The draft policy framework for ownership and governance of private banks, released by the Reserve Bank of India on Friday, has said that no private bank and foreign banks operating in India, would be allowed to hold more than a 5 per cent stake in another private bank. 
 
Under the Banking Regulation Act, a domestic bank can now hold up to 30 per cent stake in another bank. 
 
The policy draft also suggests capping the stake of one single entity or a group of related entities through the foreign direct investment route in private banks at 10 per cent. 
 
The same limit is applicable to foreign institutional investors too. They will not be allowed to hold more than 10 per cent within the overall FII limit of 49 per cent. 
 
It also said that promoters of new private banks may be allowed to start with a higher stake, but will be required to bring it down to 10 per cent within three years. At present, promoters are allowed to hold up to a 49 per cent stake in a new private bank. 
 
The draft guidelines also said that voting rights restrictions and other related provisions of the Banking Regulation Act would continue to be applicable as appropriate. 
 
At present, the voting right of stakeholders is capped at 10 per cent, irrespective of the holding of an entity. If an individual entity's maximum stake is capped at 10 per cent, there will not be any need to free voting rights. 
 
The proposed norms will have an immediate impact on HSBC's 14.62 per cent acquisition of UTI Bank. HSBC will now have to indicate to the Reserve Bank of India a time-bound plan to bring down its stake in UTI Bank to 5 per cent. HSBC executives refused to comment on this issue. 
 
Promoters of new private sector banks like Kotak Mahindra, Yes Bank and others, including HDFC Bank, will be required to bring down their stakes to 10 per cent. 
 
Kotak Mahindra Bank started operations last year. One of the conditions in the licence agreement with the RBI was that the promoters could hold up to 49 per cent stake for five years. 
 
Yes Bank is expected to set up shop in the third quarter of the current financial year. 
 
Housing Development Finance Corporation, which floated HDFC Bank in the mid-1990s, still holds over 24 per cent of the bank's equity. 
 
Similarly, ICICI Bank will also have to bring down its stake in both Federal Bank and South Indian Bank, in both of which it holds more than 15 per cent. 
 
The draft norms said that wherever any individual entity or related entities hold stakes in excess of 10 per cent, they will be required to indicate a time-table for reducing it to the permissible level. 
 
The draft guidelines also said that all private banks should have a net worth of Rs 300 crore (Rs 3,000 million) at all times. Where the net worth declines to Rs 300 crore, it should be restored within a reasonable time. 
 
This will trigger a major shakeout in old private banks, most of which have a lower capital base. They will be required to indicate a time-table to push up their capital base to the stipulated level. 
 
The one-point objective of the norms -- which have been placed in the public domain for discussion and feedback -- seems to be to make the ultimate ownership and control of private sector banks well-diversified. Besides, important shareholders holding more than 5 per cent and above, should be 'fit and proper'. 
 
To avoid any conflict of interest, the RBI will not appoint its nominee on the boards of private banks, except in exceptional circumstances. 
 
No single entity or group of related entities, will be allowed to hold, directly or indirectly, in excess of 10 per cent of the paid-up capital of a private bank. Where the ownership is that of a financial entity, it must be a widely held entity and publicly-listed. 
 
As per the existing policy, large industrial houses will not be allowed to set up banks, but will be permitted to acquire strategic stakes not exceeding 10 per cent of the paid-up capital of the bank. 
 
The draft guidelines clarified that the aggregate foreign investment in private banks from all sources (FDI, FII, NRI) could not exceed 74 per cent, and at all times, at least 26 per cent of the paid-up capital of the private bank would have to be held by residents.