RBI Group Suggests Permitting Higher Promoter Stake In Banks

An RBI working group has suggested that bank promoters be allowed to hold up to 26% of paid-up voting equity share capital.

People standing in queue outside Kotak Mahindra Bank. (Photo:  BloombergQuint) 
People standing in queue outside Kotak Mahindra Bank. (Photo: BloombergQuint) 

An internal working group of the Reserve Bank of India has suggested that promoter entities be allowed to hold a higher stake in their banks than currently permitted.

The group has suggested that the cap on promoters’ stake in the long run may be raised from the current levels of 15% to 26% of the paid-up voting equity share capital of the bank. The group, however, suggested a long 15-year transition for this change.

This will balance the need for diversified ownership on the one hand and bring more skin in the game for the promoter, on the other. The 26% stake would serve as the threshold for maximum holding by a promoter in long run. This stipulation would mean that promoters, who have already diluted their holdings to below 26%, will be permitted to raise it to 26%, subject to meeting ‘fit and proper’ status.
RBI Internal Working Group

The issue of maximum promoter stake has been a contentious one. The stake promoters have been permitted to hold have differed between different rounds of bank licensing. However, when guidelines for on-tap bank licences were announced, the cap was set at 15%.

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Last year, Kotak Mahindra Bank challenged the RBI’s diktat in the Bombay High Court arguing that the regulator had changed the goal post a number of times since its licence was issued. The matter was eventually resolved out of court.

“The move to allow promoters to hold 26% of the paid-up voting equity share capital of the bank seems to be a way of turning the exception allowed to Kotak Mahindra Bank into a policy decision, uniform to all banks,” said independent banking analyst Hemindra Hazari. “In my view, this would undermine the credibility of RBI as it has allowed independent private banks to arm-twist the regulatory body and guide its policy decisions.”

The internal working group report said it engaged with a number of experts who were broadly of the view that while in-principle the requirement of higher shareholding in the initial years with subsequent dilution makes sense, the long-run threshold needs to be higher at 26%.

An excessive focus on limits on economic ownership seems contrary to legislative intent, the experts said. They also said voting control achieves the policy parameters of diversified ownership.

The debate over diversified ownership has also been split. India’s long history of banking has seen both banks with diversified ownership and lenders with strong promoter groups run into trouble. Most recently, allegations of governance concerns erupted at ICICI Bank under former Chief Executive Officer Chanda Kochhar. The lender has among the most diversified shareholding. Soon after, Yes Bank Ltd., promoted by Rana Kapoor, was put under moratorium.

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Past committees have suggested higher ownership to ensure more skin in the game. For instance, the PJ Nayak committee had suggested promoters’ holding of 25% recognising that low promoters’ shareholding could make banks vulnerable by weakening the alignment between management and shareholders.

Taking all these factors into consideration, the working group has suggested allowing a promoter to hold up to 26% in a bank. “The promoter, if he/she so desires, can choose to bring down holding to even below 26%, any time after the lock-in period of five years,” the group suggested.

Higher promoter stake will also give lenders more room to raise equity capital, said Dhananjay Sinha, director and head of institutional research at Systematix Group.

“The RBI is actually working to ensure that there is a buffer of equity capital for the banks in the long run. This move will especially help smaller banks looking for equity infusion to improve their growth prospects and stressed banks looking for bailout funds, as it increases the scope of capital availability for them,” Sinha said.

Non Promoter Shareholding

In the case of non-promoter shareholding, the group suggested that the cap be raised to 15% of the paid-up voting equity share capital of the bank, for all types of non-promoter shareholders in the long run.

“However, the Reserve Bank should reserve the right to prescribe any lower ceiling on holding or curb voting rights of the promoters/non-promoters, if at any point of time they are found to be not meeting ‘fit and proper’ criteria,” the group said.

At present non-promoter shareholders are put in three buckets. Individuals and non-financial institution/ entities are allowed to hold 10%; non-regulated or non-diversified and non-listed financial institutions are permitted 15%; regulated and well-diversified entities are permitted 40%.

“All in all, these steps would allow a steady flow of private capital for the entire banking sector,” Sinha said.