Guidelines On Acquisition And Holding Of Shares Or Voting Rights In Banking Companies

Posted On - 23 January, 2023 • By - King Stubb & Kasiva

To ensure that the ultimate ownership and control of banking firms are well diversified, the Reserve Bank of India (RBI) recently published the “Directions – Acquisition and Holding of Shares or Voting Rights in Banking Companies”, and the primary shareholders of banking companies are “fit and appropriate” continuously. The Banking Regulation Act of 1949’s Sections 12, 12B, and 35A have been used to exercise the authority granted to them in making this decision.

The Directions have been given to ensure that the shareholders of banking businesses are qualified to maintain control of the banking firms. The Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies established by the RBI guided the issuance of the directions. To determine whether shareholders of banking companies are “fit and appropriate,” the RBI has established a set of standards. These requirements include the shareholders’ reputation, experience, and financial stability.

All financial organisations functioning in India, including Local Area Banks (LABs), Small Finance Banks (SFBs), and Payments Banks (PBs), would be subject to this directive. By laying down precise guidelines for purchasing and possessing shares or voting rights in banking organisations, the directions seek to ensure the safety and soundness of the Indian banking industry.

How To Get Prior Approval

1. Anyone wishing to purchase a majority stake in a banking company must apply to the Reserve Bank for prior clearance.

2. The Reserve Bank will request feedback from the banking company on the proposed acquisition after receiving the application.

3. The banking company’s board of directors (the board) will evaluate the person’s “fit and proper” status based on the information provided and the due diligence performed, and it will submit its findings to the Reserve Bank in Form A1 along with a copy of the pertinent board resolution within 30 days.

4. A thorough investigation will be conducted by the Reserve Bank to determine the applicant’s “fit and proper” status, which may impose constraints on the applicant and the banking company.

5. Individuals from jurisdictions who do not comply with the Financial Action Task Force will not be allowed to purchase a majority stake in a banking company. Existing big owners from these FATF non-compliant nations will be permitted to keep investing, but they cannot make any additional purchases without the Reserve Bank’s prior consent.

6. If at any time the total holding falls below 5% of the paid-up share capital or the total voting rights of the banking company, the individual will need to request new Reserve Bank authorisation to increase the total holding back to 5% or greater.

Continuous Monitoring

Banking companies are required to monitor the ‘fit and proper’ status of their

1. Major shareholders,

2. Applicants for significant shareholding, and

3. Individuals who have received Reserve Bank of India approval but have not yet finished the approved acquisition. To do this, they need a way to find out about any updates to the Form A information, any issues with or information about the major shareholders or applicants, any changes to the Significant Beneficial Owners, and any purchases of 10% or more of the paid-up equity share capital of the significant shareholder by third parties.

The Department of Regulation of the Reserve Bank of India must receive a report from banking businesses detailing their evaluation of the critical shareholders’ and applicants’ “fit and suitable” status within 30 days of receiving the information, together with a board note and resolution. According to Section 12B (1) of the B R Act, 1949, banking organisations must set up a continuous monitoring system to ensure that crucial shareholders acquire prior Reserve Bank permission for their shareholding/voting rights.

The banking company must refer the Reserve Bank with the relevant paperwork and a copy of the board resolution if it believes that the strategies used to acquire or combine the holding were intended to avoid complying with the law.

Additionally, the banking firm must regularly report to its board regarding the continuous monitoring procedures to determine if it complies with Section 12B (5) of the B R Act, 1949.

Within six months of the Directions’ issuance, banking businesses must present a plan for reducing their shareholding to comply with the Guidelines. Bank payments are not included.

Within 14 days of the completion of the allotment process, banking companies are required to declare the specifics of the offering and allocation of shares in Form A2. They must also make sure no one exceeds the restrictions set by the Reserve Bank for them. Additionally, they must send a report to the Department of Regulation, Reserve Bank of India, within 30 days, detailing the encumbrance of shares as disclosed by the promoters and promoter group in Form B to the Department of Supervision within one working day.

The Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023, which combines three master directives, are abolished as of the day they were issued.

Subsequently, these directives offer precise standards for buying and holding stock or voting rights in Indian financial organisations such as Local Area Banks (LABs), Small Finance Banks (SFBs), and Payments Banks (PBS). Any planned acquisition must first receive Reserve Bank permission, and banks are expected to regularly check on the “fit and proper” status of significant shareholders and applicants.

To comply with the Guidelines, banks must also present reports and a plan for reducing their holdings. Additionally, they must fill out Form A2 with information about the issue and allocation of shares and Form B with information about the encumbrance of shares reported by the promoters and promoter group. These steps are intended to guarantee the stability and safety of the banking industry.


Stricter guidelines reduce the risk of any fraudulent practices and also ensure transparency among the Shareholders in order to avoid any unwanted claims or disputes.