Universal Banks

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 Guidelines

(A) Eligible Promoters

(i) Existing non-banking financial companies (NBFCs), that are ‘controlled by residents’ [as defined in FEMA Regulations, as amended from time to time], and that have a successful track record for at least 10 years will be eligible to convert into a bank or promote a new bank. If considered eligible for promoting / converting into a bank, they will have to comply with the requirements laid down in these guidelines as also the conditions specified in paragraph 2 (J) below.

(ii) Individuals / professionals who are residents [as defined in FEMA Regulations, as amended from time to time] having 10 years of experience in banking and finance, would be eligible to promote banks, singly or jointly.

(iii) Entities / groups in the private sector that are ‘owned and controlled by residents’ [as defined in FEMA Regulations, as amended from time to time] and have a successful track record for at least 10 years, provided that if such entity / group has total assets of ₹ 50 billion or more, the non-financial business of the group does not account for 40 per cent or more in terms of total assets / in terms of gross income.

(B) ‘Fit and Proper’ criteria

The Promoters / Promoter Groups1 should be ‘fit and proper’ in order to be eligible to promote banks. RBI would assess the ‘fit and proper’ status of the applicants on the basis of the following criteria:

(i) Where promoters are individuals

  1. The Promoters should each have a minimum 10 years of experience in banking and finance.

  2. The Promoters should have a past record of sound credentials and integrity.

  3. The Promoters should be financially sound and should have a successful track record for at least 10 years.

(ii) Where promoters are entities / NBFCs

  1. The promoting entity / promoter group should have a minimum 10 years of experience in running its / their businesses.

  2. The promoting entity and the promoter group should have a past record of sound credentials and integrity.

  3. The promoting entity and the promoter group should be financially sound and should have a successful track record for at least 10 years.

  4. Preference will be given to promoting entities having diversified shareholding.

(C) Corporate structure

I. Structure without NOFHC

i) In the case of promoters being individuals or standalone promoting / converting entities who / which do not have other group entities, the requirement of Non-Operative Financial Holding Company (NOFHC) is not mandatory and such promoters would have the option of setting up / converting into a banking company under the Companies Act, 2013. However, in case other group entities are proposed to be established after the bank is incorporated, the bank should move to the NOFHC structure.

ii) In case the proposal is for setting up / conversion into a bank, any change in shareholding within the promoting / converting entity, from the date of application to the RBI, as a result of which a shareholder acquires or transfers 5 per cent or more of the voting equity capital of the promoting / converting entity, shall be with the prior approval of RBI.

II. Structure with NOFHC

In case the individual promoters / promoting entities / converting entities have other group entities, the bank shall be set up only through a NOFHC. In such cases, the following conditions will be applicable:

Structure and activities

(i) The NOFHC shall be registered with RBI as a non-banking financial company (NBFC).

(ii) The NOFHC shall be owned by the Promoter / Promoter Group to the extent of not less than 51 per cent of the total paid-up equity capital of the NOFHC.

(iii) The NOFHC shall hold the bank as well as all the other financial services entities of the Group regulated by RBI or other financial sector regulators. The objective is that the Holding Company should ring fence the regulated financial services entities of the Group, including the bank from other activities of the Group i.e., commercial, and financial activities not regulated by financial sector regulators and also that the bank should be ring fenced from other regulated financial activities of the Group.

(iv) Only those regulated financial sector entities in which the individual Promoter/s / group have significant influence or control will be held under the NOFHC.

(v) The financial services entities whose shares are held by the NOFHC cannot be shareholders of the NOFHC.

(vi) Apart from setting up the bank, the NOFHC shall not be permitted to set up any new financial services entity for at least three years from the date of commencement of business of the NOFHC. However, this would not preclude the bank from having a subsidiary or joint venture or associate, where it is legally required or specifically permitted by RBI.

(vii) The general principle for reorganization of the activities in the group is that all activities permitted to a bank under Section 6 (a) to (o) of Banking Regulation Act, 1949 shall be carried out from the bank. In this context, it is clarified that :

(a) RBI requires certain specialised activities, such as, insurance, mutual funds, stock broking, infrastructure debt funds, etc. to be conducted through a separate Subsidiary / Joint Venture / Associate structure;

(b) There are certain activities such as credit cards, primary dealers, leasing, hire purchase, factoring, etc., which a bank can conduct either from within the bank or through a separate outside structure (Subsidiary / Joint Venture / Associate).

Accordingly, the activities at (a) above and activities at (b) above which are to be / proposed to be carried out outside the bank may be carried out through separate financial entities under the NOFHC.

However, if the Promoters desire to continue existing specialized activities from a separate entity proposed to be held under the NOFHC, prior approval from RBI would be required and it should be ensured that similar activities are not conducted through the bank.

Further, the activities not permitted to the bank would also not be permitted to the group i.e entities under the NOFHC would not be permitted to engage in activities that the bank is not permitted to engage in.

Shareholding

(viii) Individuals and companies, directly or indirectly connected with large industrial houses may be permitted to participate in the equity of a new private sector bank to the extent of less than 10 per cent and shall not have controlling interest in the bank. Such shareholders shall not have any Director on the Board of the bank on account of shareholder agreements or otherwise. The limit of less than 10 per cent would apply to individuals and all inter-connected companies belonging to the concerned large industrial houses on an aggregate basis.

(ix) Only non-financial services companies / entities and non-operative financial holding companies / Core Investment Companies / Investment Companies in the Group and individuals belonging to the Promoter Group will be allowed to hold shares in the NOFHC.

(x) The capital structure of the NOFHC set up by Promoter / Promoter Group shall be as under :

  1. Shareholding to the extent of not less than 51 per cent of the total voting equity shares of the NOFHC shall be held by promoter/s / companies forming part of the Promoter Group. In case the shareholding is by companies of the promoter group, such companies shall preferably have a diversified shareholding.

  2. If required, the extent of 51 per cent promoter group shareholding in the NOFHC may be held by individuals belonging to the Promoter Group. However, shareholding by such individual, along with his relatives [as defined in Section 2 (77) of the Companies Act, 2013 and Rules made there under] and along with entities in which he and / or his relatives hold not less than 50 per cent of the voting equity shares, shall not exceed 15 per cent of the total paid-up equity capital of the NOFHC. Shareholding to the extent of not more than 49 per cent of the total voting equity shares of the NOFHC may be held by the non-promoters. However, shareholding by the single individual non-promoter along with his relatives [as defined in Section 2 (77) of the Companies Act, 2013 and Rules made there under] and along with entities in which he and / or his relatives hold not less than 50 per cent of the voting equity shares, shall not be 10 per cent or more of the total shareholding of the NOFHC.

(xi) Any change in shareholding within the NOFHC as a result of which a shareholder transfers / acquires 5 per cent or more of the total equity capital of the NOFHC shall be with the prior approval of RBI.

(xii) The Promoters / Promoter Group entities / individuals associated with Promoter Group shall hold equity investment, in the bank and other financial entities in the group, only through the NOFHC.

Consolidated Supervision

(xiii) RBI will have to be satisfied that the corporate structure does not impede the financial services entities held by the NOFHC from being ring fenced, that it would be able to supervise the bank, the NOFHC, and its Subsidiaries / Joint Ventures / Associates on a consolidated basis, and that, it will be able to obtain all required information relevant for this purpose, smoothly and promptly. However, the primary supervision of the entities held by the NOFHC will be by the sectoral regulators.

(D) Minimum voting equity capital requirements for banks and shareholding by the promoters / NOFHC

I. Minimum Capital Requirements

  1. The initial minimum paid-up voting equity capital for a bank shall be ₹ 5 billion. Thereafter, the bank shall have a minimum net worth of ₹ 5 billion at all times.

  2. In cases of conversion of NBFCs into banks, the converting entity, and thereafter the bank, shall have a minimum net worth of ₹ 5 billion at all times.

II. Promoter stake in the bank

  1. The promoter/s and the promoter group / NOFHC, as the case may be, shall hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked-in for a period of five years from the date of commencement of business of the bank.

  2. Shareholding by promoter/sand the promoter group/ NOFHC in the bank in excess of 40 per cent of the total paid-up voting equity capital shall be brought down to 40 per cent within five years from the date of commencement of business of the bank.

  3. In the event of the bank raising further voting equity capital during the first five years from the date of commencement of business, the promoter/s and promoter group/ NOFHC should continue to hold 40 per cent of the enhanced voting equity capital of the bank for a period of five years from the date of commencement of business of the bank.

  4. Voting equity capital, other than the holding by promoter/s and promoter group / NOFHC, could be raised through public issue or private placements. However, no single entity or group of related entities, other than the promoters / promoter group / NOFHC, shall have shareholding or control, directly or indirectly to the extent of 10 per cent or more of the paid-up voting equity capital of the bank.

  5. The shareholding by promoter/s and promoter group / NOFHC shall be brought down to 30 per cent of the paid-up voting equity capital of the bank within a period of 10 years, and to 15 per cent of the paid-up voting equity capital of the bank within a period of 12 years from the date of commencement of business of the bank.

III. Capital and other requirements

  1. The bank shall be required to maintain a minimum capital adequacy ratio of 13 per cent of its risk weighted assets (RWA) for a minimum period of 3 years after the commencement of its operations subject to any higher percentage as may be prescribed by RBI from time to time. On a consolidated basis, the NOFHC shall maintain capital adequacy as per Basel norms applicable to the entity.

  2. The bank shall get its shares listed on the stock exchanges within six years of the commencement of business by the bank.

  3. The capital requirements for the regulated financial services entities held by the NOFHC shall be as prescribed by the respective sectoral regulators.

(E) Regulatory framework

The bank will be governed by the provisions of the Banking Regulation Act, 1949, Reserve Bank of India Act, 1934, Foreign Exchange Management Act, 1999, Payment and Settlement Systems Act, 2007, Credit Information Companies (Regulation) Act, 2005, Deposit Insurance and Credit Guarantee Corporation Act, 1961, other relevant Statutes and the Directives, Prudential regulations and other Guidelines/Instructions issued by RBI and other regulators from time to time, including the regulations of SEBI regarding public issues and other guidelines applicable to listed banking companies.

Other conditions for the bank

  1. The bank should be “controlled by residents” (as per FEMA, 1999 and as amended from time to time) at all times.

  2. The Board of the bank should have a majority of independent Directors.

  3. Any acquisition of shares / compulsorily convertible debentures / bonds /voting rights which will take the aggregate holding of an individual / entity / group to the equivalent of 5 per cent or more of the paid-up equity capital or the total voting rights of the bank, will require prior approval of RBI.

  4. No single entity or group of related entities, other than the promoters / NOFHC, shall have shareholding or control, directly or indirectly, to the extent of 10 per cent or more of the paid-up voting equity capital of the bank.

  5. The bank shall maintain arm’s length relationship with Promoter / Promoter Group entities, and the major suppliers and major customers of these entities.

  6. In taking a view on whether an entity belongs or is linked / related to the Promoter or Promoter entities, RBI will be guided by the provisions of the Banking Regulation Act, 1949, Accounting Standards and other related factors. The decision of the RBI in the matter will be final.

  7. The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks. For this purpose, the bank should build its priority sector lending portfolio from the commencement of its operations.

  8. The bank shall open at least 25 per cent of its branches in unbanked rural centres (population up to 9,999 as per the latest census) to avoid over concentration of their branches in metropolitan areas and cities which are already having adequate banking presence.

  9. The bank should be fully networked and technology driven from the beginning with all modern infrastructural facilities.

  10. The bank should have a high powered Customer Grievances Cell to handle customer complaints.

  11. Compliance with terms and conditions laid down by RBI is an essential condition of grant of licence. Any non-compliance will attract penal measures including cancellation of licence of the bank.

  12. In view of increasing emphasis on stringent prudential norms, transparency, disclosure requirements, banks need to have strength and efficiency to work profitably in a highly competitive environment.

  13. Banking being a highly leveraged business, licences shall be issued on a very selective basis to those who conform to the above requirements, who have an impeccable track record and who are likely to conform to the best international and domestic standards of customer service and efficiency. Therefore, it may not be possible for RBI to issue licences to all the applicants just meeting the eligibility criteria prescribed above.

(J) Additional conditions for NBFCs promoting / converting into a bank

(i) The Promoters / Promoter Groups with an existing NBFC [that is ‘controlled by residents’ [as defined in FEMA Regulations as amended from time to time)], if considered eligible for a bank licence, will have two options:

  1. Promote a bank, or

  2. Convert the NBFC into a bank.

(ii) Under both the above options, the NOFHC / the bank or both, as the case may be, should comply with all the requirements laid down in the guidelines.

(iii) Further, under both the above options, the Promoters will have to set up a NOFHC if they have other entities in their group. The NOFHC and the bank set up under it should comply with all the requirements laid down in the guidelines.

(iv) If the existing entities have diluted the promoter shareholding to below 40 per cent, but above 26 per cent, due to regulatory requirements or otherwise, RBI may not insist on the promoters’ minimum initial contribution as indicated in paragraph 2 (D) (II) of the guidelines and the lock-in period of 5 years will apply to 26 per cent promoter shareholding.

(v) RBI will consider allowing retaining existing branches of the NBFC which is converting into a bank, as bank branches, with prior approval and subject to conformity / compliance with the extant guidelines on branch authorization.

RBI

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