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Clarifications to Queries on Guidelines for Licensing of New Banks in the Private Sector

Q.264. Promoters/ Promoter Groups should be financially sound and have a successful track record of running their business for at least 10 years. What are the yardsticks to measure ‘financially sound’ and ‘successful track record’? +

The assessment of the ‘financial soundness’ and ‘successful track record’ is a matter of judgment, and will have to be determined both on quantitative and qualitative basis; and no specific yardstick/criteria can be spelt out. In making this judgment, consideration will also have to be given to information obtained from the regulators, and enforcement and investigative agencies like Income Tax, CBI, Enforcement Directorate, etc. wherever considered appropriate. Further, the applications received will be subjected to a multi-layered evaluation process, including the High Level Advisory Committee (HLAC). [Paragraph 2(B) of the guidelines]

Q.59. Does 51 per cent holding by public in clause 2 (C)(ii)(b) mean a company has to be necessarily a listed entity or could be an entity where 51 per cent is held by other than Promoters? +

A company in which public holds 51 per cent need not necessarily be listed. For the purpose of these guidelines, ‘public shareholding’ implies that no person along with his relatives (as defined in Section 6 of the Companies Act, 1956) and entities in which he and / or his relatives hold not less than 50 per cent of the voting equity shares, by virtue of his shareholding or otherwise, exercises ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) over the company.[para 2 (C) (ii) of the guidelines]

Q.122. On holding structure, will the transfers of shares to NOFHC be tax exempt? +

Taxation will be as per the laws / rules of the tax authorities.

Q.422. What are the timelines for achieving the mandate of 25% branches in rural areas? How many branch licenses would be afforded at the time of inception? +

Clarifications on queries relating to regulatory forbearance and transition issues (360-422)

a) CRR and SLR requirements

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

No forbearance for maintenance of CRR and SLR will be granted by RBI, as these are statutory requirement for the banks.

b) Priority Sector Lending (PSL)

As per the current guidelines, the PSL targets (40 per cent of adjusted net bank credit) for the current year (April-March) are computed based on the adjusted net bank credit (ANBC) or credit equivalent of off-balance sheet exposures (OBSE) of 31st March of the preceding year (April-March), whichever is higher, and the achievements under the targets are reckoned on the position as on 31st of the succeeding year.

The new banks have to comply with the PSL requirements- targets and sub-targets. For the new banks converted from NBFCs and for new banks that would acquire the loan book from the Group entities (NBFCs), the PSL targets and sub-targets and achievements thereunder would be counted on the entire portfolio after the commencement of business as per the existing instructions. The newly set up banks will have time from the date of grant of in-principle approval to achieve the PSL target. The amount of time would depend upon the date of commencement of their banking business.

For example, if ‘in-principle’ approval is granted in February 2014, the bank has to commence banking business latest by August, 2015. In that case, the bank has to maintain PSL by March 31, 2017 on the ANBC base as of March 31, 2016 (the reference date). In such a scenario about 37 months would be available to the Promoters/Promoter Groups to achieve the PSL target. In an alternate scenario, if ‘in-principle’ approval for setting up of a bank is granted sometime in April, 2014, the bank has to commence banking business latest by October 2015. If the bank commences banking business by October 2015, the ANBC base for computation of PSL targets gets shifted to March 31, 2016 (the reference date), and the bank has to achieve the targets by March 31, 2017 ( i.e. 35 months from the date of issue of ‘in-principle’ approval). In a third scenario, if ‘in-principle’ approval is granted in June 2014, the bank has to commence banking business latest by December 2015. In that case, the bank has to maintain PSL by March 31, 2017 on the ANBC base as of March 31, 2016 (the reference date). In such a scenario about 33 months would be available to the Promoters/Promoter Groups to achieve the PSL target on the existing loan book carried over to the new banks.

c) Prudential/Exposure Norms

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

d) Branch Authorization Norms

The guidelines [para 2(L)] lay down the requirement very clearly.

The conversion of existing NBFC branches into bank branches would be automatically permitted for Tier 2 to 6 centres. The number of ultra small branches (USB) and number of branches in Tier 2 to 6 centres, would be as per the business plans of the Promoters/Promoter Group and requirement of the new bank. In the case of Tier 1 centres, conversion would only be allowed with the specific prior approval of the RBI and subject to the existing rules/ methodology applicable to domestic banks regarding opening of branches in these centres, and also subject to maintaining a minimum 25 per cent of the bank branches in unbanked rural centres (population up to 9,999 as per the latest census) required of all banks as specified in 2(K) of the guidelines. For this purpose, RBI would issue a letter of authorization under Section 23 of the Banking Regulation Act, 1949.

In cases of excess NBFC branches in Tier 1 centres, all such branches which would carry out banking business may, with prior RBI approval, be converted into bank branches. The excess over the entitled number of Tier 1 branches would be adjusted against the future entitlements of the new bank within a maximum period of 3 years from the date of commencement of business by the bank. The remaining Tier 1 branches will have to be closed down at the end of three years. The Promoters/Promoter Group have to provide a roadmap in this regard.

e) FDI in the new banks

As transfer of assets and liabilities would be a part of the re-organization of the business of the group entities to comply with the provision of our guidelines, more particularly to comply with the NOFHC structure, the new bank would be permitted to grandfather such liabilities till maturity, subject to the following conditions:

The ECB/FCCB liabilities for the purpose of transfer to the new bank should be frozen as on the date of in-principle approval for setting up a new bank;
The liabilities under ECB/FCCB that would be transferred to the new bank together with other forex borrowing should not exceed 50 per cent of its Tier I capital;
In case these borrowings exceed the limit of 50 per cent of Tier I capital due to grandfathering of ECB/FCCB, no further borrowing would be permitted till the aggregate borrowings are brought within the regulatory limit.
In order to protect the interests of the depositors of the new bank, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank.

g) Capital adequacy for the NOFHC

RBI would not provide any time window to comply with the capital requirement at the consolidated level. No regulatory forbearance would be granted in this regard.

h) Tax issues

The matter falls outside the purview of RBI. The tax laws as prescribed by the tax authorities would have to be adhered to.

i) Delay in grant of approvals

In genuine cases of delay in granting approval by regulators / Government, RBI may consider granting extension of time for operationalising the bank.

j) Reorganization of business and transfer of assets and liabilities to the new banks

The receipt of applications for the new bank licence will close on July 1, 2013. At the time of making applications, the Promoters/Promoter Groups will have to furnish a road map and methodologies they would adopt to comply with all the requirements of the corporate structure indicated in para 2 (C)(ii) and (iii) of the guidelines and realign the business between the entities to be held under the NOFHC (para 2(C)(iv) within a period of 18 months. After the ‘in-principle approval’ is accorded by RBI for setting up of a bank, the proposed bank has to start operations within this period. The actual setting up of NOFHC and the bank, re-organization of the Promoter Group entities to bring the regulated financial services entities under the NOFHC as well as realignment of business among the entities under the NOFHC have to be completed during this period. The Promoters/Promoter Group would be issued the banking licence under Section 22 of the Banking Regulation Act, 1949 for carrying out of banking business by the Reserve Bank of India upon compliance with the terms and conditions stipulated in the ‘in-principle approval’ for setting up of a bank and on completion of the process as mentioned above within the stipulated time frame of 18 months from the date of in-principle approval.

f) Transfer of ECB and term borrowings/bonds from other entities to banks

Q.281. Most banks and NBFCs have a staffing subsidiary. The employees in this company perform transactional activities for the bank / NBFC. Since such staffing subsidiaries are integral in nature to the banking business we presume that the banks/NOFHC would be continued to be allowed to hold such subsidiaries. Please confirm. +

A. The NOFHC will be required to hold only regulated financial services entities. The bank will be permitted to have a subsidiary or joint venture or associate, only where it is legally required or specifically permitted by RBI [Paragraph 2(C)(vi) of the guidelines]. Banks however, are not permitted to have staffing subsidiaries.

Q.343. As per the Banking Laws (Amendment) Act 2012 passed by the Parliament, RBI has been empowered to increase ceiling of voting rights from 10% to 26%. In view of the legislation change, the 10% ceiling for new banks may be enhanced to 26%. +

It is clarified that as per the extant policy no single entity or group of related entities, other than the NOFHC, shall have shareholding or control, directly or indirectly, in excess of 10 per cent of the paid-up voting equity capital of the bank. In the context of the amendments to the Banking Regulation Act, 1949, the issue of raising the voting rights from 10 per cent to 26 per cent in phases will be considered as and when necessary and will be notified separately. [Paragraph 2 (K) (iii) of the guidelines]

Q.348. Will clauses applicable to Housing Finance Company (governed by NHB) be same as applicable for NBFC when applying for licence? +

A. Yes. The Promoters/Promoter Group of a housing finance company(HFC) regulated by NHB desiring to promote a bank or convert the HFC into a bank will have to comply with the additional conditions stipulated at paragraph 2(L) of the guidelines.

Q.286. The FI is presently extending direct finance to eligible entities (which are in the priority sector category) as permitted by the statute, to supplement efforts of the banks by introducing new and innovating products for adoption by other lenders in due course. In addition, the FI also extends equity/quasi equity assistance to the eligible entities as permitted by the statute and supported by the Government through special dispensation, also approved by the regulator. These being permitted activities under statute, can the same be continued by the FI? +

If the FI is a private sector entity, then it has to comply with the corporate structure prescribed at paragraph 2(C)(ii) of the guidelines. If the FI is a public sector entity, provisions of the paragraph 2(C)(ii) of the guidelines will not be applicable, though the entity has to set up a NOFHC for holding the bank. In either case, the activities that can be conducted by a bank have to be transferred to the bank and the regulated financial services activities which a bank cannot undertake have to be transferred to a separate subsidiary or subsidiaries under the NOFHC.[para 2 (C) (iii) of the guidelines]

Q.352. Can RBI provide a range/estimate on the minimum and maximum number of licenses that it is planning to issue? +

A. There is no predetermined number. RBI will be very selective while considering the applications for new bank licences. It will look for very high quality applications. It may, therefore, not be possible to issue licence to all the applicants meeting the eligibility criteria. [Paragraph 4(ii) of the guidelines]

Q.358. The term "effective control" may please be clarified. +

The term ‘effective control’ means any arrangement whether in the form of shareholding or agreement or otherwise, which enables exercise of control.

Q.292. Post setting up the bank, if the promoters wish to enter into new financial businesses such as insurance, asset management, do they set up a new subsidiary under the NOFHC or under the bank? +

A. Post setting up the bank, if the promoters wish to enter into new financial business such as insurance, asset management, they have to set up new subsidiaries under the NOFHC; not under the bank. This would not preclude the bank from setting up a subsidiary, if there is a legal requirement or requirement of the concerned financial sector regulator, subject to RBI approval. However, the NOFHC shall not be permitted to set up any new financial services entity for at least three years from the date of commencement of its business. [para 2(C)(vi) of the guidelines]

Q.359. Request you to kindly elaborate the details required to be submitted to RBI for verification of source of funds. +

A. The applicants should furnish detailed information about the persons/entities, who would subscribe to the voting equity capital (shareholding pattern) of the proposed NOFHC and the bank, including foreign equity participation in the proposed bank. Applications should be supported by detailed information on the background of Promoters, their expertise, track record of business and financial worth, Memorandum and Articles of Association and latest financial statements of the Promoter entities for the past ten years, income tax returns for last three years, details of Promoters’ direct and indirect interests in various entities/companies/industries, details of credit/other facilities availed by the Promoters/ Promoter entity(ies)/ other group entity(ies) alongwith details of the bank’s/ financial institution’s branches where such facilities were / are availed. The Promoters may furnish any other relevant information and documents supporting the applications. Further, the RBI may call for any other additional information, as may be required, in due course. [Paragraph 2 to 4 of Annex II to the guidelines].

Q.296. If an existing NBFC is converted into a bank or an existing business is transferred to the bank to be carried out by it “departmentally”, then will the same be permitted to be valued at fair value for the purpose of issuance of voting capital? +

A. The assets and liabilities for the purpose of transfer from one entity to another under restructuring of the existing business may be valued as per the relevant provisions of the applicable laws.

Q.300. Is the percentage shareholding to be computed on fully diluted basis (taking into account any issue of convertible instruments and assuming complete conversion)? +

For the purpose of ensuring that minimum 51 per cent voting equity shareholding in the NOFHC are held by the companies in which public hold not less than 51 per cent, any convertible instruments held by the promoters, whether compulsorily or optionally convertible into voting equity shares, will be considered as voting equity shares.

Q.368. NBFC applicants for a bank license that have large existing borrowings in the form of Bonds/ ECBs may not be compliant with extant banking guidelines. If such an NBFC were allowed to convert into a bank or transfer its assets and liabilities into a new Bank, could the legacy borrowings of the NBFC be grandfathered till maturity in the Bank? Please clarify. +

Clarifications on queries relating to regulatory forbearance and transition issues (360-422)

a) CRR and SLR requirements

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

No forbearance for maintenance of CRR and SLR will be granted by RBI, as these are statutory requirement for the banks.

b) Priority Sector Lending (PSL)

c) Prudential/Exposure Norms

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

d) Branch Authorization Norms

The guidelines [para 2(L)] lay down the requirement very clearly.

e) FDI in the new banks

The ECB/FCCB liabilities for the purpose of transfer to the new bank should be frozen as on the date of in-principle approval for setting up a new bank;
The liabilities under ECB/FCCB that would be transferred to the new bank together with other forex borrowing should not exceed 50 per cent of its Tier I capital;
In case these borrowings exceed the limit of 50 per cent of Tier I capital due to grandfathering of ECB/FCCB, no further borrowing would be permitted till the aggregate borrowings are brought within the regulatory limit.
In order to protect the interests of the depositors of the new bank, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank.

g) Capital adequacy for the NOFHC

RBI would not provide any time window to comply with the capital requirement at the consolidated level. No regulatory forbearance would be granted in this regard.

h) Tax issues

The matter falls outside the purview of RBI. The tax laws as prescribed by the tax authorities would have to be adhered to.

i) Delay in grant of approvals

In genuine cases of delay in granting approval by regulators / Government, RBI may consider granting extension of time for operationalising the bank.

j) Reorganization of business and transfer of assets and liabilities to the new banks

f) Transfer of ECB and term borrowings/bonds from other entities to banks

Q.304. If the voting equity shares of the bank are issued at a premium, can the ` 500 crore threshold be achieved via Networth instead of paid up capital? +

A. No. The initial minimum capitalization of the bank should be paid-up voting equity capital of ` 5 billion.

Q.376. Would financial services entities held by the NOFHC get some time to comply with the capital adequacy norms, on a standalone basis? +

Clarifications on queries relating to regulatory forbearance and transition issues (360-422)

a) CRR and SLR requirements

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

No forbearance for maintenance of CRR and SLR will be granted by RBI, as these are statutory requirement for the banks.

b) Priority Sector Lending (PSL)

c) Prudential/Exposure Norms

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

d) Branch Authorization Norms

The guidelines [para 2(L)] lay down the requirement very clearly.

e) FDI in the new banks

The ECB/FCCB liabilities for the purpose of transfer to the new bank should be frozen as on the date of in-principle approval for setting up a new bank;
The liabilities under ECB/FCCB that would be transferred to the new bank together with other forex borrowing should not exceed 50 per cent of its Tier I capital;
In case these borrowings exceed the limit of 50 per cent of Tier I capital due to grandfathering of ECB/FCCB, no further borrowing would be permitted till the aggregate borrowings are brought within the regulatory limit.
In order to protect the interests of the depositors of the new bank, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank.

g) Capital adequacy for the NOFHC

RBI would not provide any time window to comply with the capital requirement at the consolidated level. No regulatory forbearance would be granted in this regard.

h) Tax issues

The matter falls outside the purview of RBI. The tax laws as prescribed by the tax authorities would have to be adhered to.

i) Delay in grant of approvals

In genuine cases of delay in granting approval by regulators / Government, RBI may consider granting extension of time for operationalising the bank.

j) Reorganization of business and transfer of assets and liabilities to the new banks

f) Transfer of ECB and term borrowings/bonds from other entities to banks

Q.310. In the context of listing, we understand that the capital market regulator has taken a stance that non-voting capital is not permissible but capital with differential voting right is permissible. Given this background, how will RBI’s requirement be met in this regard? +

Non-voting shares are outside the purview of the guidelines, but subject to relevant laws and SEBI regulations wherever applicable.

Q.381. Given the challenges of achieving financial inclusion, such as higher risk appetite, capital requirements etc, is there going to be any forbearance from RBI towards the new banks, to meet their financial inclusion requirements, (e.g technological support, longer timeframe for meeting 25 per cent branch requirement. +

Clarifications on queries relating to regulatory forbearance and transition issues (360-422)

a) CRR and SLR requirements

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

No forbearance for maintenance of CRR and SLR will be granted by RBI, as these are statutory requirement for the banks.

b) Priority Sector Lending (PSL)

c) Prudential/Exposure Norms

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

d) Branch Authorization Norms

The guidelines [para 2(L)] lay down the requirement very clearly.

e) FDI in the new banks

The ECB/FCCB liabilities for the purpose of transfer to the new bank should be frozen as on the date of in-principle approval for setting up a new bank;
The liabilities under ECB/FCCB that would be transferred to the new bank together with other forex borrowing should not exceed 50 per cent of its Tier I capital;
In case these borrowings exceed the limit of 50 per cent of Tier I capital due to grandfathering of ECB/FCCB, no further borrowing would be permitted till the aggregate borrowings are brought within the regulatory limit.
In order to protect the interests of the depositors of the new bank, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank.

g) Capital adequacy for the NOFHC

RBI would not provide any time window to comply with the capital requirement at the consolidated level. No regulatory forbearance would be granted in this regard.

h) Tax issues

The matter falls outside the purview of RBI. The tax laws as prescribed by the tax authorities would have to be adhered to.

i) Delay in grant of approvals

In genuine cases of delay in granting approval by regulators / Government, RBI may consider granting extension of time for operationalising the bank.

j) Reorganization of business and transfer of assets and liabilities to the new banks

f) Transfer of ECB and term borrowings/bonds from other entities to banks

Q.316. When the direction for NOFHC to be issued by RBI is expected? +

The NOFHC guidelines will be issued shortly.

Q.320. Para 2 (F) limits the aggregate non-resident holding at 49%. We believe that only direct shareholding will be taken into consideration for computing the foreign shareholding. Please confirm. +

A. The foreign shareholding in the bank will be calculated as per the Department of Industrial Policy and Promotion (DIPP) Press Notes 2, 3 and 4 of 2009 / FEMA Regulations as amended from time to time. Therefore, the indirect foreign shareholding will be calculated as per the methodology enumerated in DIPP Press Notes 2, 3 and 4 of 2009 / FEMA Regulations as amended from time to time. [Paragraph 2(F) of the guidelines]. As the Promoter Group companies that would set up the NOFHC would be ‘owned and controlled by residents’, their downstream investment in the NOFHC and further in the bank will not be counted towards foreign indirect investment.

Q.384. A listed company permitted to promote a bank may not find it possible to complete all restructuring required before promoting a bank, including permissions from regulators/government authorities, within one year of receipt of in-principle approval. Therefore, would RBI consider granting extension of time on a case-to-case basis for operationalising the bank? +

Clarifications on queries relating to regulatory forbearance and transition issues (360-422)

a) CRR and SLR requirements

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

No forbearance for maintenance of CRR and SLR will be granted by RBI, as these are statutory requirement for the banks.

b) Priority Sector Lending (PSL)

c) Prudential/Exposure Norms

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

d) Branch Authorization Norms

The guidelines [para 2(L)] lay down the requirement very clearly.

e) FDI in the new banks

The ECB/FCCB liabilities for the purpose of transfer to the new bank should be frozen as on the date of in-principle approval for setting up a new bank;
The liabilities under ECB/FCCB that would be transferred to the new bank together with other forex borrowing should not exceed 50 per cent of its Tier I capital;
In case these borrowings exceed the limit of 50 per cent of Tier I capital due to grandfathering of ECB/FCCB, no further borrowing would be permitted till the aggregate borrowings are brought within the regulatory limit.
In order to protect the interests of the depositors of the new bank, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank.

g) Capital adequacy for the NOFHC

RBI would not provide any time window to comply with the capital requirement at the consolidated level. No regulatory forbearance would be granted in this regard.

h) Tax issues

The matter falls outside the purview of RBI. The tax laws as prescribed by the tax authorities would have to be adhered to.

i) Delay in grant of approvals

In genuine cases of delay in granting approval by regulators / Government, RBI may consider granting extension of time for operationalising the bank.

j) Reorganization of business and transfer of assets and liabilities to the new banks

f) Transfer of ECB and term borrowings/bonds from other entities to banks

Q.362. Process of restructuring the existing financial entities in Promoter Group to comply with guidelines involves substantial unintended costs including by way of stamp duty, income tax etc (e.g MAT implication for NOFHC as NOFHC would be non-operating entity having no offset available under MAT), Hence, appropriate changes to various legislations would be required to avoid this burden. We request that appropriate transition period is provided till the relevant legislations are so amended. +

Clarifications on queries relating to regulatory forbearance and transition issues (360-422)

a) CRR and SLR requirements

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

No forbearance for maintenance of CRR and SLR will be granted by RBI, as these are statutory requirement for the banks.

b) Priority Sector Lending (PSL)

c) Prudential/Exposure Norms

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

d) Branch Authorization Norms

The guidelines [para 2(L)] lay down the requirement very clearly.

e) FDI in the new banks

The ECB/FCCB liabilities for the purpose of transfer to the new bank should be frozen as on the date of in-principle approval for setting up a new bank;
The liabilities under ECB/FCCB that would be transferred to the new bank together with other forex borrowing should not exceed 50 per cent of its Tier I capital;
In case these borrowings exceed the limit of 50 per cent of Tier I capital due to grandfathering of ECB/FCCB, no further borrowing would be permitted till the aggregate borrowings are brought within the regulatory limit.
In order to protect the interests of the depositors of the new bank, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank.

g) Capital adequacy for the NOFHC

RBI would not provide any time window to comply with the capital requirement at the consolidated level. No regulatory forbearance would be granted in this regard.

h) Tax issues

The matter falls outside the purview of RBI. The tax laws as prescribed by the tax authorities would have to be adhered to.

i) Delay in grant of approvals

In genuine cases of delay in granting approval by regulators / Government, RBI may consider granting extension of time for operationalising the bank.

j) Reorganization of business and transfer of assets and liabilities to the new banks

f) Transfer of ECB and term borrowings/bonds from other entities to banks

Q.390. Where the Promoter has to convert an existing NBFC into the bank, would the RBI consider a transition period, during which such regulations would be waived on a case by case basis so that the existing entity is afforded an easy transition without impacting the stakeholders and for ease of operations? +

Clarifications on queries relating to regulatory forbearance and transition issues (360-422)

a) CRR and SLR requirements

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

No forbearance for maintenance of CRR and SLR will be granted by RBI, as these are statutory requirement for the banks.

b) Priority Sector Lending (PSL)

c) Prudential/Exposure Norms

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

d) Branch Authorization Norms

The guidelines [para 2(L)] lay down the requirement very clearly.

e) FDI in the new banks

The ECB/FCCB liabilities for the purpose of transfer to the new bank should be frozen as on the date of in-principle approval for setting up a new bank;
The liabilities under ECB/FCCB that would be transferred to the new bank together with other forex borrowing should not exceed 50 per cent of its Tier I capital;
In case these borrowings exceed the limit of 50 per cent of Tier I capital due to grandfathering of ECB/FCCB, no further borrowing would be permitted till the aggregate borrowings are brought within the regulatory limit.
In order to protect the interests of the depositors of the new bank, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank.

g) Capital adequacy for the NOFHC

RBI would not provide any time window to comply with the capital requirement at the consolidated level. No regulatory forbearance would be granted in this regard.

h) Tax issues

The matter falls outside the purview of RBI. The tax laws as prescribed by the tax authorities would have to be adhered to.

i) Delay in grant of approvals

In genuine cases of delay in granting approval by regulators / Government, RBI may consider granting extension of time for operationalising the bank.

j) Reorganization of business and transfer of assets and liabilities to the new banks

f) Transfer of ECB and term borrowings/bonds from other entities to banks

Q.407. The bank shall open at least 25 per cent of its branches in unbanked rural centres (population up to 9,999 as per the latest census) to avoid over concentration of their branches in metropolitan areas and cities which are already having adequate banking presence. What are the timelines for achieving the mandate of 25 per cent branches in rural areas? How many branch licences would be afforded at the time of inception? +

Clarifications on queries relating to regulatory forbearance and transition issues (360-422)

a) CRR and SLR requirements

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

No forbearance for maintenance of CRR and SLR will be granted by RBI, as these are statutory requirement for the banks.

b) Priority Sector Lending (PSL)

c) Prudential/Exposure Norms

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

d) Branch Authorization Norms

The guidelines [para 2(L)] lay down the requirement very clearly.

e) FDI in the new banks

The ECB/FCCB liabilities for the purpose of transfer to the new bank should be frozen as on the date of in-principle approval for setting up a new bank;
The liabilities under ECB/FCCB that would be transferred to the new bank together with other forex borrowing should not exceed 50 per cent of its Tier I capital;
In case these borrowings exceed the limit of 50 per cent of Tier I capital due to grandfathering of ECB/FCCB, no further borrowing would be permitted till the aggregate borrowings are brought within the regulatory limit.
In order to protect the interests of the depositors of the new bank, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank.

g) Capital adequacy for the NOFHC

RBI would not provide any time window to comply with the capital requirement at the consolidated level. No regulatory forbearance would be granted in this regard.

h) Tax issues

The matter falls outside the purview of RBI. The tax laws as prescribed by the tax authorities would have to be adhered to.

i) Delay in grant of approvals

In genuine cases of delay in granting approval by regulators / Government, RBI may consider granting extension of time for operationalising the bank.

j) Reorganization of business and transfer of assets and liabilities to the new banks

f) Transfer of ECB and term borrowings/bonds from other entities to banks

Q.392. If an NBFC converts into a bank, whether there would be any transition period given to them to comply with requirements of SLR, Priority sector and Exposure norms? +

Clarifications on queries relating to regulatory forbearance and transition issues (360-422)

a) CRR and SLR requirements

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

No forbearance for maintenance of CRR and SLR will be granted by RBI, as these are statutory requirement for the banks.

b) Priority Sector Lending (PSL)

c) Prudential/Exposure Norms

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

d) Branch Authorization Norms

The guidelines [para 2(L)] lay down the requirement very clearly.

e) FDI in the new banks

The ECB/FCCB liabilities for the purpose of transfer to the new bank should be frozen as on the date of in-principle approval for setting up a new bank;
The liabilities under ECB/FCCB that would be transferred to the new bank together with other forex borrowing should not exceed 50 per cent of its Tier I capital;
In case these borrowings exceed the limit of 50 per cent of Tier I capital due to grandfathering of ECB/FCCB, no further borrowing would be permitted till the aggregate borrowings are brought within the regulatory limit.
In order to protect the interests of the depositors of the new bank, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank.

g) Capital adequacy for the NOFHC

RBI would not provide any time window to comply with the capital requirement at the consolidated level. No regulatory forbearance would be granted in this regard.

h) Tax issues

The matter falls outside the purview of RBI. The tax laws as prescribed by the tax authorities would have to be adhered to.

i) Delay in grant of approvals

In genuine cases of delay in granting approval by regulators / Government, RBI may consider granting extension of time for operationalising the bank.

j) Reorganization of business and transfer of assets and liabilities to the new banks

f) Transfer of ECB and term borrowings/bonds from other entities to banks

Q.398. There are certain activities which have prudential limitations to a bank on a standalone basis but not on an NBFC. Will such an activity, loans against shares, be allowed to be carried through an existing NBFC under the NOFHC, subject to meeting the consolidated CME of 40 per cent of net worth? +

Clarifications on queries relating to regulatory forbearance and transition issues (360-422)

a) CRR and SLR requirements

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

No forbearance for maintenance of CRR and SLR will be granted by RBI, as these are statutory requirement for the banks.

b) Priority Sector Lending (PSL)

c) Prudential/Exposure Norms

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

d) Branch Authorization Norms

The guidelines [para 2(L)] lay down the requirement very clearly.

e) FDI in the new banks

The ECB/FCCB liabilities for the purpose of transfer to the new bank should be frozen as on the date of in-principle approval for setting up a new bank;
The liabilities under ECB/FCCB that would be transferred to the new bank together with other forex borrowing should not exceed 50 per cent of its Tier I capital;
In case these borrowings exceed the limit of 50 per cent of Tier I capital due to grandfathering of ECB/FCCB, no further borrowing would be permitted till the aggregate borrowings are brought within the regulatory limit.
In order to protect the interests of the depositors of the new bank, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank.

g) Capital adequacy for the NOFHC

RBI would not provide any time window to comply with the capital requirement at the consolidated level. No regulatory forbearance would be granted in this regard.

h) Tax issues

The matter falls outside the purview of RBI. The tax laws as prescribed by the tax authorities would have to be adhered to.

i) Delay in grant of approvals

In genuine cases of delay in granting approval by regulators / Government, RBI may consider granting extension of time for operationalising the bank.

j) Reorganization of business and transfer of assets and liabilities to the new banks

f) Transfer of ECB and term borrowings/bonds from other entities to banks

Q.121. Does public holding mean (i) Listing is necessary? (ii) Absence of any other large shareholders? (e.g. 2-3 others owning 5-10 percent each) +

A. Public shareholding does not necessarily imply that the company is listed. What is required is that at least 51 percent of the shareholding is widely dispersed among shareholders other than the Promoters and none of such shareholder along with his relatives (as defined in Section 6 of the Companies Act, 1956) and entities in which he and / or his relatives hold not less than 50 percent of voting equity shares exercise ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) by virtue of his shareholding or otherwise.

Q.14. Does this condition (51 per cent shareholdings by a listed company) only apply for entities / groups in the private sector that are ‘owned and controlled by residents’? +

A. Yes. The condition (not less than 51 per cent of the total voting equity shares of the NOFHC to be held by the companies in the Promoter Group, which have not less than 51 percent public shareholding) is applicable to the companies in the Promoter Groups in the private sector that are ‘owned and controlled by residents’[as defined in Department of Industrial Policy and Promotion(DIPP) Press Note No.2, 3 and 4 of 2009/FEMA Regulations as amended from time to time].However, such a company need not necessarily be listed.[para 2 (A) and (C) (ii) of the guidelines]

Q.326. Can the NOFHC and bank Board consist of eligible individuals who are non resident Indians or foreign nationals? +

A. There is no bar on having eligible individuals who are non resident Indians or foreign nationals on the Boards of the NOFHC and the bank. [Paragraph 2 (G) (vii) of the guidelines]

Q.408. RBI will consider allowing the bank to take over and convert the existing NBFC branches into bank branches only in the Tier 2 to 6 centres. Existing branches of the NBFC in Tier 1 centres may be allowed to convert into bank branches only with the prior approval of RBI. For the branches of NBFC converted into bank, in Tier 1 cities which don’t get approval, can they continue to operate and sell non-banking financial services products such as insurance, asset management etc? +

Clarifications on queries relating to regulatory forbearance and transition issues (360-422)

a) CRR and SLR requirements

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

No forbearance for maintenance of CRR and SLR will be granted by RBI, as these are statutory requirement for the banks.

b) Priority Sector Lending (PSL)

c) Prudential/Exposure Norms

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

d) Branch Authorization Norms

The guidelines [para 2(L)] lay down the requirement very clearly.

e) FDI in the new banks

The ECB/FCCB liabilities for the purpose of transfer to the new bank should be frozen as on the date of in-principle approval for setting up a new bank;
The liabilities under ECB/FCCB that would be transferred to the new bank together with other forex borrowing should not exceed 50 per cent of its Tier I capital;
In case these borrowings exceed the limit of 50 per cent of Tier I capital due to grandfathering of ECB/FCCB, no further borrowing would be permitted till the aggregate borrowings are brought within the regulatory limit.
In order to protect the interests of the depositors of the new bank, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank.

g) Capital adequacy for the NOFHC

RBI would not provide any time window to comply with the capital requirement at the consolidated level. No regulatory forbearance would be granted in this regard.

h) Tax issues

The matter falls outside the purview of RBI. The tax laws as prescribed by the tax authorities would have to be adhered to.

i) Delay in grant of approvals

In genuine cases of delay in granting approval by regulators / Government, RBI may consider granting extension of time for operationalising the bank.

j) Reorganization of business and transfer of assets and liabilities to the new banks

f) Transfer of ECB and term borrowings/bonds from other entities to banks

Q.65. It is currently unclear as to whether any unregulated financial services business e.g. investment advisory services (not covered within the scope of the extant SEBI guidelines) are permitted to be undertaken and whether they need to fall within the NOFHC umbrella or outside the same and directly held by the Promoter Group entities, or would the Promoter Group mandatorily be required to divest its holdings? +

A. The bank as well as the other financial services entities in which the Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) and that are regulated by RBI or other financial sector regulators will have to be necessarily held under the NOFHC. If any financial service is not regulated by RBI or any of the other financial sector regulators, any entity in the Promoter Group providing such service, cannot come under the NOFHC. The Promoter Group will not be required to divest its holdings in such entities. [para 2 (C) (iii) of the guidelines]

Q.15. Since the Promoters / Promoter Groups with an existing NBFC will have to set up NOFHC, whether such NOFHC will also have to comply with 51 per cent public holding condition? +

A. The NOFHC has to be wholly owned by the Promoters/Promoter Group. However, at least 51 per cent of the voting equity shares of the NOFHC have to be held by companies in the Promoter Group in which public hold not less than 51 per cent of the voting equity of those companies.[para 2 (C) (ii) (b) of the guidelines]

Q.332. Currently, various sectoral regulators have a simple formula for capital requirement. Is there a distinct formula / mechanism followed by RBI for computation of risk weighted assets in financial services entities regulated by other regulators? +

A. NOFHC should maintain capital adequacy and other requirements on a consolidated basis based on the prudential guidelines on Capital Adequacy and Market Discipline – New Capital Adequacy Framework (NCAF) issued under Basel II framework and Guidelines on Implementation of Basel III Capital Regulations in India [Paragraph 2(H)(iii) (a) of the guidelines].

Q.112. We believe that Infrastructure Financing should be considered as a specialized activity to be conducted through a separate financial entity outside the bank but under the NOFHC. RBI has frequently expressed its concerns on the increasing share of bank lending to the Infrastructure sector, given its long term liability profile and higher weighted risks. Therefore, it is our submission that it would be better to allow Infrastructure Financing to be carried out in an IFC format, with its more stringent and appropriate regulatory compliances. +

The general principle in this regard is that para-banking activities, such as credit cards, primary dealer, leasing, hire purchase, factoring etc., can be conducted either inside the bank departmentally or outside the bank through subsidiary/ joint venture /associate. Activities such as insurance, stock broking, asset reconstruction, venture capital funding and infrastructure financing through Infrastructure Development Fund (IDF) sponsored by the bank can be undertaken only outside the bank. Lending activities must be conducted from inside the bank. However, other regulated financial services entities (excluding entities engaged in credit rating and commodity broking) in which the Promoters/Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) have to be held under the NOFHC and not under the bank unless it is legally required or specifically permitted by RBI. [para 2 (C) (iv) of the guidelines]

Q.23. In the application, the promoter / promoter group would provide a clear roadmap for formation of NOFHC and letters of approval of key stakeholders. Do we understand that the NOFHC could then be formed after the grant of in-principle approval, as a condition precedent to getting a certificate of commencement of business –unless specifically instructed otherwise? +

At the time of making applications, the Promoters/Promoter Group will have to furnish a road map and methodologies they would adopt to comply with all the requirements of the corporate structure indicated in para 2 (C)(ii) and (iii) of the guidelines and realign the business between the entities to be held under the NOFHC [para 2(C)(iv) of the guidelines] within a period of 18 months. After the ‘in-principle approval’ is accorded by RBI for setting up of the bank, the actual setting up of NOFHC and the bank, re-organization of the Promoter Group entities to bring the regulated financial services entities under the NOFHC as well as realignment of business among the entities under the NOFHC have to be completed within a period of 18 months from the date of in-principle approval or before commencement of banking business, whichever is earlier.

Q.415. (a) Can the existing branches of NBFC’s in North Eastern states and Sikkim be converted directly into bank branch as there are no metropolitan areas in these regions? (b) Does the RBI have an upper limit on the number of branch licences it will be willing to issue to an existing NBFC, which is becoming a bank. An existing NBFC may have a large number of branches in rural and unbanked areas, which It would want to convert into bank branches, at the start of operations, either as full fledged branch or as ultra small branch – whether there is any upper limit in the number of USB, which can be opened at the time of conversion to a Bank. (c) For the branches in Tier 1 which don’t get approved, can they continue to operate and sell non-banking financial services products such as insurance, asset management etc. +

Clarifications on queries relating to regulatory forbearance and transition issues (360-422)

a) CRR and SLR requirements

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

No forbearance for maintenance of CRR and SLR will be granted by RBI, as these are statutory requirement for the banks.

b) Priority Sector Lending (PSL)

c) Prudential/Exposure Norms

No regulatory forbearance would be granted to the new banks in respect of prudential/ exposure norms.

d) Branch Authorization Norms

The guidelines [para 2(L)] lay down the requirement very clearly.

e) FDI in the new banks

The ECB/FCCB liabilities for the purpose of transfer to the new bank should be frozen as on the date of in-principle approval for setting up a new bank;
The liabilities under ECB/FCCB that would be transferred to the new bank together with other forex borrowing should not exceed 50 per cent of its Tier I capital;
In case these borrowings exceed the limit of 50 per cent of Tier I capital due to grandfathering of ECB/FCCB, no further borrowing would be permitted till the aggregate borrowings are brought within the regulatory limit.
In order to protect the interests of the depositors of the new bank, while allowing grandfathering of term borrowings and other secured liabilities taken over from NBFCs, RBI will impose additional capital charge on the new bank, where it would allow creation/ continuation of floating charges on the assets of the new bank.

g) Capital adequacy for the NOFHC

RBI would not provide any time window to comply with the capital requirement at the consolidated level. No regulatory forbearance would be granted in this regard.

h) Tax issues

The matter falls outside the purview of RBI. The tax laws as prescribed by the tax authorities would have to be adhered to.

i) Delay in grant of approvals

In genuine cases of delay in granting approval by regulators / Government, RBI may consider granting extension of time for operationalising the bank.

j) Reorganization of business and transfer of assets and liabilities to the new banks

f) Transfer of ECB and term borrowings/bonds from other entities to banks

Q.33. Where there are no promoters of an existing financial services company, can that financial services company act as a promoter? +

All regulated financial services entities of the Promoters/Promoter Group in which the Promoters/Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) have to be held by a NOFHC. Regarding financial groups setting up banks, the existing NBFC must transfer all regulated financial services business to a new company and shares in that new company must be held by the NOFHC. Conversion of the NBFC into a non operating holding company would enable meeting the requirement of para 2(C)(iii) of the guidelines provided the listed non operating holding company meets the requirement of para(C)(ii)(b) of the guidelines i.e. the public hold not less than 51 percent voting equity shares in the company.

Q.277. Would shareholding in any Promoter Group entity holding shares in NOFHC be treated as ‘indirect’ shareholding in the bank? +

No. Shareholding in Promoter Group entity holding shares in NOFHC will not be treated as ‘indirect’ shareholding in the bank. It may be mentioned here that the Promoters / Promoter Group entities / individuals associated with Promoter Group shall hold equity investment in the bank and other financial entities held by the NOFHC, only through the NOFHC [Paragraph 2 (C) (viii) of the guidelines]

Q.9. With reference to condition 2(C)(ii)(b), whether the companies which form part of promoters group where public holds not less than 51 per cent of voting capital, have to be listed companies at the time of application for banking license? Are these companies required to continue to remain listed? +

The requirement is that the companies in the Promoter Group in which the public hold not less than 51 per cent of the voting equity shares shall hold not less than 51 per cent of the total voting equity shares of the NOFHC.[ para 2 (C) (ii) (b) of the guidelines] A company in which public holds 51 per cent need not necessarily be listed. For the purpose of these guidelines, ‘public shareholding’ implies that no person along with his relatives (as defined in Section 6 of the Companies Act, 1956) and entities in which he and / or his relatives hold not less than 50 per cent of the voting equity shares, by virtue of his shareholding or otherwise, exercises ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) over the company.

Q.50. What could be some of the indicative criteria that the RBI would consider in determining if an entity/ group has/have “sound credentials and integrity”? +

A. The requirement that Promoters / Promoter Group should have a past record of sound credentials and integrity as a part of ‘Fit and Proper’ criteria is a matter of overall judgment and no indicative criteria can be spelt out. [para 2 (B) of the guidelines]

Q.51. Could NOFHC itself be a listed entity? +

A. No. NOFHC is to be wholly-owned by the Promoters/Promoter Group. Therefore, it cannot be a listed company. [para 2 (C) (i) of the guidelines]

Q.291. Can the CIC registered with RBI be eligible to act as NOFHC? +

A CIC of the Promoter Group will be eligible to hold the voting equity shares of NOFHC. Alternately, a CIC of the Promoter Group may also become a NOFHC. However, under both the options, the corporate structure of the NOFHC must comply with requirements at para 2 (C) of the guidelines, and the new bank and the regulated financial sector entities in which Promoter Groups have ‘significant influence’ and ‘control’ (as defined in Accounting Standard 23) have to be held under the NOFHC. [Paragraph 2(C)(iii) & (vii) of the guidelines]

Q.271. Is the Promoter required to ‘set up’ a new company to be classified as NOFHC or can a Promoter Group identify and reclassify one of its existing group companies as NOFHC? +

The corporate structure of the NOFHC as given in paragraphs 2 (C) (i), (ii) & (iii) will have to be fully met. The requirement is that the NOFHC has to be wholly owned by the Promoters/Promoter Group. Further, at least 51 percent of the voting equity shares of the NOFHC have to be held by companies in the Promoter Group in which public hold not less than 51 percent of the voting equity of those companies. [Paragraph 2 (C) (i) & (ii) of the guidelines] If an existing Promoter Group company including a core investment company of the Group satisfies the above criteria, it can be the NOFHC.

Q.136. (i) It is our understanding that a widely held, listed NBFC, with no operations, can be the NOHFC that holds a Bank. Please confirm. (ii) It is also our understanding that a widely held listed NBFC, with no operations, and with no Promoter / Promoter Group, can be the NOHFC that holds a Bank. Please confirm. (iii) Please confirm that it would be permissible for the Government of India to own more than 10 percent, but less than 26 percent, of a widely held, listed NOFHC, with no Promoter/Promoter Group, that holds the Bank. (iv) Para 2K(iii) states that "No single entity or group of related entities, other than the NOFHC, shall have shareholding or control, directly or indirectly, in excess of 10 percent of the paid-up voting equity capital of the bank". Our understanding is that it would be permissible if the Government of India were to be the only entity that holds more than 10 percent, but less than 26 percent of the Bank. +

A. (i) to (iii)The NOFHC must be wholly owned by the Promoters/Promoter Group. Therefore, it cannot be listed and accordingly a listed NBFC cannot be a NOFHC.

(iv) The 10 percent stipulation will also apply to the Government of India shareholding in the bank, as these banks would be private sector banks.

Q.152. Will individuals in the promoter group who are not relatives, as defined in Section 6 of the Companies Act, 1956, be allowed to hold 10 per cent each in the NOHFC or will their aggregate shareholding be restricted 10 per cent? +

The limit of 10 per cent applies to an individual’s own shareholding along with the shares held by his relatives (as defined in Section 6 of the Companies Act, 1956) and the entities in which he and / or his relatives hold not less than 50 per cent of voting equity shares [para 2 (C) (ii) (a) of the guidelines].If there are two or more individuals who are part of the Promoter Group and are not relatives of each other, the limit would apply individually, and need not be aggregated. However, all such individuals cannot hold more than 49 per cent of the voting equity shares of the NOFHC.

Q.123. Aligning the existing Group business and ownership structure to the form required by the Guidelines will require transfers of shareholdings and / or business activities within the Group. Such transfers may be liable to income tax, VAT and / or stamp duty. The Financial Holding Working Group Report released by the RBI had recommended amendments to taxation and stamp duty laws to minimise the transition cost of migrating to the Financial Holding Company Structure. This was also reiterated during the discussions in relation to the amendment to the Banking Regulation Act, 1949. Can any relief be expected in this regard ? +

Taxation will be as per the laws / rules of the tax authorities.

Q.88. Under clause 2 (C)(vi), the NOFHC is not permitted to set up any new financial services entity for at least 3 years from date of commencement of its business, what does “set-up” envisage? Could minority shareholding be regarded as “set-up”? +

A. Setting-up would mean incorporating a new entity or acquiring shares in an existing entity in which the Promoter Group will have ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) and which carries on regulated financial services business whereby such entities would be required to be a subsidiary, joint venture or associate of the NOFHC. [para 2 (C) (vi) of the guidelines]

Q.90. If the intention to “set-up” new financial services business is mentioned in the application for banking licence made to the RBI, would this be considered / permitted? +

A. Promoters/Promoter Groups will not be permitted to set up any new financial services entity within three years from the date of commencement of business of the NOFHC, even if such intention is mentioned in the applications. [para 2 (C) (vi) of the guidelines]

Q.5. Is it possible that ten independent individuals holding voting equity shares not exceeding 10 per cent each of the total voting equity shares of the NOFHC, be the promoters and set up this NOFHC? +

No. The requirement is that not less than 51 per cent of the voting equity shares of the NOFHC shall be held by companies in the Promoter Group, in which the public hold not less than 51 percent of the voting equity of such companies. If 10 independent individuals form a Group, then such a Group cannot satisfy the above criteria laid down for holding the NOFHC. Additionally, such newly formed Promoter Group would not be able to meet one of the ‘Fit and Proper’ criteria, which requires Promoters/Promoter Groups to have a successful track record of running their business for at least 10 years. Essentially, the intention is that existing groups should set up banks and not groups set up for this purpose. However, it is clarified that individuals belonging to the Promoter Group can participate in the voting equity shares of NOFHC. While any such individual along with his relatives (as defined in Section 6 of the Companies Act 1956) and along with entities in which he and / or his relatives hold not less than 50 per cent of the voting equity shares, can hold voting equity shares not exceeding 10 per cent of the total voting equity shares of the NOFHC, all such individuals (along with their relatives and companies as specified above) irrespective of their numbers, cannot hold more than 49 per cent of the voting equity shares of the NOFHC (since the companies forming part of the Promoter Group whereof companies in which the public hold not less than 51 per cent of the voting equity shares shall hold not less than 51 per cent of the total voting equity shares of the NOFHC).[ para 2 ( C ) (ii) (a) and (b) of the guidelines]

Q.48. In the event the NOFHC/ bank being promoted by a sub-set of existing promoters (having regard to the definition of “Promoter/ Promoter Group”), would the regulated financial services entities of the remaining Promoter Group (not promoting the NOFHC/ bank), be required to become subsidiaries of the NOFHC? +

A. Yes. All the regulated financial services entities in which the Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) will have to be brought under the NOFHC as subsidiaries, or associates or joint ventures. [para 2 (C) (iii) & (vii) of the guidelines]

Q.6. Can 10 or more unrelated individuals act as promoters each holding not more than 10 per cent shares in NOFHC? +

Q.55. Where the CIC is a listed entity (and meets the owned and controlled by residents test as per the extant DIPP guidelines), would the stated Promoter Group of the CIC for listing purposes be also treated as the Promoter Group for the new bank? +

A. Promoter Group for the purpose of these guidelines will be as per the definition given in Annex I to the guidelines.

Q.52. Could a non-corporate entity such as an LLP or Trust (public, private or charitable) be permitted as being a part of the Promoter/ Promoter Group for setting up the NOFHC? +

The shares of NOFHC can be held by individuals, corporate entities and companies belonging to the Promoter Group. An LLP and trust do not fall under any of these categories. Therefore, an LLP or trust cannot hold voting equity shares directly in the NOFHC but can hold indirectly through a company in the Promoter Group which holds voting equity shares of the NOFHC.

Q.53. Where shares of a NOFHC are held by public trusts, whose trustee are the promoters, whether the same could be considered under 2(C)(ii)(b) category for considering 51% holding in NOFHC? +

Q.54. If a Core Investment Company (CIC), being the promoter, is newly incorporated for holding the NOFHC, would the track record of the Promoter/ Promoter Group in the CIC be considered? +

A. The overall track record of the Promoters/Promoter Group for at least 10 years will be seen. If the Promoters/Promoter Group incorporates a new CIC for the purpose of holding shares in the NOFHC, the track record of the Promoters/Promoter Group setting up the CIC will be seen. [para 2 (B) (b) of the guidelines]

Q.100. Whether a multi-layered, non-operative company i.e. Promoting company Holding only investments, while the one on top of it involved in Financial Sector, can be a 100 percent promoter of an NOFHC to promote a bank, if the promoter company meets public holding criteria of at least 51 percent ? +

A. The guidelines require that:

all regulated financial services entities of the Promoters/Promoter Group in which the Promoters/Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) should be carried on only through entities held by the NOFHC.
no entity in which the NOFHC has a shareholding can hold shares in the NOFHC.

Therefore, there cannot be a company involved in the financial sector which is on top of the NOFHC and is a 100 percent promoter of the NOFHC.

Q.101. Will a Housing Finance Company (HFC) or Housing Finance Activities of the promoting company will necessarily have to be brought under NOFHC ? In case the HFC is substantially held by a Financial Sector Regulated entity will RBI insist on the investing company (financial sector entity) to come under NOFHC? +

Lending activities must be conducted from inside the bank. Therefore, the housing finance activity of the HFC should be transferred to the bank under the NOFHC. The financial sector regulated entity which holds the HFC substantially will have to come under the NOFHC.[para 2(C)(iii) of the guidelines]

Q.102. If the Group presently provides housing finance through an entity established for this purpose, please could you clarify whether these activities could continue to be undertaken by the housing finance entity under the NOFHC? Alternately, could the bank hold the housing finance entity as its subsidiary, a structure which some other banks appear to have adopted ? +

Q.56. Would any investor holding more than 10 per cent of the ‘free float’ in the listed CIC be also compulsorily viewed as being a Promoter by virtue of a more than 10 per cent ownership in the CIC even if such investor does not otherwise form part of the Promoter Group (the working assumption here being that the CIC will hold significant interests in non-financial services businesses as well as 100 per cent interest in an NOFHC). +

A. Merely holding 10 per cent of the free float in the listed CIC would not make the investor a Promoter. If the investor does not form a part of the Promoters/Promoter Group as per the definition given in Annex I to the guidelines, he would not be considered as a Promoter.

Q.57. In respect of the capital structure of the NOFHC, having regard to the use of the word “and” are sub-clauses (a) and (b) of clause 2 (C)(ii), to be read as conditions to be fulfilled cumulatively? +

A. It is essential that clause (b) of para 2(C)(ii) (i.e. not less than 51 per cent of the voting equity shares of the NOFHC to be held by companies in which the public hold not less than 51 per cent of the voting equity shares) is satisfied in all cases, whereas clause (a) of para 2(C) (ii) does not stipulate any minimum shareholding. Accordingly, it is not necessary that an individual, along with his relatives (as defined in Section 6 of the Companies Act, 1956) and along with entities in which he and/or his relatives hold not less than 50 per cent of the voting equity shares should hold shares in the NOFHC. [para 2 (C) (ii) of the guidelines]

Q.58. Having regard to clause 2 (C)(ii)(a), can a single individual investor hold 10 per cent directly in the NOFHC and also have significant holdings in other Promoter group companies in which the public holds not less than 51 per cent of voting equity shares? +

A. Yes. It would be possible for an individual belonging to the Promoter Group, along with his relatives (as defined in Section 6 of the Companies Act, 1956) and along with entities in which he and/or his relatives hold not less than 50 per cent of voting equity shares, to have significant holdings in other Promoter Group companies in which the public holds not less than 51 per cent of voting equity shares.

Q.103. Can an entity incorporated under Companies Act which is listed on stock exchanges, regulated by one of the financial sector regulator and engaged primarily in retail mortgage lending, promote the NOFHC? +

A. No. Such an entity cannot promote a NOFHC because lending activities must be conducted from inside the bank. Therefore, the retail mortgage lending activity of the entity should be transferred to the bank under the NOFHC. Further, all regulated financial services entities of the Group in which the Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) have to be held by a NOFHC. [para 2 (C)(iii) and (vii) of the guidelines]

Q.104. Will the applicant be treated as a private sector entity if the total Government /Public Sector Undertaking / Government companies’ shareholding in the applicant is less than 50 percent? +

A. Entities, in which the Government / Public Sector Undertaking / Government Companies’ shareholding is less than 50 percent, would be treated as private sector entities, provided there are no explicit or implicit agreements or arrangements through which Government can exercise control. [para 2 (A) (i) of the guidelines]

Q.105. If 40 percent of the applicant is held by a regulated public financial institution incorporated under an Act of Parliament and wholly owned by the Government of India, by virtue of the applicant’s shareholding by a public financial institution incorporated under an Act of the Parliament, will such financial institution be treated as an entity not belonging to the Promoter Group ? Further, due to the proviso to Clause II of Annexure I of the guidelines, can it be interpreted that this financial institution will not be part of the Promoter Group? +

Whether a public financial institution is part of the Promoter Group will depend upon whether it is in effective control of the NOFHC to the exclusion of any other person.

Q.10. W.r.t. 2(C)(ii)(b), the companies which form part of promoters group where public holds not less than 51% of voting capital has to be a listed company? +

Q.11. Is it mandatory to have a public company as a part of the Promoter Group? +

Q.60. In the context of at least 51% of the total voting equity of the NOFHC to be held by companies of the Promoter group having at least 51% of the voting equity held by the public, please clarify whether the concept of public includes “Non-Promoter” shareholders in an unlisted entity. Also, we presume that the definition of Public companies would be in consonance with SEBI Guidelines. Please confirm. +

Q.61. Subject to the Companies Act, 1956 / Companies Bill, 2012, could the NOFHC issue non-voting equity shares/ preference shares? +

Yes, to the extent permissible under the relevant laws. However, it will not be reckoned for the purpose of calculation of promoter shareholding in the NOFHC.

Q.62. The references in paragraph 2 (C) (ii) relate to holdings of voting equity capital. Would the NOFHC be permitted to issue non-voting equity capital or other classes of capital to persons other than promoter group entities ? +

Yes, to the extent permissible under the relevant laws. However, it will not be reckoned for the purpose of calculation of promoter shareholding in the NOFHC.

Q.12. W.r.t. 2(C)(ii)(b), is it mandatory to have a public company which has more than 51% shareholding in the NOFHC as part of the promoter group? +

Q.13. Please also clarify whether ‘public’ shareholding in an entity presupposes listing of equity shares of that entity +

Q.63. Should the percentage holding in the NOFHC/ bank be computed with reference to the last audited balance sheet or as on the date of the proposed investment? +

A. The percentage holding of the NOFHC/bank will be computed with reference to the date of the investment.

Q.64. We understand that the NOFHC does not need to wholly own the ‘other regulated financial services entities’ and that direct participation in such entities by non-Promoter group individuals/ companies is permitted. Additionally, we understand that FDI in such entities as per the extant DIPP guidelines is permitted. +

A. As per Para 2 C (vii) of the guidelines, only the regulated financial sector entities in which a Promoter Group has ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) will be held under the NOFHC. Thus, the NOFHC does not need to wholly own the regulated financial services entities and direct participation in such entities by non-Promoter Group individuals/ companies is permitted. The pattern of shareholding and the capital requirements in the regulated financial services entities held by the NOFHC shall be as prescribed by the respective sectoral regulators. The FDI limits in such entities would be as per extant FDI policy of the Government of India/ Notifications issued under FEMA. As regards the bank, the foreign shareholding would be as per para 2 (F) of the guidelines.

Q.107. Please clarify whether it is compulsory to transfer the existing mortgage lending business of the promoter Company to the new Bank and whether any dispensation would be given to permit the existing mortgage business to be continued within the existing company outside the bank ? +

Q.108. NBFC-IFC framework was given shape to meet the increasing financing needs of the Infrastructure sector which could not be met by banks within the regulatory framework for banks. Now that the promoters/promoter entities are required to bring all their financial sector activities under the NOFHC promoting the bank, does RBI require that the Infrastructure lending activity currently being undertaken by the promoter be necessarily folded into the bank or it can be undertaken by a separate NBFC-IFC under the NOFHC? +

Q.18. (i) We understand that at the time of making applications for banking license, the applicants will need to submit the proposed structure which meets with RBI guidelines and requirements. The setting up of the NOFHC, Bank and realignment of businesses assets / portfolio into financial services, non-financial services etc. will be done after receiving in-principle approval from RBI and before the final approval of the RBI. RBI may please clarify our above understanding. (ii) Whether formation of NOFHC is required prior to submission of Bank License application, because it requires RBI approval and thus it may not be possible to set up NOFHC prior to deadline, i.e. 01.07.2013. +

Q.67. Companies within the Promoter Group that are registered with RBI as an NBFCs- Investment Companies are sought to be brought under the NOFHC pursuant to the requirement in the Guidelines to bring all regulated financial entities of the Promoter/ Promoter Group under the NOFHC. Since the activities undertaken by the aforementioned NBFC-Investment Companies are not permitted to be done departmentally by a bank, and no entity under the NOFHC can have equity/ debt exposure to a Promoter Group Company, they will need to liquidate entire investment holding (equity and / or debt) in the Promoter Group Companies. Post Liquidation of the investment holdings, these entities will retain cash or become a non–operative shell company which obviates the very need to bring such companies under the NOFHC in the first place. We would therefore suggest that listed/ unlisted investment companies and /or unlisted investment companies owned by listed companies of the Promoter / Promoter Group (insofar as they are not engaged in the financial services), where a significant portion of the assets are deployed in promoter group entities, be kept outside of the purview of consolidation under the NOFHC as these entities are already regulated by and under the direct supervision of RBI. +

Para 2(C)(iii) of the guidelines provide that only non-financial services companies/entities and non-operative financial holding company in the Group and individuals belonging to Promoter Group will be allowed to hold shares in the NOFHC. Accordingly, a non-operative financial holding company though regulated by RBI will remain outside NOFHC. NBFC (Investment Companies) which hold/deal in equity shares of Promoter Group Companies cannot be under the NOFHC because, in terms of para 2 (I) (IV) (a) of the Guidelines, the financial entities held by NOFHC shall not have any credit and investment (including investments in the equity/debt capital instruments) exposure to the Promoters/Promoter Group entities or individuals associated with the Promoter Group or the NOFHC. Therefore, NBFC (Investment Companies), which would include CICs and other non-operative holding companies, would remain outside NOFHC. However, if there are investments in voting equity shares of regulated financial sector entities in which the Group has significant influence or control, such entities will have to be brought under the NOFHC. ‘Investment Company’ as defined under para 2(I)(vi) of the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Direction, 1998, means any company which is a financial institution carrying on, as its principal business, the acquisition of securities.

Q.126. Whether exemption from tax or duties (stamp duty or otherwise) shall be available, which may arise pursuant to any restructuring, which shall be required to be undertaken for complying with the Banking guidelines. +

Taxation will be as per the laws / rules of the tax authorities.

Q.21. From a business transfer perspective, is it required that the businesses be transferred by the NBFC to the proposed bank immediately on obtaining an in principle approval or can this be done in stages as the bank is able to raise liabilities? +

Q.22. Paragraph 2 (C) (iv) provides that the general principle is that no financial services entity held by the NOFHC would be allowed to engage in any activity that a bank is permitted to undertake departmentally. In the event a Promoter Group has more than one legal entity that undertakes business activities that can be departmentally undertaken by the bank, we request a clarification in relation to what is the quantum of time that will be afforded to fold these activities into the bank post commencement of business by the bank? +

Q.68. There could be instances where a particular Group has non-operative NBFC/CICs (in addition to the NOFHC), which act solely as a holding companies for companies carrying on non-financial services businesses of the Group. In such situations, would it be correct to read the regulations in a manner that such NBFCs/ CICs would not be considered as companies engaged in financial services business? If yes, then would such NBFCs/CICs be permitted to be held outside of the purview of the NOFHC (since they hold non-financial services businesses of the Group)? +

Q.69. Where it is not contemplated that the NOFHC be held by the non-financial services operating companies/ entities, does the NOFHC necessarily need to be held by a non-operating financial holding company i.e. a company that undertakes no other activity other than holding the shares in the NOFHC? We understand that the NOFHC may be held by a CIC that also undertakes certain non-financial business. +

It is not necessary that a NOFHC should be held only by non-financial services companies/ entities. It can be held by a CIC or a non-operating holding company. The regulated financial business / entities of the holding company, if any, cannot remain with the holding company. It has to come under the NOFHC. [para 2 (C) (iii) & (vii) of the guidelines]

Q.109. Can a Promoter Group having existing NBFC operations continue the NBFC operations (of loan business) even after setting up of the Bank especially since they finance to niche areas and also since the financial investors of the NBFCs may be uncomfortable migrating to a–banking system - Para 2 C (iv) (b) seems to permit this. +

Q.25. When submitting the application for the banking license, is it required that the company envisaged to hold voting equity shares in the NOFHC satisfy conditions under clause 2C (ii) (b) above. Eg. If the promoter holding in the above company is currently greater than 49% would this holding have to be reduced when applying for the license or would a plan detailing out the process that will be used to reduce this holding suffice at application stage? +

Q.113. Whenever an activity can be undertaken both by a bank and by an NBFC (e.g. Housing Finance) we understand that Promoter would be allowed to exercise either of the options, at his discretion. Please confirm. +

Q.28. As per 2C (i) Promoter / Promoter Group will be permitted to set up a bank only through a wholly-owned Non-Operative Financial Holding Company (NOFHC). Query: Whether the formation of NOFHC is required prior to submission of bank license application form, because it requires RBI approval and thus it may not be possible to set up NOFHC prior to deadline i.e 1.7.2013? +

Q.29. Where an existing company in which promoter in his individual capacity holds more than 10 percent is converted into NOFHC, will RBI allow any transition time for the promoter's shareholding to go below 10 per cent as per condition 2C(ii)(a)? +

Q.72. Whether an existing Non-operating listed Holding company, with more than 51 percent public shareholding, will be eligible to promote a Non-Operative Financial Holding Company (NOFHC)? +

A. Yes. An existing non-operating listed holding company, with more than 51 percent public shareholding, will be eligible to promote a Non-Operative Financial Holding Company (NOFHC). [para 2 (C) (ii) (b) and 2 (C) (iii) of the guidelines]

Q.74. Can the NOFHC hold physical assets belonging to the Group and charge for them on an arm’s length basis? Similarly, since unregulated activities cannot be held by the NOFHC, we assume that the holding company above the NOFHC can, through a subsidiary, hold related businesses such as technology services or banking correspondent services or distribution services. Is this correct? +

A. NOFHC, being a non-operative financial holding company, cannot hold physical assets belonging to the Group and charge for them on an arm’s length basis. A holding company of the Promoter Group, which holds the NOFHC can undertake related businesses such as technology services or banking correspondent services or distribution services on its own, or through a subsidiary. If the non-operative holding company is a CIC or NBFC, the relevant regulations will be applicable.

Q.110. From the paragraph 2 (C) (iv) (b) of the guidelines, it is clear that hire purchase / leasing activities / factoring activities are permitted to be carried on. Hence, the objective appears to be, to allow activities which a Bank can operate concurrently with another entity / NBFC alongside. However, the term "loan business" has not been specifically mentioned. Whether the term "etc" can include loan companies also? There does not seem to be any rationale for exclusion only for loan companies while permitting hire purchase & leasing companies. It may be noted that all NBFC activities are essentially in the nature of hire purchase / leasing transactions and the nomenclature / migration to that of a loan agreement was done (about 5-6 years back) only due to the imposition of additional costs like service tax. For NBFCs, the hire purchase and lease is only a financing transaction and not an operating lease etc. The objective in all 3 transactions (Hire purchase, Lease and Loan) is only to lend money and recover the same with interest over a fixed period. Can a Promoter Group having existing NBFC operations continue the NBFC operations (of loan business) even after setting–up of the Bank - Para 2 C (iv) (b) seems to permit this. +

Q.188. Where a non-financial services company is a listed company and the promoter holding therein is not more than 49 per cent, can this be regarded as compliance with condition at 2(C)(ii)(b)? +

A. It is essential that clause (b) of para 2(C)(ii) (i.e. not less than 51 per cent of the voting equity shares of the NOFHC to be held by companies in which the public hold not less than 51 per cent of the voting equity shares) is satisfied in all cases. For the purpose of these guidelines, ‘public shareholding’ implies that no person along with his relatives (as defined in Section 6 of the Companies Act, 1956) and entities in which he and / or his relatives hold not less than 50 per cent of the voting equity shares, by virtue of his shareholding or otherwise, exercises ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) over the company.If these conditions are satisfied, then the listed non financial services company would comply with the conditions at 2 (C) (ii)(b) of the guidelines.

Q.189. Is it mandatory to have a public company as a part of the Promoter Group? +

Yes. It is essential that not less than 51 per cent of the voting equity shares of the NOFHC have to be held by companies in the Promoter Group in which the public hold not less than 51 per cent of the voting equity shares. [para 2(C)(ii)(b) of the guidelines]

Q.190. With reference to condition 2(C)(ii)(b), is it mandatory to have a public company which has more than 51 per cent shareholding in the NOFHC as part of the promoter group? +

Q.230. In case an applicant, in order to comply with the NOFHC requirements, needs to convert a small public company into a listed one, will any relaxation be provided for the timelines to comply to the takeover code? +

A. A public company need not necessarily be a listed company. At the time of making applications, the Promoters/Promoter Group will have to furnish a road map and methodologies they would adopt to comply with all the requirements of the corporate structure indicated in para 2 (C)(ii) and (iii) of the guidelines within a period of 18 months. After the ‘in-principle approval’ is accorded by RBI for setting up of a bank, the Promoters/Promoter Group will have to comply with all the requirements and the proposed bank has to start operations within this period.

Q.231. If there are existing Foreign Funding Institution / Indian Investment Institution as equity holder, how they may be accommodated as equity partners in the proposed NOFHC / and or the Bank. +

A. The NOFHC has to be wholly owned by a Promoter/Promoter Group (as per the definition given in Annex I to the guidelines) and the pattern of shareholding would be as per the provisions laid down at paragraph 2(C)(ii) & (iii) of the guidelines. The existing foreign funding institution / Indian Investment Institution who hold shares in the promoting entity of the NOFHC, not being Promoter or belonging to the Promoter Group cannot hold shares in the NOFHC. As regards shareholding in the bank by foreign funding institutions, it should be in consonance with paragraph 2 (F) of the guidelines. Further, no single entity or group of related entities, other than the NOFHC, shall have shareholding or control, directly or indirectly, in excess of 10 percent of the paid-up equity capital of the bank and any such acquisition of 5 per cent or more of the paid up equity capital of the bank will require prior approval of RBI. [Paragraph 2 (K) (ii) and (iii)]

Q.270. Is it mandatory for promoter Groups engaged solely in the financial services business and already having a core investment company to have another NOFHC for promoting a bank? +

Q.272. Please clarify which of the following types of shareholders would qualify as ‘public’ in an unlisted / listed entity: a. India domiciled institutional investors b. Employees holding ESOPs c. Private Equity Funds d. FIIs e. Other non promoter group investors +

A. All the shareholders mentioned above will be treated as ‘public’ shareholders in both unlisted and listed entities, provided that no individual shareholder along with his relatives (as defined in Section 6 of the Companies Act, 1956) and entities in which he and/or his relatives hold not less than 50 per cent of the voting equity shares, or acting in concert with other shareholders exercises ‘significant influence’ or ‘control’ (as defined in Accounting Standard 23) over the company. [Paragraph 2(C)(ii)(b) of the guidelines]

Q.163. NOFHC shall hold bank as well as entities regulated by other financial regulators, whether the promoter group entity engaged in commodities broking business which is regulated by Forward Market Commission be also held by NOFHC. +

The commodity broking business is not considered to be regulated financial services for the purpose of these guidelines, and entities in the Promoter Group which are carrying on commodity broking business cannot be held under the NOFHC.