Non-Operative Financial Holding Company

In February 2013, RBI had issued final guidelines to apply for new banking licenses in the private sector. Under these guidelines, RBI said that the entities or groups in the private sector, entities in public sector and Non-Banking Financial Companies (NBFCs) can set up a bank, which shall be a  wholly-owned Non-Operative Financial Holding Company (NOFHC). The company so formed will be registered as a NBFC.  On the basis of various applications, RBI issued in principle license to only 2 applicants viz. Infrastructure Development Finance Company (IDFC) and microfinance lender Bandhan Financial Services Ltd to start banking services in the form of NOFHC entities. This article discusses salient features of the NOFHCs:

Objective of NOHFC

The objective of bringing into the concept of the NOFHC is to separate several financial activities carried out by the same holding company.  This implies that the holding company can carry out other commercial, industrial as well as financial activities but one should not encroach upon the functions of another. Further:

• NOFHC will be allowed to engage itself in several other financial activities in the form of Joint Ventures, Subsidiaries or Associate Ventures after three years of its formation subject to some exceptions and with every activity subjected to the supervision of its primary regulator but RBI has the power to call for information and intervene when circumstances demand.
• NOFHC will have to follow a separate set of Corporate Governance Rules as well as exposure norms. The NOFHC shall be wholly owned by the Promoter / Promoter Group. The NOFHC shall hold the bank as well as all the other financial services entities of the group.

Initial minimum paid-up voting equity capital

Initial minimum paid-up voting equity capital for a bank shall be Rs. 5 billion i.e. Rs. 500 Crore.  The NOFHC shall initially hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked in for a period of five years and which shall be brought down to 15 per cent within 12 years. The bank shall get its shares listed on the stock exchanges within three years of the commencement of business by the bank.

Regulation of NOFHC

The bank will be governed by the provisions of the relevant Acts, relevant Statutes and the Directives, Prudential regulations and other Guidelines/Instructions issued by RBI and other regulators.  The NOFHC shall be registered as a non-banking finance company (NBFC) with the RBI and will be governed by a separate set of directions issued by RBI.

FDI in the NOFHC

The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy.

Corporate governance of NOFHC

At least 50% of the Directors of the NOFHC should be independent directors. The corporate structure should not impede effective supervision of the bank and the NOFHC on a consolidated basis by RBI.

Prudential norms for the NOFHC

The prudential norms will be applied to NOFHC both on stand-alone as well as on a consolidated basis and the norms would be on similar lines as that of the bank.

Exposure norms

The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank shall not invest in the equity / debt capital instruments of any financial entities held by the NOFHC.

Business Plan for the bank

The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion.

Other conditions for the bank :

• The Board of the bank should have a majority of independent Directors.
• The bank shall open at least 25 per cent of its branches in unbanked rural centres (population upto 9,999 as per the latest census)
• The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks.
• Banks promoted by groups having 40 per cent or more assets/income from non-financial business will require RBI’s prior approval for raising paid-up voting equity capital beyond ` 10 billion for every block of Rs. 5 billion.
• Any non-compliance of terms and conditions will attract penal measures including cancellation of licence of the bank.
• Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.