RBI panel offers suggestions on corporate structure, pledging of shares

The Reserve Bank of India’s internal task force to review existing ownership guidelines and corporate structure of Indian private sector banks has made a series of suggestions on issues such as corporate structure , the pledge of shares by promoters and the initial capital required for the licensing of new banks.

Significantly, the report stated that well-managed large non-banking financial companies (NBFCs) with an asset size of ₹50,000 crore and above, including those owned by a company, can be considered for conversion in banks, subject to the completion of 10 years of operation and compliance with due diligence criteria and compliance with additional conditions specified in this regard.

He noted, however, that a stricter set of criteria may need to be established if NBFCs owned by large industrial firms are to be considered for conversion into banks. “Depending on the experience after, say, five years with the conversion of NBFCs to banks, the Reserve Bank could review policies in this regard to tighten or loosen the policy,” he said.

Searching for comments

The RBI has invited comments on the report by January 15, 2021. “The RBI will consider the comments and suggestions before deciding on the matter,” it said.

The task force called for maintaining the Non-operative Financial Holding Company (NOFHC) as the preferred structure for all new licenses to be issued to universal banks. “However, this should only be mandatory in cases where individual promoters, entities promoting the conversion of entities have other group entities,” he said.

While banks licensed before 2013 can transition to a NOFHC structure at their discretion, once the NOFHC structure achieves tax neutral status, all banks licensed before 2013 must transition to the NOFHC structure within five years of the announcement. fiscal neutrality. noted.

Noting that concerns regarding banks undertaking different activities through subsidiaries, joint ventures, associates should be addressed through appropriate regulations until the NOFHC structure is made possible and operational, the task force suggested that A bank and its existing subsidiaries, JV, associates should not be permitted to engage in any activity similar to that which a bank is permitted to undertake at the departmental level.

“However, banks may be permitted to make total investments in a financial or non-financial services company, which is not a subsidiary, JV, associated up to 20% of the bank’s paid-up share capital and reserves.

The panel further called for prohibiting the pledging of shares by promoters during the lock-up period, which amounts to bringing unencumbered promoter shares below the prescribed minimum threshold.

“The Reserve Bank could introduce a reporting mechanism for the pledging of shares by private sector bank promoters,” she said.

The minimum initial capital required for licensing new banks is expected to be doubled to ₹1,000 crore from ₹500 crore for universal banks and ₹300 crore for small financial banks from the current ₹200 crore.

For payment banks considering converting to a small corporate bank with three years’ experience as a payment bank, that may be considered sufficient, he said.

In addition, SFBs and payment banks can be listed within “six years from the date of achieving a net worth equivalent to the entry-into-force capital requirement prescribed for universal banks.” or “10 years from date of commencement of operations”, whichever comes first.