Foreign ownership

Are there any restrictions on foreign ownership of banks (or non-banks)?

Foreign investments in Indian banks are permissible from all sources up to the higher limit of 74 per cent of the bank’s paid-up equity share capital.

Foreign banks can set up branches and wholly owned subsidiaries in India.

Implications and responsibilities

What are the legal and regulatory implications for entities that control banks?

In the context of shareholders that control banks, other than ensuring that the regulatory standards are met and that they are ‘fit and proper’, there are no other specific requirements. A bank’s board of directors are also regulated by ensuring a ‘fit and proper’ criterion.

What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?

From the outset, a bank’s shareholders appoint the bank’s board of directors. For a bank, the most crucial aspect of corporate governance is the presence of a professional board of directors that retains full and effective control, and also monitors the executive management. A bank’s director constantly has to satisfy the ‘fit and proper’ criterion to continue in that role in India. The duties and responsibilities of a board of directors include:

• the fiduciary duty towards the bank;
• the duty to act only within the powers as laid down by the bank’s memorandum and articles of association;
• the duty to act only within the powers as laid down by applicable laws and regulations;
• the duty to maintain confidentiality and disclose their interests in advance;
• the duty to comply with RBI and Indian government monetary and credit policies;
• the duty to strengthen internal control systems and proper maintenance of accounts’ books, and periodic reconciliation; and
• the duty to maximise the interests of stakeholders.

What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?

Provisions regarding the winding-up of a banking company are provided in the BR Act. However, no special legal provisions regarding the implications that will be faced by a controlling individual or entity in an insolvency scenario of a bank have been provided.

Changes in control

Required approvals

Describe the regulatory approvals needed to acquire control of a bank (or non-bank). How is ‘control’ defined for this purpose?

Prior approval of the Reserve Bank of India (RBI), as under the Banking Regulation Act, 1949 (the BR Act), is required for:

• shares acquisition or voting rights (to the extent of 5 per cent or more of the paid-up share capital); and
  fresh shares acquisition or voting rights (in excess of 10 per cent) by existing shareholders.
• Control is primarily gained by voting arrangements for the purposes of banking regulations.

Foreign acquirers

Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?

Indian regulatory authorities are receptive to foreign acquirers. However, such acquisition is limited to private sector banks under the Master Direction on Ownership in Private Sector Banks, Directions, 2016. The acquisition of a shareholding in a private sector bank is subject to the extant foreign direct investment (FDI) policy, which states that the aggregate foreign investment in private sector banks from all sources (FDI, foreign institutional investors, non-resident Indians) shall not exceed 74 per cent of paid-up capital of the bank and, at all times, at least 26 per cent of the paid-up share capital of the private sector banks shall be held by Indian residents.

The requirement of RBI prior approval in the event where the shareholding of a private sector bank reaches or exceeds 5 per cent is also applicable to foreign investors. Furthermore, as for all other types of banks and entities, the RBI will assess the ‘fit and proper’ status of foreign investors.

Under what circumstances can a foreign bank (or non-bank) establish an office and engage in business? For example, can it establish a branch or must it form or acquire a locally chartered bank?

A foreign bank can establish a branch in India in accordance with the provisions of the Master Circular on Branch Authorisation (dated 1 July 2014), issued by the RBI. As per the circular, a foreign bank is required to bring an assigned upfront capital of US$25 million at the time of opening its first branch in India. Foreign banks that already have one branch in India are required to comply with the previous requirement before their request for the opening of a second branch is considered.

A foreign bank can also open a wholly owned subsidiary in India on the basis of the RBI Scheme for Setting up of Wholly Owned Subsidiaries by Foreign Banks in India. The minimum paid-up voting equity capital for a wholly owned subsidiary is 5 billion rupees. The newly set up wholly owned subsidiary of the foreign bank is required to bring in the entire amount of initial capital upfront, which should be funded by free foreign exchange remittance from its parent.

Further, under the Consolidated FDI Policy Circular (dated 15 October 2020), foreign banks are allowed to acquire a maximum of 74 per cent of the paid-up capital of private banks. Except in the case of a wholly owned subsidiary of a foreign bank, a minimum of 26 per cent of the paid-up capital of a private bank is to be held by Indian residents.

Factors considered by authorities

What factors are considered by the relevant regulatory authorities in an acquisition of control of a bank (or non-bank)?

The test applied by the RBI for the acquisition of control of a bank is the ‘fit and proper’ test. For acquisitions of 5 per cent or more of paid-up share capital in the bank, the following factors regarding the acquirer are reviewed by the RBI:

• integrity;
• reputation;
• track record in financial matters;
• compliance with tax laws;
• records of previous business conduct;
• past offences under any legislation designed to protect members of the public from financial loss due to dishonesty or malpractice;
• records of any serious financial misconduct;
• the source of fund for acquisition; and
• past records of standards of good corporate governance, if the body is a body corporate.

Filing requirements

Describe the required filings for an acquisition of control of a bank.

Under the Reserve Bank of India (Prior Approval for Acquisition of Shares or Voting Rights in Private Sector Banks) Directions, 2015 (the Acquisition Directions), the following forms need to be filed for acquiring a major shareholding in a private sector bank:

• Form A: a declaration to be submitted by the applicants that intend to acquire a major shareholding in a private sector bank; and
• Form B: an annual declaration to be furnished to the bank by all the existing major shareholders of private banks.

In the case of an FDI in a private bank, inward remittance for subscription to shares should be reported to the authorised dealer by the issuing company within 30 days of the receipt of remittance in the Advance Reporting Form along with the Foreign Inward Remittance Certificate. Upon the issuance of shares, the same must be reported by the issuing company within 30 days of issuance, as per Form FC-GPR. The sale of such securities held by a non-resident to an Indian resident must be reported by the Indian resident, as per Form FC-TRS, within 60 days of the receipt of remittance.

Time frame for approval

What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?

Section 12B of the BR Act and the Acquisition Directions both regulate the acquisition of share and voting rights of a private sector bank by foreign and domestic entities alike. The decision of the RBI on the application made for acquiring such a stake in the bank shall be made within a period of 90 days from the date of receipt of the application by the RBI. This is provided that, in computing the period of 90 days, the period taken by the applicant for furnishing the information called for by the RBI shall be excluded.

This article was originally published in Lexology on 16 March 2022 Co-written by: Veena Sivaramakrishnan, Partner; Soummo Biswas, Partner; Mohit Bhatia, Counsel; Milind Rai, Associate. Click here for original article

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