The Indian central bank has issued on Monday a set of draft guidelines for new banking licence in the private sector that bars promoter groups generating over tenth of revenues or have such assets from real estate or broking activities; calls for minimum capital commitment of Rs 500 crore; 49 per cent foreign investment ceiling (including FII/NRI and FDI) for the first five years and mandatory stock exchange listing within two years of receiving a banking license.
The Reserve Bank of India (RBI) has sought views on the draft guidelines, to be sent by October 31, 2011, and the final guidelines will be issued and the process of inviting applications for setting up of new banks in the private sector will be initiated thereafter, and after some amendments to Banking Regulation Act, 1949, are in place.
Here are the key highlights:
Eligible Promoters
Private groups that are owned and controlled by residents shall be eligible to promote banks.
Groups with diversified ownership, sound credentials and integrity that have a successful track record for at least 10 years shall be eligible to promote banks and RBI may seek feedback on applicants from other regulators and agencies like Income Tax, CBI, Enforcement Directorate, etc. This, in effect, rules out a first-generation entrepreneur setting up a new bank.
RBI has made an exception for promoters with a large exposure to real estate and broking activities as they have inherently riskier businesses model and business culture. The central bank has also looked at the international developments after the financial crisis three years ago where there is a movement for separating banking from proprietary trading and has made a sharp remark on its dissatisfaction with the past experience of brokers on the boards of banks. Accordingly, groups that have significant (10 per cent or more) income or assets or both from such activities, including real estate construction and broking activities taken together in the last three years, shall not be eligible to promote banks.
Foreign Shareholding
The aggregate non-resident shareholding from FDI, NRIs and FIIs in the new private sector banks shall not exceed 49 per cent for the first five years from the date of licensing of the bank. It has added that no non-resident shareholder, directly or indirectly, individually or in groups, will be permitted to hold 5 per cent or more of the paid-up capital of the bank. After the expiry of five years from the date of licensing of the bank, the foreign shareholding would be as per the extant policy. Currently, foreign shareholding in private sector banks is allowed up to a ceiling of 74 per cent of the paid-up capital.
Corporate Structure
Promoters will be permitted to set up a new bank only through a wholly owned Non-Operative Holding Company (NOHC), which will hold the bank, as well as all other financial services companies regulated by RBI or other financial sector regulators. This is to ring-fence the regulated financial services activities of the group, including the new bank, from other activities of the group, i.e., commercial, industrial and financial activities not regulated by financial sector regulators. Thus, only non-financial services companies/entities and individuals belonging to the promoter group will be allowed to hold shares in the NOHC. Financial services companies belonging to the promoter group would be held by the NOHC and would not have shareholding in it.
The NOHC will be registered as an NBFC and will be governed by a separate set of guidelines. It will not be permitted to borrow funds for investing in companies held by it and will just be a vehicle to hold the investments in all regulated financial sector entities on behalf of the promoter/promoter group for regulatory and prudential comfort.
Minimum Capital Requirements & Holding By NOHC
The initial minimum paid-up capital for a new bank shall be Rs 500 crore or $110 million and the NOHC shall hold at least 40 per cent stake of the bank, which shall be locked in for a period of five years from the date of licensing of the bank. Any shareholding by NOHC beyond 40 per cent shall be brought down to 40 per cent within two years from the date of licensing of the bank.
In the event of the bank raising further capital during the first five years from the date of licensing, the NOHC should continue to hold 40 per cent of the enhanced capital of the bank for a period of five years from the date of licensing of the bank. Capital, other than the holding by NOHC, can be raised through public issue or private placements.
The shareholding by NOHC shall be brought down to 20 per cent of the paid-up capital of the bank within a period of 10 years and to 15 per cent within 12 years from the date of licensing of the bank and retained at that level thereafter.
Corporate Governance
At least 50 per cent of the directors of the NOHC should be totally independent of the promoter/promoter group entities, their business associates and their customers and suppliers.
No financial services entity under the NOHC would be allowed to engage in any activity that a bank is permitted to undertake departmentally. All such activities, if any, will have to be moved to the new bank, subject to such conditions as RBI may specify.
The source of promoters’/promoter groups’ equity in the NOHC should be transparent and verifiable.
Other Conditions
Shareholding of 5 per cent or more of the paid-up capital of the bank by individuals/entities/groups will be subject to prior approval of the RBI and no single entity or group, other than the NOHC, shall have shareholding or control, directly or indirectly, in excess of 10 per cent of the paid-up capital of the bank.
The exposure of the bank to any entity in the promoter group shall not exceed 10 per cent and the aggregate exposure to all the entities in the group shall not exceed 20 per cent of the paid-up capital and reserves of the bank.
The bank shall get its shares listed on the stock exchanges within two years of licensing of the bank.
The bank shall be required to maintain a minimum capital adequacy ratio of 12 per cent for a minimum period of three years after the commencement of its operations subject to such higher percentage, as may be prescribed by the RBI from time to time.
The promoter/promoter group with an existing NBFC, if considered eligible for a bank licence, will have two options. They can promote a new bank, if some or all the activities undertaken by it are not permitted to be undertaken by banks departmentally and in such cases, the activities will have to be transferred to the new bank. Alternatively, they will have to convert into a bank, if all the activities undertaken by it are allowed to be undertaken by a bank departmentally. In both the cases, the promoters will have to first set up an NOHC. RBI will consider allowing the new bank to take over and convert the existing NBFC branches into bank branches only in Tier 3 to 6 centres. Existing branches of the NBFC in Tier 1 and 2 centres may be allowed to convert into bank branches only with the prior approval of RBI and also subject to maintaining 25 per cent of the bank branches in unbanked rural centres. This is most relevant for groups such as Religare and Reliance Capital Promoter groups having 40 per cent or more assets/income from non-financial business.
The board of the bank should have a majority of independent directors.
All credit facilities to promoters, their business associates, major suppliers and customers should have a minimum tangible security cover of 150 per cent.
Quarterly returns to be filed must be certified by statutory auditors on all exposures including credit facilities extended to the entities in the promoter group, their business associates and major suppliers and customers for amounts in excess of Rs 1 crore.
Prior approval of the RBI for raising paid-up capital beyond Rs 1,000 crore for every block of Rs 500 crore.
