The Reserve Bank of India on Monday amended rules related to the acquisition and holding of shares in banks to ensure that their ultimate ownership and control remain well diversified and that major shareholders are “fit and proper” on an ongoing basis.

The central bank has issued ‘Master Direction – Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Instructions, 2023’.

“These instructions are issued with the intention of ensuring that the ultimate ownership and control of the banking companies is well diversified and that the main shareholders of the banking companies are ‘fit and proper’ on an ongoing basis,” it said.

Under the Master Directorate, any person intending to make an acquisition that is likely to result in a controlling interest in a banking company must obtain prior approval from the Reserve Bank by submitting an application.

“The decision of the Reserve Bank to (a) grant or deny permission or (b) grant permission for the acquisition of a lesser amount of total participation than requested, will be binding on the applicant and the banking company in question.” . He said.

After such acquisition, if at any time the total interest falls below five per cent, the person will need to apply for further approval from the RBI if the person intends to increase the total interest again to five per cent or more of the capital paid social security or full voting rights, he added.

The RBI further said that banking companies have been asked to put in place a mechanism to obtain information about any change in significant beneficial ownership or the acquisition by an individual of 10 per cent or more of the paid-up share capital of major shareholders.

In addition, a banking company will need to establish an ongoing monitoring mechanism to ensure that a majority shareholder has obtained prior approval from the Reserve Bank for participating/voting rights.

He further said that the Reserve Bank’s permission to acquire shares or voting rights in a banking company for non-promoters will be limited to 10 percent in the case of individuals, non-financial institutions, and financial institutions related to large industrial houses.

The limit is 15 percent for financial institutions, public sector companies, and the government.

In the case of a promoter, the limit has been set at 26 percent of the paid-up share capital or voting rights once 15 years have elapsed from the beginning of the activity of the bank.

Banks have also been ordered to submit regular reports on ongoing monitoring arrangements to their boards.

The instructions apply to all banking companies including Local Area Banks (LABs), Small Finance Banks (SFBs) and Payments Banks (PBs) operating in India.