The Reserve Bank of India (RBI) Friday announced that it has fined the State Bank of India (SBI) ₹1 crore for holding “shares in borrower companies, as pledgee, of an amount exceeding 30 percent of the paid-up share capital of those companies.”
Section 19 of the Banking Regulation Act of 1949 prevents a banking company from holding more than 30 percent of the paid-up share capital in any company, whether as a mortgagee, pledgee, or absolute owner. In a press release, the RBI said that it carried out the Statutory Inspections for Supervisory Evaluation of the SBI with regard to its financial positions as on March 31, 2018, and March 31, 2019, and an of the Risk Assessment Reports and the Inspection Report disclosed that the SBI acted in violation of Section 19.
Further, in light of the SBI’s transgressions, the RBI issued a notice to the bank, directing it to show cause why a penalty should not be imposed on it for violating Section 19 by holding shares in borrower companies in excess of 30% paid-up share capital of those companies. The RBI examined the SBI’s response to its notice, as well as the subsequent oral submissions, and concluded that the charge of contravention was proven, warranting the imposition of a monetary penalty on the bank.
It’s noteworthy that the RBI clarified that the imposition of penalty is solely based on deficiencies in regulatory compliance and that it is not meant to determine the validity of any transactions entered into by the bank with its customers.