RBI Committee Recommends Large Corporate-backed Private Banks; Increase in Bank Promoters' Stake to 26%
An internal working committee set up by the Reserve Bank of India (RBI) has recommended path-breaking reforms in the Indian banking sector, including participation of large Indian corporates and industrial houses as promoters of banks. The committee headed by PK Mohanty also suggested to increase in promoters' stake to 26% after a lock in period of five years.
 
"Large corporate or industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulations Act to deal with connected lending and exposures between the banks and other financial and non-financial group entities; and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision," the committee says in its recommendations. RBI has published the committee report on its website.
 
The PK Mohanty-headed working group was set up in June this year to examine and review the extant licensing and regulatory guidelines relating to ownership and control, and corporate structure of Indian private sector banks.
 
In its report, the working group has also batted for conversion of well-run large non-banking finance companies (NBFCs) with an asset size of Rs50,000 crore and above and including those which are owned by a corporate house, into banks, provided they have completed 10 years of operations and meet the due diligence criteria and satisfy other additional conditions.
 
With regard to the complex ownership structure that is in place for the banking sector in India, the working group has recommended a more liberal structure that allows promoters to hold higher shareholding in private banks.
 
It has suggested that while the initial five-year lock-in period for promoter shareholding in banks with a minimum holding of 40% of the paid-up voting equity share capital may continue, the cap on promoters' stake in the long run of 15 years may be raised to 26% from the current levels of 15%.
 
"This stipulation (26% shareholding) should be uniform for all types of promoters and would mean that promoters, who have already diluted their holdings to below 26%, will be permitted to raise it to 26% of the paid-up voting equity share capital of the bank. The promoter, if he/she so desires, can choose to bring down holding to even below 26%, any time after the lock-in period of five years," the committee has said in its report.
 
As per the current regulations, promoters of banks have to reduce their shareholding to 15% level.
 
The suggestion from the working group, to allow corporates and industrial houses become promoters of banks is in line with evolving thinking that a liberal ownership structure, backed by strong regulation, and may help expanding banking services in the country while getting the requisite investment from the corporate sector.
 
So far, RBI had remained reluctant to permit large corporate houses to promote banks as such a structure is seen to hamper free and fair operations of the banks while presenting a case for conflict of interest.
 
The NITI Aayog, on the other hand, had recently recommended to the government that long-term private capital should be allowed into the banking sector. It also suggested giving banking licences to select industrial houses.
 
To provide further flexibility to promoters of private banks, the committee has said that no intermediate sub-targets between 5 and 15 years may be required for reduction in shareholding.
 
"However, at the time of issue of licences, the promoters may submit a dilution schedule which may be examined and approved by the Reserve Bank. The progress in achieving these agreed milestones must be periodically reported by the banks and shall be monitored by the Reserve Bank," the committee said.
 
Here are the key recommendations made by the Mohanty committee...
 
The cap on promoters’ stake in the long run (15 years) may be raised from the current level of 15% to 26% of the paid-up voting equity share capital of the bank.
 
As regards non-promoter shareholding, a uniform cap of 15% of the paid-up voting equity share capital of the bank may be prescribed for all types of shareholders.
 
Large corporate/industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949 (to prevent connected lending and exposures between the banks and other financial and non-financial group entities); and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision.
 
Well-run large non-banking Finance Companies (NBFCs), with an asset size of Rs50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard.
 
For payments banks intending to convert to a small finance bank, track record of 3 years of experience as payments bank may be considered as sufficient.
 
Small finance banks and payments banks may be listed within ‘six years from the date of reaching net worth equivalent to prevalent entry capital requirement prescribed for universal banks’ or ‘10 years from the date of commencement of operations’, whichever is earlier.
 
The minimum initial capital requirement for licensing new banks should be enhanced from Rs500 crore to Rs1,000 crore for universal banks, and from Rs200 crore to Rs300 crore for small finance banks.
 
Non-operative financial holding company (NOFHC) should continue to be the preferred structure for all new licences to be issued for universal banks. However, it should be mandatory only in cases where the individual promoters / promoting entities/ converting entities have other group entities.
 
While banks licensed before 2013 may move to an NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status, all banks licensed before 2013 shall move to the NOFHC structure within five years from announcement of tax-neutrality.
 
Till the NOFHC structure is made feasible and operational, the concerns with regard to banks undertaking different activities through subsidiaries/ joint ventures/ associates need to be addressed through suitable regulations.
 
Banks currently under NOFHC structure may be allowed to exit from such a structure if they do not have other group entities in their fold.
 
RBI may take steps to ensure harmonisation and uniformity in different licensing guidelines, to the extent possible. Whenever new licensing guidelines are issued, if new rules are more relaxed, benefit should be given to existing banks, and if new rules are tougher, legacy banks should also conform to new tighter regulations, but a non-disruptive transition path may be provided to affected banks.
 
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    COMMENTS

    Ramesh Popat

    6 days ago

    a move to diminish some psu banks in due course
    though the process already initiated and some
    banks may go the pvt banks. hopefully not foreign
    banks will be allowed as in lvb.

    Kamal Garg

    6 days ago

    Current cap on voting rights is 10% or 15% of the paid up share capital of a bank for the both the categories. i.e. promoters and non-promoters ?

    Raymond fined for violations, SEBI finds governance failure
    An investigation by the Securities and Exchange Board of India (SEBI) has found that Raymond Ltd failed to take necessary approval for certain related party transactions in the matter of leasing or renting JK House in the city, among other violations of regulations.
     
    In its order, the capital markets regulator said that during the course of examination, it was observed that Raymond had allegedly failed to take necessary approval for certain related party transactions, thereby violating the provisions of Regulation 23(2) of LODR Regulations read with Clause 49(VII)(D) of the erstwhile equity listing agreement (amendments introduced vide SEBI circular dated April 17, 2014).
     
    It further found that the company had allegedly failed to disclose litigation filed by Akshaypat Singhania, Veenadevi Singhania and Anant Singhania in January 2017 along with brief details of litigation and expected financial implications, thereby violating LODR norms.
     
    The noticee had allegedly reclassified a promoter to public shareholder in June 2017 without following the due process of reclassification, thereby violating the provisions of Regulation 31A of the LODR Regulations, SEBI said.
     
    SEBI has alleged that Raymond failed to take necessary approvals for related party transactions. It has been observed that during FY 2006-2007 to FY 2016-2017, JK House, situated at 59A Bhulabhai Desai Road, Mumbai, was leased or rented to the promoter or director of Raymond through a tripartite agreement between Pashmina Holdings Ltd, the sub-lessor, and Raymond (lessor).
     
    The probe found that the sub-tenants were paying a paltry sum of Rs 7,500 per month as rent, whereas the expenditure incurred by the company for providing alternate accommodation to each of the sub-tenants was Rs 8 lakh per month.
     
    Further, in FY 2015-16, rent paid by sub-tenants remained the same but expenditure incurred by the company for providing alternate accommodation to each of the sub-tenants increased to Rs 12 lakh per month.
     
    "Thus, it is alleged that the company provided alternate accommodation to sub-tenants at approximately 99 per cent discount. Such disparity in rent paid by the sub-tenants and the company indicates that the intent of the tripartite agreement was to provide unfair economic benefit to the promoters at the cost of the company and its shareholders' funds," said the 72-page SEBI order.
     
    The company through a letter dated June 6, 2017 had submitted that "no approval of audit committee was required as payments with respect to alternate accommodation were made directly to the licensors, being unrelated third parties (under relevant leave license agreements), who were and are in (no) way related parties (as defined under Companies Act, 2013)".
     
    Further, as per listing obligations and disclosure norms, all related party transactions shall require prior approval of the audit committee.
     
    The SEBI order said that the tripartite agreement is a deemed related party transaction, thus any payment arising out of the tripartite agreement should also be considered as a related party transaction. Therefore, audit committee approval was required for payments made pursuant to the tripartite agreement from December 1, 2015 under LODR Regulations.
     
    The probe also found from the shareholding pattern for the quarter ended March 2017 that Ritwik A. Ruia held 2,000 shares of the company under the category 'Promoter and Promoter Group'.
     
    For the quarter ended June 2017, Ruia was not reflected as part of the 'Promoter and Promoter Group' of the company. However, vide letter dated September 7, 2017, the company in its reply has confirmed that "Ritwik Ruia continues to be part of Promoter and Promoter Group of the Company".
     
    It was also observed that the company has subsequently modified the holdings of the Promoter and Promoter Group for the quarter ended June 2017, by including Ruia as part of the promoters, holding 'nil' shares of the company.
     
    Thus, it is alleged that the company has not followed any procedures specified under Regulation 31A of Listing Regulations, 2015 for reclassification of promoter to public shareholders and accordingly filed an incorrect information with stock exchange, SEBI said.
     
    The order by K. Saravanan, Adjudicating Officer and Chief General Manager, SEBI, said: "I note that considering the stature of the Noticee I (Raymond), I expect the noticee to maintain a higher level of due diligence in its compliance with the provisions related to corporate governance.
     
    "However, the noticee has not only failed to do so, but also allowed the sub-lessees to unduly benefit at the loss of itself and its public shareholders. While not alleged in the SCN (show-cause notice), I clearly note that the noticee has failed to adhere to the best practices of corporate good governance."
     
    The regulator said that in the event of failure to pay the penalty of Rs 7 lakh within 45 days of the receipt of the order, recovery proceedings may be initiated under Section 28A of the SEBI Act for realisation of the said amount of penalty along with interest thereon, by attachment and sale of movable and immovable properties.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    Pay Rs62,600 Crore To Stay out of Jail: SEBI to Saharasri Subrata Roy
    The Securities and Exchange Board of India (SEBI) has filed a petition with the Supreme Court (SC) to direct Sahara conglomerate chief Subrata Roy and two of his companies—Sahara India Real Estate Corporation Ltd. (SIRECL) and Sahara Housing Investment Corporation Ltd. (SHICL) to deposit Rs62,600 crore (US$8.43 billion). The money, which is due to the company’s investors, needs to be paid immediately or else his parole should be cancelled, SEBI has argued. A few years ago, Sahara had called SEBI 'sarkari goonda' in an ad published in all leading newspapers.
     
    The market regulator petitioned the apex court that Sahara had failed to comply with 2012 and 2015 court orders to deposit the entire amount it collected from investors along with 15% annual interest. SEBI said the outstanding liability of the Sahara India Parivar group's two companies and the tycoon Subrata Roy has increased by 143% to Rs62,600 crore, including interest from the Rs25,700 crore he was ordered to pay in 2012. The market regulator says only a part of the principal amount had been deposited by Sahara. The company claims to have already deposited Rs22,000 crore with SEBI and claims that the market regulator is ‘mischievously’ adding interest on the entire amount to arrive at the sum now being demanded. SEBI has submitted in the court filing that the company has deposited only Rs15,000 crore. 
     
    In 2012, the apex court ruled that the Sahara group companies violated securities laws and illegally raised over Rs25,781 crore. Sahara contended that it raised funds in cash from millions of Indians who could not avail banking facilities. However, SEBI was unable to trace the investors and the bond scheme was ruled as illegal. Subrata Roy was sent to jail by the court in 2014 when he failed to attend a contempt of court hearing; he has been on bail since 2016. In 2013, SEBI initiated a Supreme Court-monitored recovery and refund for Rs24,000 crore collected by Sahara group from nearly three crore investors. However, it received less than 20,000 claims in over six years and about 66% of them were refunded a total amount of Rs106.10 crore. Sahara maintains that it has already returned the money of 95% of the investors.
     
    SEBI stated that non-compliance by Sahara over eight years had caused SEBI 'great inconvenience' and that those guilty of contempt should be taken into custody if they failed to deposit the amount. SEBI told the SC "Saharas have made no efforts whatsoever to comply with the orders and directions". It further added: "On the other hand contemnors' liability is increasing daily and contemnors are enjoying their release from custody.”
     
    The Sahara group has denied all wrongdoing and claimed in a statement “SEBI has 'mischievously' added 15% interest and it is a case of double payment as the companies have already paid back the investors.” 
     
    Sahara lawyers have been claiming that it was a case of 'double payment' as Sahara first made the repayment to investors and then an equivalent amount was deposited with SEBI. They further claim that a huge amount deposited by Sahara was lying unutilised and idle in banks, which was "not only hurting the interest of Sahara as a business organisation, but also impeding the economic growth of our country especially in these testing times of economic slowdown and global slump." 
     
    It has been a steep fall for the tycoon Subrata Roy, who once upon a time owned an airline, a formula one team, an IPL cricket team, plush hotels in London and New York, and financial companies, and was the main sponsor for the Indian cricket team.
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    COMMENTS

    tillan2k

    6 days ago

    saharashri converted jail also in to his business cum residence precincts not much difference as long as he is richer by thousands crores

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