Reserve Bank of India (Setting Up of Wholly Owned Subsidiaries by Foreign Banks) Guidelines, 2025

Introduction

India’s post-crisis banking framework has increasingly considered local incorporation of foreign banks as central to the goal of safeguarding financial stability and depositor protection. The Reserve Bank of India’s scheme for setting up Wholly Owned Subsidiaries (“WOS”) by foreign banks translates this policy into a detailed regulatory framework that reshapes how global banks may enter, operate, and expand in the Indian market.

Policy Rationale: International Context

In the contemporary context with the prevalent global financial crisis, interconnected foreign banks pose risks, as their failure presents a challenge for cross-border resolution. Major global countries respond by strengthening capital and liquidity buffers, while also pushing for the local incorporation of foreign banks. Local incorporation creates a separate legal entity with its own capital, board, and clear segregation of assets and liabilities in the host country. This upholds the applicability of Indian laws, gives local regulators autonomy and protection to domestic depositors. Additionally, incorporation streamlines the resolution procedure and safeguards financial stability.

Foreign Banks in India: Detailed Framework

Foreign banks may operate either through branches or a WOS, subject to the conditions, prudential norms and procedures set out below.

Branch mode or wholly owned subsidiary

Foreign banks intending to enter India in the future shall operate only through a WOS incorporated in India, and where such conditions are not attracted at the time of entry, they may operate either through a branch or WOS mode but must convert once they come within the mandatory criteria. Banks entering after August 2010 may be advised by the RBI to convert their branches into a WOS, while banks already operating before that date may be allowed to operate as branches or/and may be required to convert if so required by the RBI.

Eligibility for setting up a WOS

Any WOS requires prior approval from the home-country regulator, and RBI must be satisfied that the bank operates under strong, consolidated supervision. When considering applications, the RBI takes into account the financial standing and global ranking of the bank, as well as its economic and financial sector relations, ownership, ratings, and the robustness of its risk management and controls.​

Conditions requiring presence as WOS only

The RBI can impose the subsidiary form if the home country grants preferential treatment to domestic deposits, has inadequate or insufficient disclosure, or where the bank’s group structure is complex and not widely held or when the RBI is not satisfied with supervision in the home jurisdiction. Additionally, if foreign bank in branch mode becomes systematically important based on its asset share, it must convert to WOS.

National treatment and systemic safeguards

WOSs are generally accorded near-national treatment with a domestic private sector bank. From a systemic risk perspective, RBI may impose additional restrictions: if the combined capital of foreign banks in India exceeds 20% of the capital of the domestic banking system, further expansion by foreign banks may require RBI approval, and branch licenses may be constrained where foreign branch assets exceed 15% of total banking system.​

Minimum capital requirement

The operations of each WOS should start with a minimum paid‑up voting equity capital of ₹500 crore, which must be brought in through foreign exchange that is freely convertible, and, after conversion, the eligible branch capital will be reckoned towards the aforesaid minimum requirement, with a minimum net worth of ₹500 crore. It shall maintain a capital-to-risk-weighted assets ratio of at least 10 per cent or a higher level as prescribed by the RBI and comply with the Basel III norms applicable to Indian banks initially.​

Group Resources & Corporate Governance

A WOS must adhere to a corporate governance framework that is aligned with the standards of Indian private sector banks. This includes ensuring that 51% of directors meet the requirements of Section 10A, maintaining at least two-thirds of non-executive directors and one-third of independent directors, and adhering to nationality and residency norms, namely, that a minimum of 50% of directors must be Indian Nationals/NRIs/PIOs, with at least one-third being resident Indian Nationals. Directors must satisfy the fit-and-proper criteria, and the WOS must appoint a part-time Chairman and a full-time resident CEO, both of whom require prior approval from the RBI.

Statutory, Regulatory and Operational Conditions for WOS

A WOS of a foreign bank must operate within the full framework of Indian laws, including the Companies Act, Banking Regulation Act, RBI Act, FEMA and PSS Act, and will be subject to consolidated supervision where group NBFCs exist. Enhanced checks apply to promoters from jurisdictions with weak AML/KYC standards. WOS may raise rupee resources through permitted non-equity instruments and must comply with domestic branch authorisation rules, including obtaining special approval for sensitive locations. Priority Sector Lending norms applicable to Indian banks also apply, with a five-year relaxation for converted banks with fewer than 20 branches.

Parent entities must issue a Letter of Comfort, and any support must remain strictly at arm’s length. Dividend distribution, investment in subsidiaries, and group relationships continue to be subject to RBI scrutiny. WOS may dilute promoter shareholding to 74%, undertake M&A within regulatory limits, and must follow an approved business model focused on financial inclusion. Additional requirements include CBS-based operations from day one, robust grievance redressal, and compliance with the Ombudsman scheme. Conversion into a WOS, as well as fresh applications, must follow the RBI-prescribed process through Form III on the PRAVAAH portal, along with necessary approvals and post-licensing amalgamation steps.

Implications and Necessity for India

India’s insistence on local incorporation of foreign banks through the WOS framework is driven by the need to manage cross-border bank failures and to protect the domestic system from external shocks. RBI recently reported that 34 foreign banks were operating in India, mainly through branches, with balance sheets that could transmit parent-level liquidity and capital shocks into the Indian system if not effectively ring-fenced. International standard-setters, such as the Basel Committee, have also highlighted the systemic externalities of global systemically important banks and called for robust national resolution. Many countries have implemented these frameworks by requiring local subsidiaries for significant foreign bank operations.

The framework aims to:

• Ensure Indian rules, capital requirements and resolution powers fully cover the local operations of foreign banks.
• Safeguard Indian depositors by keeping Indian capital and assets ring-fenced, so they cannot be easily pulled out to support a stressed parent.
• Prevent any one set of foreign banks from becoming too dominant by limiting their overall share in the system and holding them to the same PSL, governance, and financial inclusion duties as domestic banks.

The implications of this framework are both prudential and developmental. WOSs receive near-national treatment, can expand their branches more freely, access rupee resources, participate in mergers with private sector banks, and bring global expertise into the Indian market. At the same time, caps on the aggregate capital and asset share of foreign banks, stricter governance, and PSL obligations ensure that foreign participation does not undermine domestic banks or public policy goals, but instead operates within a clearly defined framework.

Conclusion

The WOS framework allows India to harness the benefits of foreign banks while keeping their risks manageable and firmly under domestic control. By insisting on local incorporation, stronger capital and governance standards, and clear limits on systemic concentration, the regime aligns India with global post-crisis reforms and strengthens the credibility of its banking system.