Centrum Financial Services and BharatPe will have to go through several conditions laid down by the Reserve Bank of India (RBI) even as their proposal to start a small finance bank for taking over scam-hit Punjab and Maharashtra Cooperative (PMC) Bank has won the regulator’s approval.

The proposed small finance bank (SFB) shall initially be held by Centrum Financial Services, the RBI’s in-principle approval letter said. Within three and a half years from the date of approval, Centrum group will have to transfer its stake in the SFB to a non-operative financial holding company (NOFHC).

The group will also have to bring all its regulated financial entities under the NOFHC fold during this period. As long as Centrum “retains significant controlling interest” (more than 10% of paid-up voting equity share capital) in the group companies, Centrum Housing Finance Ltd and Centrum Microcredit Ltd, the “proposed SFB shall not undertake any type of housing loan and microcredit business”.

Due to the complex process of takeover of PMC, the RBI has provided for a few relaxations. The regulator has given Centrum and BharatPe eight years’ time to cut their stake to 40% or below and 10%, respectively, of paid-up capital. Under the current regulations for SFBs, promoters are allowed up to five years to bring down their stake to below 40%.

Centrum will also get six years to list the SFB. Under the current norms, SFBs have to go for a public float within three years after reaching a net worth of Rs 500 crore.

The RBI has also given an additional time of three years for the new SFB to comply with priority sector lending target of 75% of adjusted net bank credit; requirement of at least 50% of loan portfolio constituting of advances of up to Rs 25 lakh; and exposure limits to single and three obligor. The new SFB will have to open at least 25% of its banking outlets in unbanked rural centres.

RBI, however, reserves the right to review and modify these relaxations and forbearances, if warranted.

“RBI may withdraw the ‘in-principle’ approval if any adverse features are noticed or any condition laid down by it is violated or any other development which may prejudice efficient functioning of the proposed SFB is noticed,” the letter stated.

Incorporation

The small finance banking company shall enter into an agreement with Centrum Financial Services Ltd (CFSL). This will be to transfer the assets and liabilities of CFSL to proposed SFB, which is to be executed soon after issuance of licence for SFB.

CFSL shall then approach RBI for issuance of SFB licence, with evidence of infusion of initial capital of a minimum Rs 500 crore in the banking company. Out of this, a minimum of Rs 250 crore need to be in cash. The remaining shall be through slump sale of CFSL with the proposed SFB. This is to ensure that the SFB commences operations with a minimum capital of Rs 500 crore and minimum promoters’ contribution of 50% of the paid-up voting equity share capital of the proposed SFB.

Corporate structure of the bank

Any change in the shareholding of 5% or more by any shareholder from what was proposed in the application, shall be with the prior approval from RBI.

The promoters shall hold a minimum of 40% of the paid-up voting equity share capital of the bank at all times during the first five years from the date of commencement of business of the bank.

Capital of the bank

The SFB shall have an infusion of minimum initial capital of Rs 500 crore from the date of commencement of business.

By the end of first year from the date of commencement of business, the promoter (CFSL) and the ‘person acting in concert’ (Resilience Innovation Pvt Ltd or BharatPe) of the SFB shall have to make a further cash infusion to take the total paid-up voting equity share capital of the SFB to Rs 900 crore.

Further, warrants of Rs 900 crore shall be issued at par to the promoter and the ‘person acting in concert’ (RIPL), of the SFB which shall be exercised for cash infusion within third and fifth year from the date of commencement of business of the bank.

The promoters shall ensure that the initial and subsequent subscriptions to the capital by promoters and others (a) shall be made from genuine and bona fide sources (b) shall be made in a transparent and authorised manner and (c) shall not attract domestic and international legal prohibitions against money laundering and related offences as applicable.

Other conditions

The ‘in-principle’ approval has been granted based on the assessment of the “fit and proper” status of the promoter/ promoter group and the ‘person acting in concert’ as per the declaration submitted by them.

In this context, the promoter/promoter group and the ‘person acting in concert’ shall immediately report to the RBI any developments that may take place after the date of ‘in-principle’ approval and would have an impact on the assessment of the “fit and proper” status of the promoter/ promoter group and ‘person acting in concert’.

As regards the interpretation of any of the clauses/provisions of the terms and conditions of the guidelines/approval, the decision of the RBI shall be final.