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Getting More Than 5% of a Bank's Stock Now Requires RBI Prior Approval

Published on January 18, 2023
Current Context: Anyone who intends to make an acquisition that is likely to result in a major shareholding in a banking company must first obtain the RBI's prior approval by submitting an application, according to the Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023" published on January 16, 2023.
Getting More Than 5% of a Bank's Stock Now Requires RBI Prior Approval
  • Currently, banks in India are required to make loan loss provisions using the "incurred loss" method, previously the norm worldwide. The RBI is proposing to change the prudential norms regulating loan loss provisioning by banks to integrate the more proactive predicted credit loss strategy as opposed to the existing "incurred loss" method to increase the resilience of the banking sector further.
  • When the entity wanting to acquire a stake in banks has finished its due diligence, the RBI's decision to permit, deny or permit a reduced number of shares will be binding on the applicant and the bank.
  • If a person's aggregate shareholding falls below 5% following a purchase, they must reapply for RBI permission if they want to raise it to 5% or higher.
  • Banks with a combined shareholding in firms that do not adhere to the rules must change their practices within six months.
  • For private banks where the state or union government holds a stake, the RBI will lay out a differentiated shareholding dilution scheme.
  • The authority conferred by Sections 12, 12B, and 35A of the Banking Regulation Act of 1949 is used to issue these directives.
  • A person's "aggregate holding" of 5% or more of the voting rights or paid-up share capital in a banking business is referred to as a "major shareholding."

Question: 

Q.1 Getting More Than ____ of a Bank's Stock Now Requires RBI Prior Approval?
a. 5%
b. 6%
c. 3.5%
d. 7%
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