RBI Unlikely To Let Private Equity Firms Own Significant Stake In Domestic Banks | Profit Exclusive

While India's banking regulator remains open to the idea of allowing foreign banks to own a 26% stake in domestic lenders, private equity firms will likely not get approvals, according to two people with knowledge of the matter.

The Reserve Bank of India is concerned with the rapid stake sales by these investors in domestic banks, the people quoted above said.

In lenders such as Yes Bank, private equity funds have exited their investments in a few years, prompting RBI to limit their participation in Indian banks. RBI had allowed Advent International and Carlyle to own a 9.99% stake each in Yes Bank in 2022.

The regulator is also worried about sources of funding with these investors, according to the first of the two people quoted above. This includes concerns that corporate individuals may end up owning sizeable stakes in domestic banks through PEs, which the regulator wants to avoid. In the past, private equity funds have declined to share their list of limited partners for RBI to review, like in the case of the IDBI Bank stake sale.

RBI will allow non-bank investors to enter domestic banking only in bank rescue operations. In the case of CSB Bank (previously called Catholic Syrian Bank), RBI allowed Canada's Fairfax Financial Holdings to take over a significant stake. As of March 31, Fairfax Financial holds a 40% stake in CSB Bank.

India's central bank, however, is open to the idea of foreign banks directly owning up to a 26% stake in domestic lenders, the people quoted above said. This will likely be allowed only for strategic investors who intend to maintain their investments over time.

The regulator is not inclined to make any recommendations to the government to raise the 26% limit, the people quoted above said. While foreign direct investment in private banks is allowed up to 74%, individual investors can only control a 15% stake currently.

Even in specific cases where higher shareholding is allowed, a single investor's voting rights in a listed private bank cannot exceed 26%. This greatly limits ownership and control by foreign investors.

These developments come at a time when the government is reportedly considering raising the foreign direct investment limit in public sector banks from the current 20%.

Any change in raising voting rights beyond 26% will require legislative changes, as this ceiling is prescribed in the Banking Regulations Act. Such legislative changes will be time-consuming and will require the RBI to first make a formal recommendation, the people quoted above said.

In normal circumstances, RBI feels that allowing foreign banks to directly control a greater stake in domestic banks may limit its manoeuvrability. The second person quoted above gave the example of Yes Bank's rescue in 2020, where the RBI could quickly stitch a rescue plan and get a clutch of domestic banks to infuse equity. As a foreign bank will first be answerable to their home regulator, it may not be able to readily participate in domestic situations.

RBI continues to be open to having wholly owned subsidiaries of foreign banks own domestic banks, though. In these cases, RBI has greater regulatory control of the immediate parent, the second person said.