Failed attempt to acquire stake in Kolhapur-based bank seen as trigger.
The Reserve Bank of India (RBI) is examining surrogate holdings of Indian companies in private sector banks. The move follows a hostile takeover attempt by a leading Mumbai-based real estate company to acquire around 42 per cent in Kolhapur-based Ratnakar Bank.
A top Ratnakar Bank executive said the company, which also has interests in financial services, had approached the bank in January-February this year to explore the possibility of acquiring a substantial stake in the bank. The bank’s board, however, did not entertain the move and cited regulations that do not permit any single entity to hold more than 10 per cent in a bank.
RBI also stepped in and immediately appointed two observers on the bank’s board. At the bank’s board meeting towards the end of February, the move by the realtor was quashed in the presence of the RBI observers, but with a dissent note from some members.
RBI guidelines do not allow companies to hold shares in a bank directly and companies that have indirect holdings in banks do not get control or voting rights. On the single-entity holding limit, the guidelines stipulate that those that manage to acquire more than 10 per cent over a period of time will have their voting rights capped at 10 per cent, irrespective of the level of shareholding.
Sources close to the development said RBI is taking the issue of surrogate shareholding seriously, although scanning for such holdings is part of the routine audit of banks. They added that the issue has become significant, since RBI's attention has been drawn to the fact that surrogate shareholders have, in some cases, succeeded in wielding control over such critical decisions as lending, treasury, investment and key appointments.
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Despite the single-entity holding norm, a source said it is difficult to trace the origins of all the surrogate companies till a full-fledged audit is complete. The source said many companies own shares in banks by floating firms in other names or through subsidiaries of shell companies or via special purpose vehicles.
Many companies float financial companies or insurance ventures that buy stakes in private sector banks through bilateral off-market deals or through stock market transactions. Banks resorted to a similar practice by floating non-banking finance companies to skirt exposure norms while lending.
The sources said the current audit season will focus on such investigations. If the investigations yield something concrete, prudential measures to close possible loopholes could be put in place.
The issue of surrogate shareholdings by companies is critical for old-generation and weak private sector banks, since they need capital for expansion and are, therefore, vulnerable to acquisition.
The SS Tarapore committee on fuller capital account convertibility had proposed allowing companies to own banks but RBI did not favour this suggestion, fearing potential conflict of interest.