RBI introduces flexible shareholding framework for Local Area Banks via 2026 Amendment Directions

The Reserve Bank of India has revised the approval and monitoring framework for acquisition and holding of shares or voting rights in Local Area Banks by issuing the “Reserve Bank of India (Local Area Banks – Acquisition and Holding of Shares or Voting Rights) Amendment Directions, 2026”, effective from October 1, 2026.

These Amendment Directions modify key provisions of the earlier Reserve Bank of India (Local Area Banks – Acquisition and Holding of Shares or Voting Rights) Directions, 2025 (referred to as the Master Direction), originally notified on November 28, 2025.

The central change is the introduction of a discretionary one-time approval mechanism for certain regulated institutional investors, allowing smoother subsequent acquisitions of major shareholding in Local Area Banks, while keeping intact the Reserve Bank’s overarching fit-and-proper and prudential oversight.

Background: Existing regime under the 2025 Master Direction

Under the Master Direction issued on November 28, 2025, the regulatory framework for acquisition of shareholding in Local Area Banks required the following:

  • Any person planning an initial acquisition of major shareholding in a banking company had to obtain prior approval of the Reserve Bank.
  • If, after such initial acquisition, the person’s aggregate shareholding dropped below 5 per cent of the paid-up share capital or voting rights at any time, then fresh prior approval of the Reserve Bank was again mandatory before any subsequent acquisition of major shareholding.

This structure ensured that any person crossing the “major shareholding” threshold (as defined in the Master Direction) remained under regulatory oversight each time their holding crossed the threshold again after having fallen below it.

The new 2026 Amendment Directions retain the requirement of prior approval for initial acquisition of major shareholding. However, they introduce calibrated flexibility for specific types of institutional investors for their subsequent acquisitions, subject to safeguards.

The Reserve Bank has invoked its powers under:

  • Sections 12, 12B, and 35A of the Banking Regulation Act, 1949,

and, having considered it necessary and expedient in the public interest, has issued the Reserve Bank of India (Local Area Banks – Acquisition and Holding of Shares or Voting Rights) Amendment Directions, 2026.

Key points on commencement and scope:

  • These Amendment Directions come into force immediately from October 1, 2026.
  • They operate as modifications to the existing Master Direction and must be read together with it.

Key amendments introduced in the 2026 Directions

The 2026 Amendment Directions restructure multiple parts of the Master Direction, ranging from definitions to continuous monitoring norms and reporting formats.

1. Clarification on indirect acquisition by portfolio managers

In Chapter I, Section C (Definitions), para 4, an Explanation has been inserted after item (viii) under sub-para (2).

This Explanation clarifies when an acquisition of shares by a client will not be treated as an indirect acquisition by the portfolio manager. The acquisition by the client may be considered independent, and not attributed to the portfolio manager, provided all of the following conditions are satisfied:

  1. Registered ownership and voting rights

    • The client is recorded as the registered owner of the shares in the banking company; and
    • The client is entitled to exercise the voting rights attached to those shares.

  2. Non-binding advisory role

    • The portfolio manager only gives non-binding investment or divestment advice;
    • The portfolio manager is not exercising discretionary powers to make binding investment decisions on behalf of the client.

  3. Voting based on specific client mandate

    • If the portfolio manager does exercise voting rights in the banking company on the client’s shares, such voting is undertaken only pursuant to a specific mandate from the client.

Note: This clarification is important for institutional structures where portfolio managers may act in advisory roles. It ensures that mere advisory relationships, without discretionary authority or ownership, are not automatically categorised as indirect acquisitions by the portfolio manager.

2. New definitions: “qualifying person” and “qualifying person with one-time approval”

Two new definitions are introduced in Chapter I, Section C (Definitions), para 4 after sub-para (6), as sub-paras (6A) and (6B).

2.1 Definition of “qualifying person” – sub-para (6A)

A “qualifying person” in respect of an investee banking company is a person who satisfies both of the following:

  1. The person is:

    • a mutual fund registered with the Securities and Exchange Board of India, or
    • a pension fund registered with the Pension Fund Regulatory and Development Authority, or
    • an insurance company registered with the Insurance Regulatory and Development Authority of India; and

  2. The person does not belong to the promoter group of the investee banking company.

Thus, the concept of a “qualifying person” is limited to certain regulated financial institutions that are non-promoter investors.

2.2 Definition of “qualifying person with one-time approval” – sub-para (6B)