The Reserve Bank of India (RBI) today capped commercial banks' investments in non financial companies at 10 per cent to ensure they do not engage in activities barred by the Banking Regulation Act.
Banks do not need the regulator's prior approval for investments in non financial services companies. Banks could, through their direct and indirect holdings in other entities, exercise control or have a significant influence over such companies. As a result, they may be engaging directly or indirectly in activities that are not permitted. Hence, it was necessary to limit such investments, RBI said.
Equity investment would be subject to a limit of 10 per cent of the company's capital, or 10 per cent of the bank's capital and reserves, whichever was less. The equity investments held under the 'held for trading' category would be counted for calculating the limit. The combined equity investments in non-financial entities by banks, their subsidiaries, associates or joint ventures, and asset management companies should not exceed 20 per cent of the company's capital.
RBI said requests by banks request to hold a stake of over 10 per cent and less than 30 per cent would be considered if the company was engaged in activities permitted by the Banking Regulation Act. Banks are also permitted to set up subsidiaries for undertaking activities conducive to the spread of banking in India or are useful and necessary in public interest.
A stake of over 10 per cent, without RBI's prior approval, would be allowed if the additional acquisition was through restructuring, including corporate debt restructuring. The same norms would apply for a stake acquired to protect its interest on loans/investments made in a company.