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Introduction
The Reserve Bank of India (“RBI”) has, over time, moved from scattered circulars to a structured framework for regulating who may own shares in an Indian bank, how much they may own, and how far those shares may translate into voting power. The previous position for “banking companies” was set out in the Master Direction – Reserve Bank of India (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023 (“2023 Directions”), read with the Reserve Bank of India Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies (“2023 Guidelines”).
The Reserve Bank of India (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025 (“Directions”) represent the next iteration of this framework, but for a narrower universe. They largely preserve the existing prudential architecture around the five per cent “major shareholding” trigger, ownership caps, lock-in and the voting ceiling, but redraw the institutional scope and sharpen the focus on aggregation, cross-border flows and board-level responsibilities.
This note compares the “old” and “new” positions, focusing on commercial banks: what has materially changed, what remains substantively the same, and what this means for investors, promoters and bank boards.
Scope: from “Banking Companies” to “Commercial Banks”
The 2023 Directions apply to “banking companies” and expressly extend to all banking companies operating in India, including small finance banks, local area banks and payments banks, while excluding foreign banks not incorporated in India.1 The Directions, in contrast, are confined to “commercial banks” in the private sector. Public sector banks, small finance banks, local area banks, payments banks, regional rural banks and foreign banks are explicitly carved out.2
In practice, this now creates a split regime given the latest overhaul of the regulatory landscape. A banking group that has, for example, a universal bank and a small finance bank will see the commercial bank fall under the Directions (once notified), while the small finance bank will have its own set of Directions and relevant guidelines. Investors and diligence teams can no longer assume that a single ownership framework applies across all entities with “bank” in their name; they must first locate each entity in the correct rulebook gives RBIs new entity focused regulatory framework.
The Five per cent Gate: Unchanged Threshold, but more Structured Process
Both the 2023 regime and the Directions are built around the concept of “major shareholding”, defined as an aggregate holding of five per cent or more of the paid-up share capital or voting rights of the bank.3 Any person who proposes to acquire such major shareholding must obtain prior approval from the RBI before the acquisition.4
In both frameworks:
- The five per cent trigger is applied on an aggregate basis, taking into account direct and indirect holdings, beneficial holdings, relatives, associate enterprises and persons acting in concert; and5
- Approval must be obtained not only for a first-time crossing of five per cent, but also where a shareholder whose holding has fallen below five per cent proposes to raise it again to that level or beyond,6 or where an already-approved major shareholder proposes to increase its holding beyond the approved ceiling.7
What is new in the Directions is not the threshold but the architecture around it. For commercial banks, the application is routed through the PRAVAAH portal, and the Directions consolidate the applicant's form and the bank's comment form in the same instrument, with clearer references to timelines and the contents expected in each.
Ownership Caps: Continuity by Class, Updated References
The 2023 Guidelines prescribe caps on shareholding by different investor classes in a banking company. In broad terms:8
- Non-promoter natural persons, non-financial entities and certain financial institutions linked to large industrial houses or controlled by individuals are capped at ten per cent;
- Other financial institutions, supranational institutions, public sector undertakings and the Central or State Government may be allowed up to fifteen per cent; and
- Promoter groups are expected to move towards a steady-state cap of twenty-six per cent of paid-up equity share capital or voting rights within a defined period, although higher holdings may be permitted initially under licensing conditions or a dilution plan approved by the Reserve Bank of India.
The Directions for commercial banks carry these numerical caps forward essentially unchanged, but they update the definitional cross-references. For example, by tying “promoter”, “promoter group” and “large industrial house” definitions to the Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025.9 For investors, the message is that the “buckets” remain familiar: ten per cent or fifteen per cent for non-promoters, and twenty-six per cent as the long-term outcome for promoters.
Lock-in and Encumbrance: Preserving the Economic Discipline
The 2023 Guidelines link higher shareholding permissions with a lock-in requirement. Where the RBI permits a person to hold ten per cent or more but less than forty per cent of the paid-up equity share capital of a banking company, the entire holding is subject to a lock-in of five years. Where permission is given to hold forty per cent or more, forty per cent of the paid-up equity is locked in for five years. Shares under lock-in cannot be encumbered in any manner, and there is no minimum continuing shareholding required after the lock-in expires.10
The Directions replicate this model for commercial banks and reaffirm the “no encumbrance” rule for locked-in shares.11 That continuity matters commercially. Seeking permission of ten per cent or more in a commercial bank is not simply about gaining more economic exposure; it necessarily entails a period during which the investor cannot freely dispose of or pledge the relevant shares. The Directions do not change that trade-off; they simply restate it for a narrower universe of banks.
Voting Rights: The Twenty-Six per cent Ceiling and Supervisory Discretion
Under the 2023 Guidelines, a shareholder in a banking company cannot exercise voting rights in excess of twenty-six per cent of the total voting rights, regardless of the size of shareholding. The Guidelines also clarify how voting rights held through depositories, custodians or other intermediaries are to be exercised so that the statutory ceiling and the prior-approval requirement are respected.12 The Directions extend the same twenty-six per cent voting ceiling to commercial banks and retain the link to fit-and-proper assessments.13
Both the 2023 regime and the Directions contemplate that, in appropriate cases, the RBI may restrict a shareholder's voting rights further where concerns arise about fitness and propriety, even if shareholding remains within the permitted caps.14 The practical result is that, for commercial banks, “influence” is determined by three levers: the permitted cap on ownership, the lock-in on a portion of that ownership, and the ceiling (and possible further restriction) on voting power.
Aggregation and Look-Through: from Annex to Core
One of the more technical aspects of the 2023 framework is how it computes “aggregate holding”. The 2023 Directions and Guidelines treat aggregate holding as a combination of direct and indirect holdings, beneficial holdings and holdings by relatives, associate enterprises and persons acting in concert, and provide detailed illustrations of how to attribute holdings and votes in complex structures such as fund complexes, trusts, layered holding companies and omnibus accounts.15
The Directions for commercial banks do not change the substance of this approach, but they elevate these concepts from annexure-style guidance into the core definition and operative sections. They also expressly acknowledge that pledge invocation and other forms of enforcement over encumbered shares can themselves amount to “acquisition” for the purposes of the five per cent gate.16
For investors, especially those using fund, trust or multi-vehicle structures, the message is that the RBI will treat ownership as a social and control-based question, not merely a matter of whose name appears on the register. For commercial banks, the Directions make it clear that mapping significant beneficial owners, persons acting in concert and voting mandates is part of core compliance.
Cross-Border Investment and the FATF Lens
The 2023 Directions and Guidelines already introduced a clear Financial Action Task Force (“FATF”) overlay: new major shareholding is not ordinarily permitted where the applicant, or the source or routing of funds, is from a jurisdiction identified by FATF as non-compliant, whether as a high-risk jurisdiction subject to a call for action or a jurisdiction under increased monitoring. Existing major shareholders from such jurisdictions may continue to hold but face constraints on further acquisition and additional scrutiny.17
The Directions preserve this policy stance for commercial banks and sharpen it through implementation and process. They expressly use “from or through” language in relation to FATF-listed jurisdictions and integrate targeted FATF questions into the application form for prior approval, requiring disclosures on the origin and routing of funds and on the FATF status of relevant jurisdictions.18
This elevates FATF considerations from a background compliance issue to a gateway question for capital: a structure that would be acceptable on domestic prudential grounds may still be ineligible to become a new major shareholder in a commercial bank if its ownership or routing path touches a FATF-listed jurisdiction.
The Bank's Gatekeeper Role and Practical Implications
Under the 2023 framework, banks are expected to do more than mechanically register transfers. When an application is filed to acquire major shareholding, the RBI may seek the concerned bank's comments; the board is expected to apply the bank's “fit and proper” policy, pass a resolution and respond in Form A1.19 Banks must also monitor major shareholders on an ongoing basis, obtain periodic declarations, report specified changes (for example, in significant beneficial ownership or in the quantum of major shareholding) and disable voting rights where an unapproved major shareholder has emerged.20
The Directions make this gatekeeper role more explicit for commercial banks. They codify timelines for board comments on applications, prescribe in greater detail the information to be furnished in the bank's comment form, and expand event-based reporting to include, for example, changes in significant beneficial ownership and material changes in the shareholding of existing major shareholders21
For commercial banks and their boards, the practical implications are threefold:
- Internal “fit and proper” policies and shareholder-monitoring procedures need to be aligned with the Directions;
- The company secretariat and compliance functions must maintain live registers of major shareholders and approvals, updated for every relevant corporate or transactional event; and
- Minutes, board papers and regulatory filings must be capable of demonstrating to the RBI that the bank has actively discharged its gatekeeper role.
Conclusion
Compared with the Directions, the 2023 Directions and 2023 Guidelines do not seek to disrupt the core prudential architecture established by the 2023 Directions and 2023 Guidelines. The five per cent approval gate, the class-wise caps on ownership, the five-year lock-in for significant holdings, the twenty-six per cent voting ceiling and the emphasis on continuous fitness and propriety of major shareholders remain intact.
What the Directions do is narrower and, in many ways, more technical: they confine the regime to commercial banks, refresh definitional cross-references, bring aggregation and attribution rules into the foreground, sharpen the FATF overlay and formalise the bank's gatekeeper role. For investors and promoters, the work now lies in mapping each banking exposure to the appropriate regime, recalibrating transaction planning and documentation for commercial banks, and treating the Directions as an opportunity to regularise ownership structures before they are finally notified.
Footnotes
1. Paragraph 2.1 of the Master Direction – RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023.
2. Paragraph 3 of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
3. Paragraph 3.1(e) of the Master Direction – RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023; Paragraph 4(5) of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
4. Paragraph 4.1 of the Master Direction – RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023; Paragraph 7 of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
5. Paragraph 3.1(b) of the Master Direction – RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023; Paragraph 4(2) of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
6. Paragraph 4.5 of the Master Direction – RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023; Paragraph 14 of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
7. Paragraph 5 of the RBI Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies; Paragraph 6 of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
8. Paragraph 8 & 9 of the RBI Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies.
9. Paragraph 10(1)(i)(a) & 27 of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
10. Paragraph 12, 13 & 14 of the RBI Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies.
11. Paragraph 14, 15 & 16 of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
12. Paragraph 15, 16 & 17 of the RBI Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies.
13. Paragraph 17, 18 & 19 of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
14. Paragraph 4.6 of the Master Direction – RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023; Paragraph 16 of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
15. Paragraph 3.1(b) & Annex I of the Master Direction – RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023.
16. Paragraph 4(2) of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
17. Paragraph 4.6 of the RBI Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies; Paragraph 6 of the Master Direction – RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023.
18. Paragraph 15, 16 & Annex I of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
19. Paragraph 4.2 & 4.3 of the Master Direction – RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023.
20. Paragraph 5 of the Master Direction – RBI (Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023.
21. Paragraph 9 & 19 of the RBI (Commercial Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
