RBI panel favour allowing promoters to keep holdings in first 5 years

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RBI panel favour allowing promoters to keep holdings in first 5 years

An internal working group of the Reserve Bank on the ownership and corporate structure of private sector favoured allowing promoters to keep their holdings in the first five years - more than the current minimum of 40 per cent now favoured - and then capping it at 26 per cent after 15 years of operations.

A promoter of a private bank needs to reduce holdings to 20 per cent within 10 years, and to 15 per cent within 15 years, according to the RBI's current norms.

The Reserve Bank has stated that the cap on promoters' stake in the long run of 15 years may be raised from the current levels of 15 per cent to 26 per cent of the paid-up equity share capital of the bank, as part of the report on the ownership guidelines and corporate structure for private sector banks.

The report favors no changes to the extant instructions on initial lock-in requirements, which may continue as a minimum of 40 per cent of the paid-up equity share capital of the bank for the first five years, because of the mandated lock-in period for promoters' initial shareholding.

They favour a continuation of the 40 per cent holding stipulation on the 40 per cent holding for the first five years to ensure that the promoters maintain skin in the game and the credibility of the control of the promoter group until the business is properly established and stabilised. It will ensure that the promoter stays committed to the bank in the formative years, giving it the necessary strategic direction.

The report says there isn't need to fix a cap on the promoters' holding in the initial five years, as existing licensing guidelines have not mandated any cap on promoter's shareholding in the first five years, so it may be difficult for a new bank to raise capital from external sources or investors. The promoter will be able to add additional capital when required by allowing them to hold a higher stake.

There is a cap on promoters' stake in the long run of 15 years that could be raised from current levels of 15 per cent to 26 per cent of the paid-up equity share capital of the bank. This stipulation should not apply to all types of promoters and does not mean that promoters who have already diluted their holdings to below 26 per cent will not be allowed to raise it to 26 per cent of the paid-up voting equity share capital of the bank.

The promoters can choose to bring down holding to even below 26 per cent, any time after the lock-in period of five years.