Finmin to take time for view on holding cos

Surprised by the Reserve Bank of India's (RBI's) discussion paper suggesting holding company structure for banking groups, the finance ministry will take some time for a formal stance.

"We have not yet taken any stand on the RBI draft paper. We will study the matter and public comments and give our views only after that," said a finance ministry official.

The RBI paper comes days after Finance Minister P Chidambaram approved a recommendation by the Foreign Investment Promotion Board giving conditional approval to ICICI Bank for diluting 24 per cent stake in its proposed holding company for insurance and asset management business.

Consequently, ICICI Bank has to get approval from the RBI. Both ICICI Bank and the State Bank of India have applied to the RBI for floating holding companies for their insurance and asset management businesses.

"The RBI move has come as a surprise. We were expecting the central bank to approve the ICICI Bank's proposal," said another official. The RBI is likely to take up the case of the two banks on the basis of the feedback received by mid-September. The decision will have wider policy implications for all banking groups in the country.

The RBI paper says it will be desirable to avoid an intermediate holding company structure in which a bank owns a holding company that conducts the non-banking business.

The banking regulator has suggested a bank holding company (BHC) or a financial holding company (FHC) model in which both bank and non-bank subsidiaries of a banking group are owned by the holding firm. Such a holding firm will not come under RBI's regulations and its investment in other subsidiaries will not be linked to the capital of the banks.

If the RBI's suggestion is implemented, the character of public sector banks may also undergo a change as the government will need to set up holding companies for such banks.

Government holding through a BHC/FHC will not be possible for public sector banks under the existing statutes. Under existing laws, a subsidiary floated by a government-owned bank is treated as a private sector enterprise.

The government will have to take legislative action to ensure the public sector character of the banks is maintained if the BHC/FHC model is implemented.

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