Introduction

In a significant move for India’s banking sector, Sumitomo Mitsui Banking Corporation (SMBC), Japan’s second-largest bank by assets, has agreed to acquire a 20% stake in Yes Bank, one of India’s leading private lenders. This deal marks a major foreign direct investment (FDI) in India’s banking industry and comes at a time when Yes Bank is recovering from a turbulent phase, including a government-led rescue in 2020.

Context and Latest Developments

SMBC, part of the larger Sumitomo Mitsui Financial Group (SMFG) has been expanding its footprint in Asia. India’s fast-growing economy makes it a key market. After facing a near-collapse in 2020 due to bad loans, Yes Bank was bailed out by a consortium led by the State Bank of India (SBI). Since then, it has stabilised, making it an attractive investment. SMBC’s proposed 20% stake would make it the largest shareholder in Yes Bank, surpassing SBI’s current 26% holding.

Deal Structure & Legalities

SMBC is expected to invest via a preferential allotment of shares, injecting fresh capital into Yes Bank. The deal requires clearance from the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and possibly the Competition Commission of India (CCI).SMBC’s investment must comply with India’s strict banking and foreign investment regulations. Key laws and policies include:

A. Foreign Direct Investment (FDI) Policy for Banking

Under the FDI Policy, foreign banks can acquire up to 74% in private Indian banks, but beyond 5%, RBI approval is mandatory. Since this exceeds 5%, SMBC must seek RBI’s “fit and proper” clearance under the Banking Regulation Act, 1949.

B. Reserve Bank of India (RBI) Guidelines

1. Master Direction on Ownership in Private Banks (2016)
Single Entity Cap: No single entity (including foreign banks) can hold more than 10% without RBI’s special permission. SMBC’s 20% stake would require an exemption.
Promoter vs. Investor: If SMBC is classified as a promoter, stricter governance rules apply. If deemed an investor, compliance is easier. However, this is unlikely as their proposed 20% stake errs on the side of caution, and avoids triggering an open offer of shares. Previously, the bank had shown interest in a 51% stake.

2. Foreign Exchange Management Act (FEMA), 1999
SMBC must route its investment through FEMA-compliant channels, ensuring proper foreign exchange reporting.

3. SEBI Takeover Code (SAST Regulations, 2011)
Since SMBC’s stake crosses 5%, it must disclose the acquisition under SEBI’s Substantial Acquisition of Shares and Takeovers (SAST) Regulations.

C. Competition Law Considerations

CCI Approval: If the deal significantly impacts competition, SMBC may need clearance under the Competition Act, 2002.

D. Recent Regulatory Trends (2024 Updates)

The RBI has been encouraging foreign investments in Indian banks but remains cautious about control issues.
Alongside this, given Yes Bank’s history, RBI may impose additional conditions on SMBC, such as governance reforms.

Benefits to Yes Bank

Yes Bank’s CET-1 ratio (capital adequacy) will improve, aiding loan growth. Additionally, SMBC’s experience in global corporate banking can aid in expanding Yes Bank’s wholesale and international operations.
With SMBC’s credibility as a strong foreign investor, there is also room for investor confidence to grow. However, this may come at the cost of the dilution of the shares of existing shareholders, such as SBI, whose stakes would be effectively reduced. Lastly, RBI approval remains the largest hurdle to overcome, with strict conditions being anticipated due to Yes Bank’s past troubles. 

Conclusion

If occurring, SMBC’s 20% share can symbolise a landmark deal in Indian banking, creating a new precedent for FDI in the banking sector. It can further reinforce India’s attractiveness as a global destination for banking investment. Regulations are expected in September.

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Sources & Further Reading
RBI Master Direction on Ownership (2016)
SEBI SAST Regulations (2011)
Business Standard: “Yes Bank expects Japan’s SMBC to maintain at least 20% stake, says CEO” (May 2025)
Economic Times: “Japanese bank SMBC’s plan to buy stake in Yes Bank hits RBI wall: Report” (September 2024)