RBI nod must for 5% or more investment in private banks through convertible bonds

Any individual or company acquiring 5% or more in a private bank through convertible bonds, in addition to a direct purchase of shares, will need to take prior approval from the Reserve Bank of India, the central bank said in a notification on Thursday.

While any entity acquiring shares equivalent to 5% or more was already required to take prior permission, the acquisition of convertible bonds, which on conversion would give the investor 5% or more equity in the bank, was a grey area.

The central bank has now clarified that even in the case of such convertible instruments, prior permission would be needed.

“A person intending to acquire shares or compulsorily convertible debentures/bonds or voting rights or convert optionally convertible debentures/bonds of 5% or more in a private sector bank, will have to apply to the Reserve Bank of India for obtaining its prior approval,” the notification said.

According to a senior banking industry consultant, the issue has come up since some investors are looking to invest in new banking entities, such as the recently licensed small finance banks, through convertible bonds.

In September, RBI had given 10 entities an in-principle nod to set up small finance banks. Most of the entities that got approval were existing microfinance firms, many of whom have large foreign investor holdings. However, the small finance bank guidelines require that foreign shareholding be brought down to 49% in the next 18 months.

In order to bring down foreign shareholding, some of the new banking entities are looking at bringing in domestic investors and some of them are looking to invest through convertibles (bonds), explained the consultant quoted above requesting anonymity.

In addition, the notification said all major shareholders will also now have to give an annual declaration to the bank in which they hold more than 5% stake, stating that they are “fit and proper” to do so. If the said bank believes that a shareholder does not meet the fit and proper criterion, the it will have to inform RBI, the notification added.

“Every person intending to have a major shareholding in any private sector bank would be required to apply to the Reserve Bank of India along with his declaration in the prescribed format,” the RBI said.

As per existing rules, RBI must deem any shareholder with more than 5% in a bank to be “fit and proper”. The new rules ensure the continuity of that criterion with the requirement for an annual declaration.

Shareholders already holding 5% with the central bank’s approval can increase their shareholding to 10% without another round of approvals, the central bank said. “However, the major shareholder will have to furnish the details of the source of funds for such incremental acquisition and obtain a ‘no objection’ from the concerned bank before such incremental acquisition,” RBI said.

Fresh approval is required if a shareholder is increasing stake beyond 10%. Both these conditions remain unchanged from existing rules.

Source : Livemint