The RBI has simplified bank-shareholding rules for mutual funds, insurance companies and pension funds by allowing eligible investors to obtain one-time approval for subsequent major acquisitions up to 10%, instead of potentially requiring fresh RBI approval each time their stake falls below 5% and is subsequently increased again. Let’s understand the new rules with the help of an example.
What has changed?
1. Biggest change: One-time RBI approval for future acquisitions
Earlier: If a person obtained RBI approval for a major shareholding in a bank, but later their total holding fell below 5%, they had to obtain RBI’s prior approval again before subsequently acquiring a major shareholding.
Now: RBI can give a one-time approval to certain eligible institutional investors for subsequent acquisitions of major shareholding in the same bank, up to 10% of the bank’s paid-up share capital or voting rights.
This means they will not necessarily need to seek fresh RBI approval every time their holding falls below 5% and they subsequently increase it again, provided they have obtained this one-time approval and comply with its conditions.
2. Who can get this one-time approval?
RBI has introduced a new term, “qualifying person.”
A qualifying person can be:
- A SEBI-registered Mutual Fund
- A PFRDA-registered Pension Fund
- An IRDAI-registered Insurance Company
The entity must also not belong to the promoter group or group of the investee banking company under the definition provided in the Directions.
So, in simple terms, this relaxation is specifically designed for regulated institutional investors such as mutual funds, insurance companies and pension funds.
3. Maximum limit under one-time approval: 10%
RBI can grant one-time approval for subsequent acquisitions of major shareholding up to 10% of paid-up share capital or voting rights of a banking company. The approval can be granted to qualifying persons individually or collectively. Applications have to be made through RBI’s PRAVAAH portal.
4. Initial acquisition still requires RBI approval
This is an important point. RBI has not removed the requirement for approval for the initial acquisition of major shareholding.
The circular specifically says: Prior approval will continue to be mandatory for the initial acquisition of major shareholding in a banking company.
The relaxation relates to subsequent acquisitions by qualifying institutional investors after one-time approval has been obtained.
5. RBI can revoke the one-time approval
The approval is not unconditional. RBI can revoke it if:
- the terms and conditions of approval are violated; or
- the qualifying person, or a person associated with it, is subsequently found not to be “fit and proper.”
So RBI continues to retain supervisory control over these investors.
6. 10% limit will be calculated on an aggregate basis
For the purpose of the one-time approval, the major shareholding limit of up to 10% will be calculated on an aggregate basis according to the existing provisions of the Directions.
7. Portfolio managers get an important clarification
RBI has also clarified when shares acquired by a client will not be treated as an indirect acquisition by the client’s portfolio manager. This treatment applies when all three conditions are satisfied:
- The client is the registered owner of the shares and has the voting rights.
- The portfolio manager only provides non-binding investment/divestment advice.
- If the portfolio manager exercises voting rights on behalf of the client, it does so based on a specific mandate from the client.
This clarification helps distinguish the client’s ownership from the portfolio manager’s role as an adviser.
8. Continuous monitoring will continue
RBI has amended its continuous-monitoring provisions to specifically include “qualifying persons with one-time approval.” Therefore, receiving one-time approval does not mean that the investor is outside RBI’s ongoing monitoring framework.
9. Reporting required when holding crosses 5%
There is also a new reporting requirement. After the initial acquisition, major shareholders with one-time approval and qualifying persons with one-time approval must report when their aggregate holding falls below 5%, or increases above 5%.
They must report the change to RBI, and the concerned banking company within three working days of the event.
Old Rule vs New Rule
| Point | Earlier position | New position |
|---|---|---|
| Initial major shareholding | Prior RBI approval required | Still required |
| Holding subsequently falls below 5% | Fresh RBI approval required before subsequent major acquisition | Eligible investors can obtain one-time approval |
| Who gets relaxation? | No such special one-time approval framework | Mutual funds, pension funds and insurance companies meeting conditions |
| Subsequent acquisition limit | Fresh approval framework applied | One-time approval can cover acquisitions up to 10% |
| Application | RBI approval process | One-time approval through PRAVAAH |
| RBI supervision | Applicable | Continues |
| Approval cancellation | — | RBI can revoke one-time approval for non-compliance or failure of fit-and-proper requirements |
| Crossing 5% | Existing framework | Movement below/above 5% must be reported within 3 working days |
Simple example
Suppose a qualifying mutual fund obtains RBI approval and acquires a major stake in Bank ABC. Later, its investment falls below 5%.
Under the earlier framework described by RBI, if it subsequently wanted to make another acquisition amounting to major shareholding, fresh prior RBI approval was required.
Under the new framework, the qualifying mutual fund can obtain a one-time approval from RBI for subsequent acquisitions, subject to the applicable conditions and the 10% ceiling.
So the amendment essentially reduces the need for repeated RBI approvals for eligible regulated institutional investors while keeping RBI’s oversight, reporting requirements and fit-and-proper controls intact.
Click here to download RBI Circular
