Holding company to ring fence banks from promoter groups' biz

Only non-financial services companies, individuals of promoter group will be allowed to hold shares in NOFHC

The Reserve Bank of India (RBI) today said it will allow corporate groups, non-banking finance companies and public sector entities to set up a bank only through a wholly-owned non-operative financial holding company (NOFHC).

The NOFHC, registered as a non-banking finance company, will hold the bank and other financial services entities of the promoter group. "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," RBI said in a statement.

Holding Company Structure

Only non-financial services companies and individuals belonging to the promoter group will be allowed to hold shares in the NOFHC. These shares cannot be transferred to entities outside the promoter group.

An individual belonging to the promoter group along with his relatives and entities owned by him can hold maximum up to 10% of the total voting equity shares of the NOFHC. Companies, that are part of the promoter group and where majority shareholding is with public, must hold at least 51% of the NOFHC's voting equity shares.

Any change in shareholding by the promoter group in the NOFHC resulting in a shareholder acquiring five% or more in the holding company will need prior approval from the central bank.

Shareholding in banks

The NOFHC will have to pare its stake in the bank to 40% within three years from the date of commencement of business. It will maintain its shareholding in the bank at 40% for an initial period of five years and then reduce it to 20% within 10 years and to 15% within 12 years. The promoters can hold stake in the bank only through the NOFHC.

The bank will also have to get listed on the stock exchanges within three years.

RBI said the bank's initial minimum paid-up capital must be Rs 500 crore. The NOFHC and the entities held by it will need to maintain a capital adequacy ratio of 13% for at least three years.

Foreign shareholding in new banks is capped at 49% for the first five years from the date of licensing. No non-resident shareholders will be allowed to hold five% or more for five years, RBI said.

Operational Guidelines

The NOFHC shall not be permitted to set up any new financial services entity for at least three years. This, however, will not prevent the bank from forming a subsidiary or joint venture, where it is legally required or permitted by RBI.

Also, financial services entities held by the NOFHC will not be allowed to engage in any activity that a bank can undertake departmentally.

The bank will not be permitted to lend or invest in any entity belonging to the promoter group.