Update. RBI paves way for new category of NBFC- NOFHC. Corporate Law Services Group CS Vinita Nair

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RBI paves way for new category of NBFC- NOFHC Corporate Law Services Group corplaw@vinodkothari.com CS Vinita Nair vinita@vinodkothari.com April 10, 2014 Check at: http://india-financing.com/staff-publications.html for more write ups. Copyright: This write up is the property of Vinod Kothari & Company and no part of it can be copied, reproduced or distributed in any manner. Disclaimer: This write up is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.

Background Reserve Bank India (RBI) vide press release dated 22 nd February, 2013 1 had issued guidelines for licensing of New Banks in the Private Sector (Banking Guidelines). Thereafter, on June 3, 2013 RBI came up with FAQs giving clarification on Queries on Guidelines for Licensing of New Banks in the Private Sector 2. Subsequently on April 2, 3014 RBI made a press release 3 conveying RBI s decision to grant in-principle approval to 2 applicants viz. IDFC Limited and Bandhan Financial Services Private Limited to set up Banks under Banking Guidelines. The in-principal approval will be valid for a period of 18 months during which the applicants have to comply with the requirements if the Banking Guidelines and other conditions as may be stipulated by the RBI. Thereafter, RBI will consider granting of a licence for commencement of banking business u/s 22 (1) of the Banking Regulation Act, 1949 for doing banking business. Present Circular As per the Banking Guidelines, promoter or promoter group will be permitted to set up a new bank only through a wholly-owned Non-operative Financial Holding Company (NOFHC). Such NOHFC will hold the Bank as well as all other financial services companies regulated by RBI or other financial sector regulators based on permissible regulatory prescriptions. While the NOHFC will obtain NBFC registration with DNBS, the regulatory and supervisory framework will be governed by DBOD. One of the pre-condition for registering NOFHC is that an in-principle approval for setting up a commercial bank must have been received from RBI. As mentioned above RBI has granted in-principal approval to two companies. Thus, RBI has created a new category of NBFC in the form of NOFHC RBI has vide RBI/2013-14/558 DNBS (PD).CC.No. 374/03.10.001/2013-14 dated 7 th April, 2014 4 and has amended Non-Banking Financial (Non-Deposit Accepting or Holding) Companies 1 http://www.rbi.org.in/scripts/bs_pressreleasedisplay.aspx?prid=28191 2 http://www.rbi.org.in/scripts/faqview.aspx?id=94 3 http://rbi.org.in/scripts/bs_pressreleasedisplay.aspx?prid=30931 4 http://www.rbi.org.in/scripts/notificationuser.aspx?id=8830&mode=0

Prudential Norms (Reserve Bank) Directions, 2007 ( Prudential Norms) to include the definition of NOFHC to the following effect: 5 (viii c) Non-Operative Financial Holding Company (NOFHC) means a non-deposit taking NBFC referred to in the Guidelines for Licensing of New Banks in the Private Sector issued by Reserve Bank, which holds the shares of a banking company and the shares of all other financial services companies in its group, whether regulated by Reserve Bank or by any other financial regulator, to the extent permissible under the applicable regulatory prescriptions Further, in order to avoid circular movement of funds, the Banking Guidelines prescribed that the financial entities held by NOFHC shall not 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 and several others. Keeping in line with the same, RBI has made an insertion of a new sub-paragraph in Paragraph 18 of the Prudential Norms which deals with concentration of credit/ investment to the following effect: (3) An NBFC which is held by an NOFHC shall not i. have any exposure (credit and investments including investments in the equity / debt capital instruments) to the Promoters / Promoter Group entities or individuals associated with the Promoter Group or the NOFHC; ii. make investment in the equity / debt capital instruments in any of the financial entities under the NOFHC; iii. invest in equity instruments of other NOFHCs. Explanation:- For the purposes of this Paragraph, the expression, Promoter and Promoter Group shall have the meanings assigned to those expressions in Annex 1 to the Guidelines for Licensing of New Banks in the Private Sector issued by Reserve Bank. Definition of Promoter and Promoter Group as per Banking Guidelines: Promoter Promoter means, the person who together with his relatives (as defined in Section 6 of the Companies Act, 1956), by virtue of his ownership of voting equity shares, is in effective control of the NOFHC, and includes, wherever applicable, all entities which form part of the Promoter Group. 5 Insertion of new clause (viii c) in Paragraph 2(1)

Promoter Group Promoter Group includes: (i) the promoter; (ii) relatives of the promoter as defined in Section 6 of Companies Act 1956; and (iii) in case promoter is a body corporate: (A) a subsidiary or holding company of such body corporate; (B) any body corporate in which the promoter holds ten per cent or more of the equity share capital or which holds ten per cent or more of the equity share capital of the promoter; (C) any body corporate in which a group of individuals or companies or combinations thereof which hold twenty per cent or more of the equity share capital in that body corporate also holds twenty per cent or more of the equity share capital of the promoter; (D) Joint venture (as defined in terms of AS 23) with the promoter; (E) Associate (as defined in terms of AS 27) of the promoter; (F) Related party (as defined in terms of AS 18) of the promoter; and (iv) in case the promoter is an individual: (A) any body corporate in which ten per cent or more of the equity share capital is held by the promoter or a relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of his immediate relative is a member; (B) any body corporate in which a body corporate as provided in (A) above holds ten per cent or more, of the equity share capital; (C) any Hindu Undivided Family or firm in which the aggregate shareholding of the promoter and his immediate relatives is equal to or more than ten per cent of the total; and (v) all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus21 under the heading "shareholding of the promoter group"; (vi) Entities sharing a common brand name with entities discussed in A, B, C, D E, F where the promoter is a body corporate and A, B, C where the promoter is an individual;

Provided that a financial institution, scheduled bank, foreign institutional investor or mutual fund shall not be deemed to be promoter group merely by virtue of the fact that ten per cent or more of the equity share capital of the promoter is held by such institution. Also see our other related write-ups: See Primer on Banking Guidelines: https://indiafinancing.com/guide_to_non_operative_financial_holding_companies_for_new_banks_i n_india.pdf See Article on FAQs by RBI for banking guidelines published in moneylife at: http://www.moneylife.in/article/new-banking-licenses-confusions-galore-in-rbisclarifications/33052.html