Banking and Insurance - Laws and Practice · Control over Organization of Banks

RBI Approval for Shareholding and Management of Banks

Updated 11 October 2026 · Fact-checked

Under section 12B of the Banking Regulation Act, 1949, no person can acquire 5% or more of a banking company's paid-up capital or voting rights without RBI's previous approval. Under section 35B, appointing, re-appointing or removing a chairman, MD, whole-time director or CEO, and fixing their pay, also needs RBI approval.

Understand Restrictions on Voting Rights, Shareholding and Management

A bank holds public deposits. So the law does not leave its ownership and top management only to shareholders. The RBI has a say in who controls a bank and who runs it. Two sections do this work: section 12B for shareholding and section 35B for management.

Section 12B (ownership). A person cannot acquire or agree to acquire shares or voting rights in a banking company, directly or indirectly, alone or acting in concert, if the result is holding 5% or more of the paid-up share capital or 5% or more of the voting rights. Prior RBI approval is needed. Your holding is counted together with shares held by your relative, your associate enterprise and persons acting in concert with you.

The Act defines these terms. An associate enterprise includes your holding or subsidiary company, your joint venture, an entity that controls your board, one that in RBI's opinion has significant influence on you, or one that can obtain economic benefits from your activities. Acting in concert means cooperating, under a formal or informal agreement or understanding, for a common objective of acquiring shares or voting rights above the 5% limit.

RBI may approve only if it is satisfied that the applicant is a fit and proper person, in view of the public interest, banking policy, preventing detrimental conduct of the bank's affairs, emerging trends and best practices, or the interest of the banking and financial system. RBI must decide within 90 days of receiving the application, excluding the time the applicant takes to give information it called for.

RBI also has follow-up powers. It can bar a transfer of shares and direct the bank not to give effect to it. If the transfer was registered, the transferee cannot vote on a poll. It can attach conditions, such as prior approval for further acquisition. If holders of more than 5% are not fit and proper, it can order that they together exercise no more than 5% of total voting rights on a poll, after a hearing. The bank itself must check compliance before it allots or registers a transfer of shares.

Section 35B (management). In a banking company, an amendment to any provision on the maximum number of directors, or on the appointment, re-appointment, termination or remuneration of a chairman, managing or whole-time director, manager or CEO, has no effect unless RBI approves it. This applies whether the provision is in the memorandum, articles, an agreement or a resolution. Separately, the actual appointment, re-appointment or termination of a chairman, managing or whole-time director, manager or CEO has no effect without RBI's previous approval. Perquisites and benefits, even after the term ends, count as remuneration.

Key rules to remember

Section 12B(1) threshold: Applicant's holding + holding of relative, associate enterprise and persons acting in concert ≥ 5% of paid-up capital or of voting rights → previous RBI approval needed; The test is on shares or voting rights, and covers direct and indirect acquisition and an agreement to acquire.
Approval test, section 12B(2): RBI approves only if the applicant is a fit and proper person, judged on the stated grounds; Grounds include public interest, banking policy, and the interest of the banking and financial system.
Time limit for RBI decision, section 12B(6): Decision within 90 days of receipt, excluding time taken by the applicant to furnish information called for; The clock stops while you supply information RBI asked for.
Voting cap, section 12B(8): Person(s) holding more than 5% found not fit and proper → aggregate voting rights on poll limited to 5% of total voting rights; Needs an opportunity of being heard first.
Section 35B(1)(a): Amendment of provisions on maximum number of directors, or appointment, re-appointment, termination or remuneration of chairman, MD, other directors, manager or CEO → no effect unless approved by RBI; Applies to provisions in the memorandum, articles, an agreement or a resolution.
Section 35B(1)(b): Appointment, re-appointment or termination of chairman, managing or whole-time director, manager or CEO → no effect without RBI's previous approval; Covers termination too, not only appointment.

How to solve Restrictions on Voting Rights, Shareholding and Management questions

For any case on bank shareholding or management, apply the same provision, facts, conclusion pattern.

1Identify whether the question is about ownership (section 12B) or management and pay (section 35B).
2For 12B, list every holding to be added: the applicant's own, relatives, associate enterprises and persons acting in concert.
3Compute the combined percentage of paid-up capital and of voting rights. Check if either is 5% or more after the acquisition.
4If the threshold is crossed, state that previous RBI approval is needed, and mention the fit and proper test and the 90-day period.
5For 35B, identify the post (chairman, MD, whole-time director, manager, CEO) and the act (appointment, re-appointment, termination, or change of remuneration or terms).
6Treat perquisites and benefits, including those after the term ends, as remuneration.
7State the consequence: without approval the acquisition is not permitted, or the appointment or amendment has no effect. Also mention RBI's power to bar transfers or cap votes where relevant.
8Close with a clear conclusion and one practical compliance step, such as the bank's own check before allotment or transfer.

Quickest way: Five-percent and approval checklist

When to use it: Use when a short case asks whether RBI approval is needed.

Add up all linked holdings (self, relatives, associates, concert parties).
Compare with 5% of capital and of voting rights.
For management matters, ask: is the post chairman, MD, whole-time director, manager or CEO, and is it an appointment, termination or pay change?
If yes to either test, answer: RBI's previous approval is needed, otherwise the act has no effect or is not permitted.

Common mistakes in Restrictions on Voting Rights, Shareholding and Management

Testing only the applicant's own shares against 5%.
Students forget the aggregation rule.
Fix: Always add the holdings of relatives, associate enterprises and persons acting in concert.
Saying approval is needed only for an acquisition above 5%.
Loose reading of the threshold.
Fix: The Act says 5% or more. Reaching exactly 5% triggers approval.
Applying section 35B to all directors for appointment.
Mixing clause (a) and clause (b).
Fix: Appointment, re-appointment or termination needs approval for chairman, managing or whole-time director, manager or CEO. Clause (a) amendments cover other directors' provisions too, including remuneration.
Ignoring perquisites when discussing remuneration.
Remuneration is assumed to mean salary only.
Fix: Quote the Explanation: any benefit, amenity or perquisite, even after the term ends, is deemed remuneration.
Forgetting the bank's own duty.
Focus stays on the acquirer.
Fix: Before issuing, allotting or registering a transfer of shares, the bank must ensure compliance with 12B(1) and any approval conditions.
Stating that RBI's 90 days include time spent waiting for the applicant.
Skipping the proviso.
Fix: Time the applicant takes to furnish information called for is excluded.

Worked examples

Example 1

Mr. Rao holds 3% of the paid-up capital of a banking company. His brother holds 1.5% and Rao's wholly owned subsidiary holds 0.8%. Rao proposes to buy a further 1% from the market. Is RBI approval needed?

Show the solution

Provision: section 12B(1) requires previous RBI approval if the acquisition, taken with holdings of the applicant, his relative, associate enterprise and persons acting in concert, makes the total 5% or more.
The brother is a relative. A subsidiary of the applicant is an associate enterprise. Both are counted.
Existing combined holding = 3% + 1.5% + 0.8% = 5.3%. Adding the 1% gives 6.3%.
The combined holding is already above 5%, so the new acquisition clearly makes the holding 5% or more.

Answer: Yes. The total after acquisition would be 6.3%, which is above 5%, so Mr. Rao must obtain RBI's previous approval. RBI will consider whether he is a fit and proper person and must decide within 90 days, excluding time he takes to supply information it asks for. The bank must also check compliance before registering the transfer.

Example 2

The board of a private sector bank passes a resolution increasing the remuneration of its managing director and giving her a post-retirement car allowance. It also terminates its CEO. Advise on the validity.

Show the solution

Provision: section 35B(1)(a) says an amendment of a provision on remuneration of a managing director or CEO, whether in a resolution of the board, has no effect unless approved by RBI.
The Explanation deems any benefit or perquisite, even after the term of office ends, to be remuneration. So the post-retirement car allowance is covered.
Section 35B(1)(b) says termination of appointment of a CEO has no effect unless made with RBI's previous approval.
The board resolution alone therefore cannot make either decision effective.

Answer: Neither decision takes effect without RBI. The increase and the post-retirement allowance need RBI's approval, and the CEO's termination needs RBI's previous approval. The bank should apply to RBI first and act only after approval.

Exam tips

Write the provision, then the facts, then the conclusion. Examiners reward this structure.
Always quote 5% and say 'paid-up share capital or voting rights'.
Name the three groups added to the applicant's holding: relatives, associate enterprises, persons acting in concert.
In 35B answers, list the posts exactly and mention that termination also needs prior approval.
Add a compliance line: the bank must verify approval before allotting or registering a transfer.

Practice questions from Control over Organization of Banks

Restrictions on Voting Rights, Shareholding and Management: frequently asked questions

What is the shareholding limit in a bank without RBI approval?

Under section 12B, you cannot acquire shares or voting rights that take you, with your relatives, associate enterprises and persons acting in concert, to 5% or more of paid-up capital or voting rights without RBI's previous approval.

On what basis does RBI grant approval under section 12B?

RBI must be satisfied that the applicant is a fit and proper person, in view of grounds such as public interest, banking policy and the interest of the banking and financial system. It may call for information and impose conditions.

Does section 35B cover pay of bank directors?

Yes. An amendment of any provision on remuneration of the chairman, managing or whole-time director, other directors, manager or CEO has no effect unless RBI approves it. Perquisites and benefits count as remuneration.

What can RBI do if a shareholder is not fit and proper?

It can bar a share transfer, direct the bank not to give effect to it, or limit the voting rights on poll of a person or group holding above 5% to 5% in aggregate. It must give a hearing before the voting cap order.