Opening the doors for mergers and acquisitions in the banking industry for the first time in decades, the Reserve Bank of India (RBI) has signaled that it is open to persons owning more than 10 percent stake in a banks. RBI said the revision was necessitated after the Banking Law (Amendment) Act, 2012, adding that there could be structured transactions which could hide the actual ownership. These directions will also apply to compulsorily convertible bonds, voting rights or convert optionally convertible bonds.
As per the latest policy revision , the Central Bank could permit promoters, or investors to own more than 10 per cent if the applicant meets certain conditions including if ‘it is in public interest’ and in the ‘desirability of diversified ownership’.
The central bank had been rigid about the 5 per cent cap on ownership and a 10 per cent voting rights to ensure that no single holder gets a dominant position in running a bank. Till now many investors who owed up to 4.99 per cent in banks were keen on raising it but did not do so. But now will have an opportunity to raise their holdings. If they get the central bank permission to buy 5 per cent, then they automatically have a right to go up to 10 per cent. Shareholders owning more than 5 per cent will have to give an annual declaration to the concerned bank of which they own shares.
RBI has however said that “If in the bank's assessment any major shareholder is not 'fit and proper', it will have to immediately furnish the requisite information to the Reserve Bank”. While, giving the details of the ‘fit and proper criterion’ which would be used to grant permission for bigger stakes, the Central Bank notified that ‘The applicant’s integrity, reputation and track record in financial matters and compliance with tax laws,'' will be a barometer to judge the ‘fit and proper criteria’.
RBI further said that sourcing of funds would be critical for raising stake beyond 10 per cent, and the major shareholder will have to furnish the details of the source of funds for such incremental acquisition and obtain 'no objection' from the concerned bank before such incremental acquisition.