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.

2026 Amendment: Harmonised Dividend Norms

On March 10, 2026, the RBI issued the Reserve Bank of India (Setting Up of Wholly Owned Subsidiaries by Foreign Banks) Amendment Guidelines, 2026 (Ref. No. RBI/DOR/2025-26/233), introducing a significant update to Paragraph 13 of the 2025 Guidelines relating to dividend declaration by foreign bank WOS entities.

The amended provision clarifies that a WOS of a foreign bank, being a company incorporated in India, may declare dividends in the same manner as domestic commercial banks, subject to the criteria laid down in the Reserve Bank of India (Commercial Banks – Prudential Norms on Declaration of Dividends and Remittance of Profit) Directions, 2026. Dividends so declared may be repatriated in accordance with the provisions of FEMA, 1999. These amendments come into effect from Financial Year 2026-27. 

The amendment achieves three key regulatory objectives: 

• It reinforces the Indian incorporation status of foreign bank WOS entities, subjecting them to the same dividend rules as domestic banks. 
• It establishes unambiguous competitive parity between foreign bank subsidiaries and Indian commercial banks, preventing regulatory arbitrage. 
• It updates the cross-reference to the latest prudential directions (2026), replacing the earlier 2025 Directions, and explicitly integrates FEMA compliance for overseas profit repatriation. 

Banking Laws (Amendment) Act, 2025: Broader Regulatory Context

The WOS framework operates alongside a broader legislative overhaul of Indian banking law. The Banking Laws (Amendment) Act, 2025, notified on April 15, 2025 and implemented in two stages (August 1 and December 15, 2025), amended five major banking legislations – the RBI Act 1934, Banking Regulation Act 1949, SBI Act 1955, and the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980.

Key reforms under this Act with relevance to foreign bank WOS operations include: 

• Governance improvements: The threshold for ‘substantial interest’ in a bank has been raised from ₹5 lakh to ₹2 crore (unchanged since 1968), reflecting economic realities and impacting director eligibility assessments relevant to WOS governance. 
• Depositor protection: Up to four nominees may now be appointed per bank account, with simultaneous and successive nomination options – applicable to WOS entities as companies incorporated in India.
• Reporting modernisation: CRR and SLR reporting cycles have been standardised to the last day of each fortnight/month across all bank types, replacing the outdated ‘last Friday’ system. This uniformity applies to WOS entities as well. 
• Audit quality for PSBs: Public sector banks are now empowered to set auditor remuneration, a governance reform that signals the direction of RBI’s broader expectations for all regulated banking entities, including WOS. 

Updated Treatment of Foreign Bank Branch Exposures

In December 2025, the RBI also issued amendments to the Large Exposures Framework (LEF) and Intragroup Transactions and Exposures (ITE) guidelines, providing clarification on the prudential treatment of exposures of foreign bank branches operating in India to their group entities. These changes reinforce the principle that foreign bank WOS and branch entities must manage concentration risk carefully, particularly in relation to ultra-large borrowers and interconnected group counterparties. Banks are now required to maintain explicit policies on concentration risk management and must factor in a borrower’s total banking system exposure during credit assessment. 

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.

The 2026 amendment to dividend norms and the enactment of the Banking Laws (Amendment) Act, 2025 mark the most recent chapter in this evolving framework, reinforcing competitive neutrality, improving governance, and bringing India’s banking regulation closer to global best practices. Foreign banks considering entry or conversion to the WOS model should factor in these updated norms particularly the new dividend repatriation rules effective FY 2026-27 as part of their regulatory compliance planning. 

Last Updated on 27 May, 2026