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Issue and Pricing of Shares by Private Sector Banks

Finsec Law Advisors

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The Reserve Bank of India has recently started issuing master directions, instead of the annual master circulars, which consolidate instructions issued by the RBI on each subject matter. These master directions will be updated regularly as and when a circular is issued on the respective subject. RBI issued such a master direction, on April 21, 2016, in relation to the norms governing issue and pricing of shares by private sector banks.

The erstwhile norms required private sector banks to seek prior approval of RBI for initial public offers and preferential issues, including qualified institutional placements. No such approval was required in case of rights and bonus issues. The master direction has done away with this requirement entirely by stating that banks have general permission to undertake all such issues without prior-approval of the RBI. However, certain other requirements that private sector banks must comply with at the time of undertaking an issue include the following:

  • Compliance with Foreign Exchange Management Act, 1999, and the applicable foreign investment policy.
  • Compliance with the Companies Act, 2013, the rules thereunder and applicable SEBI guidelines, which include requirements such as board and shareholder approvals.
  • Compliance with RBI prior approval requirements, if any of the investors subscribing to shares as part of the issue are breaching the 5% shareholding threshold.
  • Compliance with the pricing norms prescribed by SEBI in case of listed banks, and prescribed by the Companies Act, 2013, and the rules thereunder, for unlisted banks.

Under the new regime, the bank will be required to interact with RBI only on completion of allotment, i.e., when they are required to report all details of the issue in the prescribed formats. Due to the removal of the prior-approval requirements entirely, the issue process for private sector banks is now simplified and has been made quicker and more efficient. Although the master direction does not contain any other significant changes, it brings in clarity and certainty regarding RBI’s position on issue of shares by private sector banks.