MC EXclusive | RBI may not budge on 26% voting rights cap for bank promoters

RBI

The Reserve Bank of India (RBI) may not make any change in rules that cap the voting rights for shareholders in private banks at 26 percent.

Potential bidders for Yes Bank and IDBI Bank are said to be seeking exceptions to this regulation. “The regulator makes exceptions in cases where banks are in distress. However, neither is in a distress situation to warrant exceptions,” said a highly placed source with knowledge of the matter.

“The RBI is unlikely to budge on the regulation pertaining to voting rights,” said another source, refusing to be named.

On August 1, Moneycontrol had reported that the cap on voting rights may be a contentious issue for the Yes Bank stake sale. Subsequently, on September 12, based on information from sources, the publication had reported that Yes Bank's stake sale was stuck as the RBI was concerned with majority ownership by a foreign bank.

Email to the RBI seeking comments on this matter remained unanswered till publishing the article.

Capping voting rights at 26 percent is unique to India. Most countries permit promoters to enjoy voting rights commensurate to their shareholding.

“Indian banking regulations, especially with the acquisition and transfer of shares, is relatively nascent compared to western countries. The regulator thought that it was too soon to make any amendments to this regulation,” said another person privy to the matter.

As per the RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023, a permission from the central bank was necessary to acquire shares or voting rights in a banking company for non-promoters, and beyond 10 percent in case of individuals, non-financial institutions, and financial institutions connected with large industrial houses.

The limit is 15 percent in case of financial institutions, public sector undertakings and the government. For promoters, the limit is  26 percent of the paid-up share capital or voting rights after the completion of 15 years from commencement of business of the banking company.

In case a promoter holds a larger stake in the bank, there is a five-year lock-in for 40 percent stake from the date of completion of acquisition of the bank. Once the lock-in period expires, promoter’s shareholding needs to be brought down to 26 percent over a 10-year timeframe.

However, the maximum permissible voting rights for a promoter (except in case of payments banks) is restricted to 26 percent from the day one of operations.

Japanese financial services majors like Sumitomo Mitsui Banking Corporation and Mitsubishi UFJ Financial Group are said to have shown interest in State Bank of India’s 24 percent stake in Yes Bank, while Kotak Mahindra Bank, Emirates NBD and Fairfax India Holding are in contention for IDBI Bank. The bidding process for IDBI Bank commenced in October 2022, though only letters of intent has been received from potential bidders. In case of Yes Bank, SBI’s three-year lock-in period on the former stake ended in March 2023. However, the stake sale process is said to have commenced only in April this year.