EaseValueWhat Happened?
On October 1, 2026, the Reserve Bank of India released the Amendment Directions to the Payment Banks – Acquisition and Holding of Shares or Voting Rights Rules, 2026. The key change: mutual funds, insurance companies, and pension funds registered with their respective regulators can now apply for one-time approval to acquire major shareholding (up to 10% of paid-up capital or voting rights) in payment banks, without needing separate approval for each subsequent acquisition in the same banking company. Previously, every acquisition of major shareholding required individual prior RBI approval.
Background & Legal Context
These amendments modify the Master Direction issued by RBI on November 28, 2025, under Sections 12, 12B, and 35A of the Banking Regulation Act, 1949. The original framework mandated prior RBI approval for any person acquiring major shareholding in a banking company. If shareholding fell below 5% later, fresh approval was needed for any re-acquisition.
The RBI's rationale is clear: institutional investors like mutual funds, insurance companies, and pension funds are regulated entities themselves, maintaining high governance standards. Allowing them one-time approval streamlines the acquisition process while maintaining regulatory oversight. The new "qualifying persons" category is defined as:
- Entities registered with SEBI (mutual funds)
- Entities registered with PFRDA (pension funds)
- Entities registered with IRDAI (insurance companies)
- Provided they do NOT belong to the promoter group of the target banking company
Under Income Tax Act, 2025, this regulatory framework indirectly impacts taxation of capital gains on share transactions. While the Act itself does not have a dedicated section for payment bank acquisitions, Sections 47 and 48 (which define capital assets and compute capital gains) and Section 55 (cost of acquisition) remain relevant when these qualifying persons sell their shareholding. The corporate tax status of mutual funds (Section 10(23D) of Income Tax Act, 2025), insurance companies (Section 10(4) of Income Tax Act, 2025), and pension funds (Section 10(47) of Income Tax Act, 2025) provides significant tax exemptions on income from shareholding and dividends.
What Does This Mean for You?
For Mutual Funds: If your mutual fund registered with SEBI wants to acquire 5%, 7%, or 10% shareholding in a payment bank across multiple transactions, you can now apply once for one-time approval through the RBI's PRAVAAH portal. You don't need to wait for fresh approval after each tranche of acquisition. This speeds up investment deployment and reduces administrative burden. However, the approval can be revoked if the fund fails to meet "fit and proper" criteria as defined by RBI.
For Insurance Companies: IRDAI-registered insurance companies can now structure their investment portfolio in payment banks more efficiently. If your company is a long-term investor planning to build a 5-10% stake gradually, the one-time approval eliminates repeated application cycles. This is particularly beneficial for insurance companies with significant investment mandates.
For Pension Funds: PFRDA-registered pension funds (both National Pension System and other regulated schemes) can now deploy capital more flexibly. Since pension funds have long-term investment horizons and are bound by fiduciary duties, the RBI's trust in granting one-time approval reflects confidence in these institutions.
For Payment Banks: Payment banks like Airtel Payments Bank, Amazon Pay, Google Pay, and others must file Form A1 comments when institutional investors apply for one-time approval. This ensures transparency and allows banks to flag any concerns about incoming investors.
Taxation Implications for AY 2026-27 and Beyond: When these qualifying persons acquire shareholding, they are considered capital expenditure under Section 55(1) of Income Tax Act, 2025. The cost of acquisition forms the basis for computing capital gains when shares are eventually sold. Since mutual funds, insurance companies, and pension funds enjoy exemption on income under Sections 10(23D), 10(4), and 10(47) respectively, capital gains from these share sales remain largely tax-free, provided they fall within the exemption scope.
However, if a mutual fund distributes these gains to unit holders, the unit holders may face tax liability depending on their individual tax status.
What Should You Do Now?
Step 1: Review Your Investment Strategy If your organization (mutual fund, insurance company, or pension fund) is SEBI, IRDAI, or PFRDA-registered and has been planning payment bank acquisitions, reassess your timeline. You can now consolidate multiple small acquisitions into one application, reducing legal and compliance costs.
Step 2: Prepare Your PRAVAAH Application Applicants must file through the RBI's PRAVAAH portal with Form A (declaration). The application must include your regulatory registration certificate, organizational structure, governance details, and investment rationale. Do NOT attempt manual submissions—the system is digital-only.
Step 3: Document Your "Fit and Proper" Status The RBI can revoke approval if you or any associated person is found not "fit and proper." Maintain clean audits, ensure compliance with all regulatory directives from SEBI/IRDAI/PFRDA, and avoid any enforcement actions. For AY 2026-27 audits, ensure your CA certifies that there are no tax defaults or outstanding demand orders.
Step 4: Monitor the 5% Threshold Once you acquire shareholding, if your aggregate holding falls below 5% or rises above 10%, you must report this to RBI and the payment bank within 3 working days. Failure to report is a compliance violation and can trigger RBI action.
Step 5: Coordinate with Your Tax Team Inform your tax compliance team (CA) about this acquisition. They need to track the cost of acquisition for future capital gains computation and ensure proper classification in your financial statements as per applicable accounting standards.
Step 6: Understand One-Time Approval Scope The one-time approval is ONLY for acquiring major shareholding in the SAME banking company. If you want to acquire in a different payment bank, you need fresh approval. Also, the 10% cap is aggregate—if you already hold 8%, you can acquire only 2% more under this one-time approval.
Key Takeaways
- Streamlined Approval Process: Mutual funds, insurance companies, and pension funds get one-time RBI approval for subsequent acquisitions of up to 10% shareholding in payment banks, eliminating repeated application cycles.
- Definition Matters: Only SEBI-registered mutual funds, IRDAI-registered insurance companies, and PFRDA-registered pension funds qualify. Non-institutional investors still need approval for every acquisition.
- Tax Exemption Benefits Remain: Under Income Tax Act, 2025, capital gains from these shareholdings remain tax-exempt for mutual funds (Section 10(23D)), insurance companies (Section 10(4)), and pension funds (Section 10(47)), provided conditions are met.
- Compliance is Non-Negotiable: One-time approval can be revoked for non-compliance or if the investor is deemed not "fit and proper" by RBI. Maintain clean regulatory records and tax compliance for AY 2026-27 onwards.
- Reporting Deadlines Are Strict: Any decrease or increase of aggregate holding below/above 5% of paid-up capital must be reported within 3 working days to RBI and the banking company. Missing this deadline invites penalties.
Bottom Line: This RBI amendment makes it easier for institutional investors to build meaningful stakes in payment banks without regulatory friction. However, the underlying tax position remains unchanged—exemptions apply as per Income Tax Act, 2025. For AY 2026-27, ensure your CA tracks these acquisitions properly in your tax audit and financial statements.
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