RBI to vet funds source for pvt bank acquisitions

Reserve Bank of India (RBI) set out the norms for acquisition of stakes in private sector banks that among other things seek to scrutinise the source of funds of the acquirer.

The new norms also give substantial discretionary power to the central bank, which will now reserve the right to reject applications for transfer of shares.

These guidelines will cover acquisitions by domestic as well as foreign investors, including foreign institutional investors, foreign direct investment and non-resident Indians.

The guidelines have laid out the due diligence processes at various thresholds of shareholding. This would avoid uncertainty for potential investors and protect depositors' interests, an RBI release said.

These norms assume significance in light of the recent HSBC acquisition of a 14.5 per cent stake in UTI Bank and its proposed open offer. The government has recently increased the foreign investment ceiling in private sector banks to 74 per cent.

The RBI would constitute an independent advisory committee, which will make appropriate recommendations for dealing with applications for granting the acquisition/transfer of shares, the release said.

The central bank has emphasised the source and stability of funds where acquisition or investment takes the shareholding of the applicant to a level of 10-30 per cent in the private bank.

The guidelines also stressed the ability to access financial markets as a source of continuing financial support for the bank as well as the business record and experience of the applicant.

The RBI will also look into the corporate structure of the acquirer to ensure that it is in consonance with effective supervision and regulation of the bank.

In the event of the acquirer being a financial entity, the RBI will look into whether the applicant is a widely held entity, publicly listed and a well-established, regulated financial entity having good standing in the financial community.

Where the acquisition/investment exceeds 30 per cent, the RBI will also consider whether it is in the public interest; the desirability of diversified ownership of banks; the soundness and feasibility of plans of the applicant for the future of the bank; and their impact on control and management of the bank.

In deciding whether to grant acknowledgement for transfer of shares where the aggregate holding of an individual or group is 5 per cent or more of the paid-up capital of the bank, the RBI will ensure that shareholders meet the fitness and propriety tests.

New norms

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• RBI will now reserve the right to reject applications for transfer of shares
• The new guidelines will cover acquisitions by domestic as well as foreign investors
• An independent advisory committee will be set up by the RBI to scan applications