MB imposes time-bound maximum shareholder limits in finance companies

• Sets very long deadline spanning till 2029 for 75% control and 50% by 2033
• Not applicable to finance companies owned by banks and those that may qualify for special approval based on conditions
• Says failure to comply with the maximum shareholder limits will result in punitive action

The Monetary Board (MB) of the Central Bank this week issued fresh guidelines to licensed finance companies (LFCs), capping the maximum number of shares held by a single shareholder or a group of shareholders acting in concert, effective from 2022 and vowed punitive actions for those who don’t fall in line. 

To this effect, the Monetary Board sent out a directive setting the maximum shareholder limit carrying voting rights by any shareholder at 50 percent—directly or indirectly—of the issued capital carrying voting rights by December 31, 2033. 

The directive shall apply on LFCs on a staggered basis, where a December 31, 2029 deadline requires all companies to bring down the single shareholder limit carrying voting rights to 75 percent before trimming it by a further 25 percent within four years. 

However, the new directive has exempted the finance companies owned by licensed banks or the ones operating with the special approval from the Monetary Board. 

Yet, such companies operating with a special approval from the Monetary Board shall reduce the shareholding to the limit determined by the board, on a case-by-case basis, on a staggered basis over a longer time period, subject to submission of a viable plan by the respective LFC, under circumstances involving, restructuring of a problematic or weak LFC, an LFC undergoing a consolidation process or in view of the stability of an LFC or the sector as a whole. 

Budget 2021 dusted out the financial sector consolidation master plan, which was in effect until end-2014.
Under the revitalised plan, the banks are now asked to absorb the finance companies under them, while other LFCs were asked to find fitting merger partners.

This will bring stability into the sector, as the process will create few well-capitalised finance companies with stronger balance sheets. 

The failure to comply with the maximum shareholder limits will result in punitive action by the Monetary Board. 
They include freezing of dividends or repatriation of profits, restricting of voting rights of shareholders’ holdings in excess of limits, prohibit the issue of further shares carrying voting rights, restrict expansion of business, impose monetary penalties or impose disclosure requirements on non-compliances.