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Who can own private sector banks? - RBI’s regulations on ownership in private sector banks?

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Who can own private sector banks? - RBI’s regulations on ownership in private sector banks?
posted Sep 4, 2017 by Deepika Jain

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Ownership of banks is decisive for the safety of the banking system as well as for the progress of economy as well. In India, most of the banks are owned by government (public sector banks). In the case of private sector banks, the RBI prefer a diversified ownership (large number of shareholders) as it will ensure more transparency and health of banks. Ownership by large number of people avoids monopoly control by a few.

RBI has issued detailed guidelines on ownership in private sector banks. The guidelines envisage diversified shareholding in private sector banks by a single entity/corporate entity/group of related entities. As per the new on-tap bank licensing policy of the RBI, corporate can’t start banks. Following are the main features of the RBI’s policy on shareholding in private sector banks. These guidelines include how much shares of a bank can be held by an individual, another bank, foreign investors etc.

(i) Any acquisition of shareholding/voting rights of 5 per cent or more in a bank should get prior approval from the Reserve Bank of India.

(ii) The ‘fit and proper’ criteria for acquisition of shareholding in a private bank beyond 5 per cent. (Only persons with good knowledge about the banking sector can take shares in banks).

(iii) Foreign Investment: The aggregate foreign investment in private sector banks from all sources (Foreign Direct Investment (FDI), Foreign Institutional Investors (FII) / Non Resident Indians (NRI) cannot exceed 74 per cent of paid-up capital of the bank. At all times, at least 26 per cent of the paid-up share capital of the private sector banks will have to be held by resident Indians.

(iv) Banks (including foreign banks having branch presence in India) can acquire up to 10% stake (share) in other banks. However, in case of exceptional circumstances, such as, weak banks, the Reserve Bank may permit them a higher level of shareholding.

(v) In banks where there are no major regulatory/supervisory concerns, a person may be permitted to acquire higher shareholding, if supported by the Board of the Directors of the concerned bank. But hostile takeover will not be allowed.

(vi) In banks where there are regulatory/supervisory concerns, the Reserve Bank may permit a person to acquire higher shareholding, even if the existing board does not support it.

answer Sep 7, 2017 by Sagar Sharma
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