RBI, banks begin holding company model talks; norms to be finalised by Sept

The HoldCo model will lead to cleaner equity holding structures within banking conglomerates

The Reserve Bank of India (RBI) has formally kick-started discussions with banks on the holding company (HoldCo) model, which will lead to cleaner equity holding structures within banking conglomerates.

In the first round of interaction, banks expressed their willingness to transition to the HoldCo regime, but have sought a two-year window, given issues on the compliance front. A highly placed source said the central bank is expected to come out with its guidelines on the HoldCo model by September 2019, and it is hoped a draft will be placed in public domain before that as well.

Along with the HoldCo structure, which is likely to be a non-operative entity (in sync with the ownership norms for banks operational since 2015), the RBI may also come out with guidelines on listing HoldCos, the permitted lines of businesses for subsidiaries, cross-holdings among banks, the HoldCo and the subsidiaries, and the regulatory mechanism to guide and monitor HoldCos.

The RBI, it is surmised, may also come out with a variant — a main banking subsidiary under the HoldCo, which, in turn, will house pure-play banking related arms as these anyway, will have to report to Mint Road for operational purposes, even as it helps cut down on regulatory and supervisory overlaps.

The new regime will entail banks unwinding their shareholding in their subsidiaries, which will come to reside in the HoldCo. The HoldCo will then decide the terms of engagement with its subsidiaries. This will act as bulwark for the bank — from the direct impact of the losses in the subsidiaries when it is upstreamed to the consolidated balance sheet (of the bank). Bank boards, too, need not be burdened with the hassles of managing the subsidiaries. This structure will also enable cleaner resolution in cases wherein the parent bank is liquidated without leading to the same fate for its subsidiaries.

The working group chaired by then RBI deputy governor Shyamala Gopinath, had in May 2011, suggested the HoldCo model for financial conglomerates. The proposal was mooted in the aftermath of the Lehman crisis, and sought to protect banks from the losses incurred by their subsidiaries, and thereby safeguard depositors’ interest. The process may entail significant compliance costs — mainly income-tax, stamp duty and other indirect tax levies, and Gopinath was for dispensation of these charges.

A few important transactions, including the sale of non-core assets held by state-run banks, are being held up because the central bank is the process of taking a view on banks and their subsidiaries, which also includes the HoldCo model.

IDBI Bank’s stake sale in IDBI Federal Life Insurance, Federal Bank’s acquisition of Chennai-based microfinance company — Mundra Microfinance — and more importantly, the possibility of Axis Bank acquiring a stake in Max Life Insurance are a few of them.

Amitabh Chaudhry, managing director and chief executive officer of Axis Bank, recently said the bank could move forward (with the Max Life acquisition, though no deal is on the table as of now) if it has the support of the regulators. “The RBI has made it clear it is not in favour of banks holding a large stake in insurance companies,” he said in an interview to a news channel.

However, some believe the HoldCo proposal would be value-depletive for shareholders of banks. “Banks are heavily invested in the subsidiaries, in terms of capital and customer base. Now when the subsidiaries are at an inflexion point, shareholders of banks should not be denied gains from potential value unlocking,” said a consultant.  

Key challenges
 

| Who will regulate and supervise the holdco

| Ownership of holdco

| Permissible activities under the holdco

| Limits on cross-holding between holdco, banks, and other financial institutions

| Capital adequacy norms for the holdco

Source: Report of the Working Group on Introduction of Financial Holding Company, May 2011