Till now, there is no specified limit; RBI has issued draft norms for feedback.
In a move to discourage banks’ participation in non-financial activities, the Reserve Bank of India (RBI) has proposed a limit on the equity investment of a bank in entities not involved in financial services.
RBI has proposed a cap on a bank’s investment in a non-financial company at 10 per cent of the latter’s capital or 10 per cent of the bank’s capital plus reserves. The central bank has issued the draft norms for discussion.
Till now, there is no specified cap of banks’ investment in non-financial entities. Section 19 of the Banking Regulation Act stipulates a cap of 30 per cent on investment in any entity, which could be a financial service one or a company not engaged in this line.
RBI said equity investments made by banks under the ‘held for trading’ category in non-financial companies would be counted for calculating the 10 per cent ceiling. Banks would not require prior approval from RBI if such investments were within the ceiling.
Request for an investment in excess of 10 per cent of a company’s paid-up capital would be considered by RBI only if the company was engaged in activities permitted to banks under the Act.
The regulator apprehends that even with such a limit on investments, banks may still be able to exercise control or influence in companies through having more than half of the voting rights indirectly through subsidiaries, joint ventures or control over the board of directors. “Such arrangements may result in banks’ indirectly undertaking activities not permitted to them under the BR Act. Banks should, therefore, desist from exercising control or significant influence over such companies,” RBI said.
While determining if an entity is a subsidiary, associate or joint venture, the regulator will use tests of ownership and control. For applying the ownership test, the stake of the bank, its subsidiaries, associates and joint ventures may be aggregated.
If the rules take effect, the regulator would ask banks to review their subsidiaries, associates and joint ventures by applying the test of ownership and control parameters, within three months. If investments do not conform to the new norms, banks would have to ensure their investments are brought down to 10 per cent of the paid-up share capital of the investee company or give up control. If banks still want to have more than 10 per cent stake, RBI approval would be needed.
RBI said banks are permitted to set up subsidiaries for activities conducive to the spread of banking in India or useful or necessary in public interest.
A bank’s equity investments in subsidiaries, entities engaged in financial services and equity investments in entities engaged in non-financial services are also to be capped at 20 per cent of paid-up share capital and reserves. The cap of 20 per cent would not apply for investments classified under the ‘Held for Trading’ category, if not held beyond 90 days.
Banks will be permitted to hold stake in excess of 10 per cent without RBI’s prior approval if the additional acquisition (of equity investments) is through restructuring or corporate debt restructuring. Such cases would also be exempted from the 20 per cent ceiling rule.
