M&M purchases stock in RBL Bank. What are RBI's guidelines for private bank ownership?
According to the RBI, banks are "special" organisations since they serve as fiduciaries and not only take and use a sizable quantity of uncollateralized public funds, but also lend them.
On July 26, Mahindra & Mahindra (M&M) said that it has invested Rs 417 crore to acquire a 3.53 percent stake in RBL Bank. The business also made a suggestion that it will increase its holdings in the bank to 9.9%.
Following the news, the price of M&M plummeted by more than 6% while RBL Bank's shares soared by more than 2.5%. Market analysts cited in a Hindu Businessline (BL) story claimed that although RBL investors are dissatisfied because a reputable company like M&M is not taking a substantial role in the bank's operations, M&M's investors may be worried about the group over-diversifying its capital.
Why did M&M declare that it will sell its less than 10% holding in the bank, and what do the Reserve Bank of India's (RBI) policies on corporations buying bank ownership say? In this tale, we attempt to provide answers.
Guidelines from the RBI on ownership and management of private sector banks
The Reserve Bank of India (RBI) said that banks are "special" organisations since they not only take and manage a sizeable sum of uncollateralized public funds in a fiduciary role, but also lend this money. The paper was headed "Guidelines on Ownership and Governance in Private Sector Banks" and was published in February 2005. Considering that banks are essential to the efficient operation of the payment system.
Given this context, the RBI established a number of regulations in the Banking Regulation Act of 1949, which has periodically been revised. The RBI has created a thorough policy framework for ownership and governance in the Indian private sector banks as part of the regulation.
What does ownership mean in the framework?
Private sector banks must have well-diversified ultimate ownership and control.
The system makes that large stockholders are "fit and proper" as required by RBI regulations. Significant shareholders are those who own 5% or more of the bank.
The framework also guarantees that the directors and CEOs in charge of the bank's operations are "fit and proper" in accordance with RBI regulations.
What does the RBI have to say about ownership?
Any acquisition of shares of 5% or more of the paid-up capital of the private sector bank shall be subject to the RBI rules on acknowledgment for acquisition or transfer of shares released on February 3, 2004.
Additionally, the legislation attempts to prevent any one business or group of linked companies from holding more than 10% of the paid-up capital of any private sector bank in order to guarantee diverse ownership of banks. Any higher degree of purchase must thus have RBI's prior clearance.
A bank may M&M take over
The RBI prohibits M&M from taking control of a bank. However, with the RBI's clearance, it is permitted to own up to 10% of a private sector bank. Any investment more than 5% in a private sector bank requires RBI permission.
If a commercial entity establishes its own bank, it will be able to use public funds to finance its operations even when doing so is against the bank's best interests.
The RBI has opposed the entry of business entities and conglomerates into banking due to the potential conflict of interest.
