RBI prior approval now a must for picking up over 5% stake in banks

RBI has defined "major shareholding" as "aggregate holding" of five per cent or more of the paid-up share capital or voting rights in a banking company by a person

The Reserve Bank of India (RBI) on Monday said any person looking to acquire more than 5 per cent stake in a bank will need prior approval from the regulator.
 

“Any person who intends to make an acquisition, which is likely to result in major shareholding in a banking company, is required to seek previous approval of the RBI by submitting an application,” the regulator said in the master direction on Acquisition and Holding of Shares or Voting Rights in Banking Companies.
 

The RBI has defined “major shareholding” as “aggregate holding” of 5 per cent or more of the paid-up share capital or voting rights in a banking company by a person.
 

Following the due diligence of the entity which plans to acquire a stake in banks, the decision of the regulator to permit or deny or to permit to acquire lower number of shares will be binding on the applicant and the bank, the RBI said.
 

After an acquisition, if the shareholding falls below 5 per cent, the person will be required to seek fresh approval from the RBI if the person intends to again raise the aggregate holding to 5 per cent or more.
 

Any person from the Financial Action Task Force (FATF) non-compliant jurisdiction will not be allowed to acquire a major shareholding in a bank.
 

“The existing major shareholders from such FATF non-compliant jurisdictions will, however, be allowed to continue with their investment, provided that there shall not be any further acquisition without prior approval of the RBI,” the master direction said.

The RBI said a bank should establish a continuous monitoring mechanism to ascertain that a major shareholder has obtained its prior approval for the shareholding/voting right.
 

“Even when the acquisition/aggregate holding is less than 5 per cent of paid-up share capital or voting rights of a banking company, a reference shall be made to the RBI by the banking company along with a copy of board resolution and necessary documents, if it has reason to believe that the methods adopted are meant to circumvent the statutory requirements,” the RBI said.

The banking regulator said banks where aggregate shareholding of entities is not in conformance with the guideline will have to comply with the norms within six months.
 

For private banks where the state or central government has a stake, the RBI will prescribe a differentiated shareholding dilution plan for such holdings.