Corporate-promoted NBFCs can have 15% stake in banks, with increase in cap

Corporate houses, which are not allowed to own a bank, can now pick up 15 per cent stake in commercial banks through their non-banking financial companies (NBFCs).

This is because the Reserve Bank of India (RBI) has allowed non-promoters to hold up to 15 per cent in private sector banks, following the recommendation of an internal working group (IWG) that was set up to review the existing guidelines on ownership and corporate structure for these entities. Voting rights, however, are likely to be capped at 10 per cent as is the case with other investors.

The IWG had recommended that all types of non-promoters can have 15 per cent in private sector banks as compared to 10 per cent currently. The banking regulator slightly modified the proposal, saying that it will allow only financial entities, supranational institutions and government undertakings to own 15 per cent stake in banks. All other types of non-promoters, including individuals, will continue to have a cap of 10 per cent.

According to experts, the decision to increase the cap to 15 per cent for financial institutions paved the way for NBFCs, including those promoted by industrial houses, to have an entry into the banking sector.

“So far as the issue of hiking non-promoter stake to 15 per cent is concerned, well government financial sector entities like NBFCs, including those promoted by corporate houses, can now have 15 per cent stake in private sector banks,” said N S Vishwanathan, former deputy governor, RBI.

The RBI has clarified that prior approval is required from the regulator for any entity to hold more than 5 per cent stake in a bank. The IWG had recommended allowing corporate houses into banking, aproposal which was not accepted by the banking regulator.
 

A few corporate houses such as the Tatas and the Mahindras have evinced interest in obtaining a bank licence, but have backed out later. Most of the large business houses, like the Tata group, Birla group and L&T, have NBFCs.

The August 2016 guidelines on on-tap licensing of universal banks said business groups in the private sectors are eligible only if their non-financial business does not account for 40 per cent or more in terms of total assets or gross income. This essentially ruled out the entry of corporate houses in banking.

The decision to allow non-promoters to have 15 per cent stake in private banks also opens the door for foreign banks — those that do not have a branch presence in India — to own 15 per cent in domestic banks.

Banking experts said the move to increase non-promoter shareholding would help lenders with greater access to capital.

“The regulator has been ensuring that no promoter (and/or) another banking company, other than overseas bankingcompanies with no presence in India, would not acquire equity beyond a certain limit. The same was true with any other financial investor as well. Of course, the question of fit and proper was still applicable for anybody acquiring more than a certain percentage,” said Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services LLP.

“Now these limits have been revised upward to encourage more capital from such shareholders, to enable the banking companies to have a larger capital base, and get the capital from a few investors as well,” Parekh told Business Standard.

“The promoter can keep his equity up to 26 per cent after a certain number of years, in which case the promoter’s involvement and control can continue. For instance, no two large investors can, by virtue of their holding, acquire controlling interest working together,” he added.

Life Insurance Corporation, for example, can now increase its stake to 15 per cent in private sector banks. In two of the private banks, Kotak Mahindra and IndusInd, LIC’s stake is now close to 10 per cent. LIC also has close to 10 per cent stake in Axis Bank — the third largest private sector bank — but the insurer is categorised as promoter, unlike IndusInd and Kotak Mahindra Bank.

Recently, IndusInd said RBI has allowed LIC to increase its stake from 5.4 per cent to 9.99 per cent at September-end. Last month, RBI allowed LIC to increase its stake in Kotak Mahindra Bank to 9.99 per cent, from 5 per cent at the end of September. Following the increase in cap for non-promoters’ stake in private banks, LIC now has another 5 per cent headroom in these banks.