Restrictions for Acquisition of NBFC’s by a Corporate Entity

Under RBI regulations, any entity looking to purchase shares of a bank that would result in a major shareholding should seek prior approval from the regulator. Major shareholding is defined as an aggregate holding of 5% or more of the paid-up share capital or voting rights in a bank. In this article, the author will be detailing all the regulations from Banking Regulation Act, RBI Master Circulars, SEBI Takeover Code and Companies Act whatever restrictions set for acquirer Company .

Banking Regulation Act, 1949

1. Section 12 (2) - A person holding shares in a banking company in respect of any shares held by him shall not exercise voting rights over ten per cent of the total voting rights of all the shareholders of the banking company. (RBI may further increase, in a phased manner up to 20%).

   
   

2. Section 12B (3)- the acquisition by way of transfer of shares of a banking company shall not be transferred if the Reserve Bank is not satisfied. In case the transfer has been registered, the transferee shall not be entitled to exercise voting rights on a poll in any of the meetings of the banking company.

   
   

3. Section 13- The banking company shall not pay out directly or indirectly by way of commission, brokerage, discount or remuneration in any form in respect of any shares issued by it where the amount exceeds two and one-half per cent in the aggregate of the paid-up value of the said shares are issued.

Master Circular on Foreign Investments in India1

Indian companies eligible to issue shares to non-residents under the FDI Scheme cannot retain the share subscription amount in a Foreign Currency Account without prior approval from the Reserve Bank.

Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies, January 16, 2023

In the 'Master Direction - Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023' issued by RBI said, Companies which go with major acquisitions in banks, has to go through RBI scrutiny.

These directions are issued with the intent of ensuring that the ultimate ownership and control of banking companies are well diversified and the major shareholders of banking companies are 'fit and proper' continuingly,"

The banking institutions must contact the RBI to receive details regarding any modifications in significant beneficial ownership or acquisition by an individual to the extent of 10% or more of the paid-up equity share capital of the primary shareholder.

Approval from the Reserve Bank is needed for non-promoters to purchase shares or voting rights in a banking institution, limited to 10% for individuals, non-financial institutions, and financial institutions associated with large industrial groups. For financial institutions, public sector enterprises, and the government, the limit is set at 15%.

If authorized by the Reserve Bank to hold 10% or more but less than 40% of the paid-up equity share capital of the banking company, the acquired shares must remain under a lock-in period for the initial five years from the acquisition's completion date.

As per the provisions of sub-section (2) of Section 12 of BR Act, 1949, r/w gazette notification DBR.PSBD.No.1084/16.13.100/2016-17 dated July 21, 2016, shareholder in a banking company cannot exercise voting rights on poll above 26 per cent of total voting rights of all the shareholders of the banking company.

SEBI(SAST Regulations), 2011

The Board of Directors cannot dispose of any substantial company assets through sale, lease, etc., or make borrowings beyond regular business operations without shareholder consent. They are also restricted from issuing unissued shares, altering the capital structure, executing buybacks, engaging with related parties, or accelerating rights vesting obligations.

Regulation 26(2)- During the offer period, the target company or its subsidiaries must not dispose of any material assets through sale, lease, or encumbrance. Additionally, the target

company cannot engage in any contractual relationship without the approval of the shareholders through a postal ballot. In the case of a hostile takeover, if the target company sells its key assets to avoid the takeover threat, it cannot use this defense as the Board of Directors is obligated not to enter into any sales agreements.

• The Target Company is barred from engaging in significant borrowings or issuing new shares. However, the company and its subsidiaries can allot shares on convertible securities issued before the public announcement of an open offer or when a document has been filed with the ROC or a record date declared before the open offer announcement.

  
  

• After a public announcement, the Target Company cannot conduct share buybacks or alter the capital structure. Additionally, they are prohibited from entering, amending, or terminating significant contracts involving the company or its subsidiaries.

Regulation 26(4) – Target company shall be prohibited from fixing any record date for a corporate action on or before the 3rd working day of the start of the tendering period till the end of such tendering period.

Companies Act, 2013

Section 239- The books and documents of a company amalgamated with or acquired by another company under this Chapter cannot be disposed of without the prior permission of the Central Government. The Government may appoint a person to examine these materials to determine if they contain evidence of any offense related to the management of the transferor company, its amalgamation, or the acquisition of its shares.

Indian regulatory bodies permit international takeovers, but such acquisitions are limited to private sector banks under the Master Direction on Ownership in Private Sector Banks, Directions, 2016. The acquisition of shares in a private sector bank is governed by the existing FDI policy, which stipulates that total foreign investment in private sector banks should not exceed 74% of the paid-up capital. Moreover, Indian residents must hold at least 26% of the paid-up share capital of private sector banks at all times.

References

1 RBI/2012-13/15, Master Circular No.15/2012-13.

This article is authored by Sudeepthi Veeravilli. She was among the Top 40 performers in the Corporate Law Quiz Competition organized by Lets Learn Law.