Reserve Bank of India vide its notification dated 16th January, 2023, has come up with this Master Direction with the purpose to ensure that the ultimate ownership and control of banking companies are well diversified and the major shareholders of banking companies are ‘fit and proper’ on a continuing basis. The given directions may be read along with the ‘Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies’ issued by the Reserve Bank of India.
CHAPTER-I (Preliminary)
- Short Title and Commencement.
These directions shall be called the Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023 and shall come into force with immediate effect. - Applicability
This notification is applicable to all banking companies (as defined in clause (c) of Section 5 of the Banking Regulation Act, 1949), including Local Area Banks (LABs), Small Finance Banks (SFBs) and Payments Banks (PBs) operating in India. - Definitions
The terms used shall bear the meanings assigned to them below, and their cognate expressions and variations shall be construed accordingly:
• “acquisition” means, acquiring, or agreeing to acquire, shares or voting rights in a banking company, directly or indirectly;
• “aggregate holding” means the total holding, directly or indirectly, beneficial or otherwise, of shares or voting rights by a person along with his relatives, associate enterprises and persons acting in concert with him in a banking company [For the purpose of arriving at indirect holding, the acquisition of shares or voting rights mentioned in Annex I of the given notification shall also be considered and that indirect acquisition is not limited to the acquisition(s) mentioned therein];
• “applicant” means the person making an application under Section 12B of the Banking Regulation Act, 1949 (10 of 1949);
• “encumbrance” has the same meaning as assigned to it in the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
• “major shareholding” means “aggregate holding” of five per cent or more of the paid-up share capital or voting rights in a banking company by a person;
• “person” means a natural person or a legal person;
• “relative” has the same meaning as defined in Section 2(77) of the Companies Act, 2013 and rules made thereunder; and
• “significant beneficial owner” has the same meaning as stated in Companies (Significant Beneficial Owners) Rules, 2018.
CHAPTER-II (Prior approval for Acquisition)
- Procedure for prior approval
• Prior approval of Reserve Bank is required by any person who intends to make an acquisition which is likely to result in major shareholding in a banking company by making an application to the Reserve Bank.
• Reserve Bank may seek comments from the banking company on receipt of the application and declaration from the applicant on the proposed acquisition.
• On receipt of the reference from the Reserve Bank, without prejudice to the generality of the aspects to be considered, the board of directors (the board) of the banking company shall, based on the information provided as well as due diligence undertaken by the banking company, deliberate on the proposed acquisition, and assess the ‘fit and proper’ status of the person. The concerned banking company shall furnish its comments after considering all relevant aspects along with a copy of the relevant board resolution and information in Form A1 specified in these directions to the Reserve Bank within 30 days. For this purpose, banking companies shall put in place a board-approved ‘fit and proper’ criteria for major shareholders, which shall consider, at a minimum, the illustrative ‘fit and proper’ criteria mentioned in the Annex II of the given notification.
• The Reserve Bank would undertake due diligence to assess the ‘fit and proper’ status of the applicant. The decision of the Reserve Bank to
(a) accord or deny permission or
(b) accord permission for acquisition of a lower quantum of aggregate holding than that has been applied for,
shall be binding on the applicant and the concerned banking company. The Reserve Bank may also impose such conditions on the applicant and the concerned banking company as deemed fit while according the permission.
• Subsequent to such acquisition, if at any point in time the aggregate holding falls below five per cent, the person will be required to seek fresh approval from the Reserve Bank if the person intends to again raise the aggregate holding to five percent or more of the paid-up share capital or total voting rights of the banking company (as per sub-section (1) of Section 12B of B R Act, 1949).
• The persons from Financial Action Task Force (FATF) non-compliant jurisdictions shall not be permitted to acquire major shareholding in a banking company. 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 Reserve Bank. Reserve Bank may, however, at any point of time, consider the fitness of such persons holding shares and pass appropriate orders on their permissible voting rights in accordance with law and applicable rules.
CHAPTER-III (Continuous Monitoring Arrangements)
- Due Diligence
A banking company shall continuously monitor that the following persons are ‘fit and proper’ on an ongoing basis:
• its major shareholders who have completed the approved acquisition;
• those applicants for whom comments have been provided by the concerned banking company to the Reserve Bank for approval to have major shareholding; and
• those applicants who have been approved by the Reserve Bank to have major shareholding but are yet to complete the approved acquisition.
Further, a banking company shall
• put in place a mechanism to obtain information on a continuous basis on any changes in the information provided in Form A appended to the Guidelines of RBI notification or any other development which may have a bearing on the ‘fit and proper’ status of major shareholder / applicant;
• examine any concern / information regarding the major shareholders / applicants that could render such persons not ‘fit and proper’ to continue as / become major shareholder and immediately furnish the report on the same to the Reserve Bank;
• obtain, within one month of the close of financial year, a report on any changes in the information provided in Form A appended to the Guidelines of RBI notification from the major shareholder / applicant; and
• make an assessment about the ‘fit and proper’ status of such person(s) in the light of information provided and its own investigations and forward the comments of its Board regarding the ‘fit and proper’ status of its major shareholders / applicants, to the Department of Regulation, Reserve Bank of India, not later than September 30 every year.
The banking companies have been asked to put in place a mechanism to obtain information on any change in significant beneficial owner or acquisition by a person to the extent of 10 per cent or more of paid-up equity share capital of the major shareholder and shall further report such change within 30 days to the Reserve Bank. - Detecting violation of Section 12B (1) of the B R Act, 1949
Banking company will have to establish a continuous monitoring mechanism to ascertain that a major shareholder has obtained prior approval of the Reserve Bank for the shareholding/voting rights. Even when the acquisition / aggregate holding is less than five per cent of paid-up share capital or voting rights of a banking company, a reference shall be made to the Reserve Bank 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 banking company shall submit periodical reports on the continuous monitoring arrangements to its board. - Diversified shareholding in the banking company
The banking companies (excluding Payments Banks) which are operational as on the date of issue of these directions and where the aggregate holding of a person is not in conformance with the Guidelines as given in the RBI notification shall within six months from the date of issue of these directions submit a shareholding dilution plan. - Reporting Requirements
After issue and allotment of shares, a banking company shall report the details in the Form A2 within 14 days of completion of the allotment process and limits approved by the Reserve Bank for a person shall not be breached.
CHAPTER-IV (Repeal and Other Provisions)
- Three Master Directions have been consolidated into these directions with suitable modifications, and thus they are repealed from the date of issue of these directions. Further, detailed direction is mentioned in the given notification.
Link: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12439&Mode=0
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