would not preclude the bank from having a subsidiary or joint venture or associate, where it is legally required or specifically permitted by RBI. Shareholding Individuals and companies, directly indirectly connected with large industrial houses 6 may be permitted to 5 Only those regulated financial sector entities in which the promoter/ promoter group has significant influence or control will be held under the NOFHC. 3 The terms promoter and promoter groups have been defined in an extensive manner to include subsidiaries, holding companies, joint ventures, related parties, etc. 4 The Draft Guidelines had prescribed that such a change in shareholding would require prior approval of the RBI. 6 A Group with assets of INR 50 billion or more with the non-financial business of the group accounting for 40% or more in terms of total assets/ in terms of gross income, will be treated as a large industrial house. (In taking a view on whether the companies, either as promoters or investors, belong to a large industrial house or to a company connected to a large industrial house, the decision of the RBI will be final.)
participate in the equity of a new private sector bank up to 10% and shall not have a controlling interest 7 in the bank. Such shareholders shall not have any director on the board of the bank on account of shareholder agreements or otherwise. The limit of less than 10% would apply to individuals and all inter-connected companies belonging to the concerned large industrial houses on an aggregate basis. Shareholding to the extent of not more than 49% of the total voting equity shares of the NOFHC may be held by the non-promoters. However, shareholding by single individual non-promoter along with his relatives and along with entities in which he and/ or his relatives 8 hold 50% or more of the voting equity shares, shall not be more than 10% of the total shareholding of the NOFHC. Only individuals, non-financial services entities, core Investment companies/ investment companies in the group will be allowed to hold shares in the NOFHC. Shareholding to the extent of not less than 51% of the total voting equity shares of the NOFHC shall be held by promoters/ companies forming part of the promoter group. In case the shareholding is by companies of the promoter group, such companies shall preferably have a diversified shareholding. Where 51% or more of the promoter group shareholding in the NOFHC is held by individuals belonging to the promoter group, shareholding by each such individual, along with his relatives 8 and along with entities in which he and/ or his relatives hold 50% or more of the voting equity shares, shall not exceed 15% of the total paid-up equity capital of the NOFHC. 7 The term controlling interest would mean the rights associated with control as defined in Companies Act, 2013 No shareholder, other than the promoters/ promoter group, shall have significant influence and control 9 in the NOFHC. Any change in shareholding within the NOFHC, from the date of grant of in-principle approval, as a result of which a shareholder transfers/ acquires 5% or more of the total equity capital of the NOFHC shall be with the prior approval of the RBI. Minimum Capital Requirements Initial minimum paid-up voting equity capital for a bank shall be INR 5 billion; thereafter, the bank shall have a minimum net worth of INR 5 billion at all times In cases of conversion of NBFCs into banks, the converting entity and thereafter, the bank, shall have a minimum net worth of INR 5 billion at all times. The promoters/ promoter group/ NOFHC shall hold a minimum of 40% of the paid-up voting equity capital of the bank which shall be 8 As defined in Section 2 (77) of the Companies Act, 2013 and Rules made thereunder 9 Control as defined under Accounting Standard (AS) 21 and AS 23.
locked-in for a period of five years from the date of commencement of business of the bank. Shareholding by promoters/ promoter group/ NOFHC in excess of 40% paid-up voting equity capital of the bank shall be brought down to 40% within five years from the date of commencement of business of the bank. 13% of its risk weighted assets for a minimum period of three years after the commencement of its operations subject to any higher percentage as may be prescribed by RBI from time to time. The bank shall get its shares listed on the stock exchanges within six years of the commencement of business by the bank. In the event of the bank raising further voting equity capital during the first five years from the date of commencement of business, the promoters/ promoter group/ NOFHC should continue to hold 40% of the enhanced voting equity capital of the bank for a period of five years from the date of commencement of business of the bank. The promoter group shareholding shall be brought down to 30% within a period of 10 years and 15% within a period of 15 10 years from the date of commencement of business of the bank. The voting capital of bank cannot be held by any single entity or group of related entities other than by the promoters/ promoter groups/ NOFHC, in excess of 10% of the paid- up equity capital of the bank during the first five years of the operations of the bank 11. The bank shall be required to maintain a minimum capital adequacy ratio of 10 The Draft Guidelines had prescribed a time frame of 12 years for bringing down the promoter group shareholding to 15%. 11 This condition of restricting the holding of voting capital in the bank only during the first five years of operation is provided in the Final Guidelines. Foreign shareholding in the bank Foreign shareholding in the bank would be as per the existing foreign direct investment policy (currently, 74%) subject to the minimum promoter shareholding requirement. Key prudential and exposure norms The bank shall comply with the provisions of Banking Regulation Act, 1949 and the existing guidelines on corporate governance and prudential norms as applicable to scheduled commercial banks. The NOFHC shall also comply with guidelines on corporate governance, prudential and exposure norms as per the RBI guidelines for Licensing of New Banks in the Private Sector dated 22 February 2013. The bank is precluded from having any exposure to its promoters, major shareholders who have shareholding to the extent of 10% or more of paid-up equity shares in the bank, the relatives 8 of the promoters as also the entities in which they have significant influence or control.
The bank cannot invest in the equity of other NOFHCs. Other important conditions for the bank The bank should be controlled by residents 1 at all times. and who are likely to conform to the best international and domestic standards of customer service and efficiency. Therefore, it may not be possible for RBI to issue licences to all the applicants just meeting the prescribed eligibility criteria. The bank shall open at least 25% of its branches in unbanked rural centres 12. Additional conditions for NBFCs promoting / converting into a bank The board of the bank should have a majority of independent directors 13. Further, the composition of the board should comply with the provisions of the Banking Regulation Act, 1949 and the instructions issued by the RBI from time to time in this regard. The bank shall maintain arm s length relationship with promoter/ promoter group entities, and the major suppliers and major customers 14 of these entities. The bank should be fully networked and technology driven from the beginning with all modern infrastructural facilities. The promoters/ promoter groups with an existing NBFC that is controlled by residents 1, if considered eligible for a bank licence, will have two options: (a) Promote a bank, or (b) Convert the NBFC into a bank. Under both the above options, the NOFHC/ the bank or both, as the case may be, should comply with all the requirements laid down in the Final Guidelines. Further, under both the above options, the promoters will have to set up a NOFHC if they have other entities in their group. The NOFHC and the bank set up under it should comply with all the requirements laid down in the Final Guidelines. The bank should have a high powered customer grievance cell to handle customer complaints. Banking being a highly leveraged business, licences shall be issued on a very selective basis to those who conform to the above requirements, who have an impeccable track record 12 Population up to 9,999 as per the latest census 13 As defined in the Companies Act, 2013 14 Major suppliers and major customers of the promoter group would mean dealings with whom constitute 10% or more of the annual purchases or sales or both taken together. If the existing entities have diluted the promoter shareholding to below 40%, but above 26%, due to regulatory requirements or otherwise, RBI may not insist on the promoters minimum initial contribution and the lock-in period of 5 years will apply to 26% promoter shareholding. RBI will consider allowing retaining existing branches of the NBFC which is converting into a bank, as bank branches, with prior approval and subject to conformity/ compliance with the extant guidelines on branch
authorization. Procedure to obtain approval grant of in-principle approval will be placed on the RBI s website periodically. The licensing window will be open ontap, and the applications in the prescribed form along with requisite information (i.e. business plan, shareholding pattern, project report, etc.) could be submitted to the RBI at any point of time. An applicant who has not been found suitable for issue of license will be advised of the RBI s decision. Such applicants will not be eligible to make an application for a banking license for a period of three years from the date of that decision. At the initial stage, the applicants will be screened by the RBI and will then be referred to a Standing External Advisory Committee (SEAC) to be set up by the RBI. The Committee will submit its recommendations to the Reserve Bank for consideration. Applicants aggrieved by the decision of CCB can prefer an appeal to the Central Board of Directors, within one month from the date of receipt of communication from RBI relating to the application not being considered. The SAEC will set up its own procedures for screening the applications. The Internal Screening Committee (ISC), consisting of the Governor and the Deputy Governors of the RBI will examine all the applications. The ISC will also deliberate on the rationale of the recommendations made by the SEAC and then submit its recommendations to the Committee on Central Board (CCB) of the RBI for the final decision to issue in-principle approval. The validity of the in-principle approval issued by the RBI will be 18 months from the date of granting in-principle approval and would thereafter lapse automatically. In order to ensure transparency, the names of the applicants for bank licences and the names of applicants that are found suitable for Comments Indian banking system has been evolving and going through a dynamic phase with RBI swiftly acting on various recommendations made by committees which have been set up for having implicit banking structure in India. The grant of universal banking licenses, differentiated banking licenses and now making universal banking license available on tap would not only effectively promote the broad level objective of financial inclusion but also revolutionise the financial system in India. The release of the on-tap licensing frame-work is a welcome move and could open the window of opportunity for those eligible applicants keen on entering the banking sector.
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