The Telegraph
Since 1st March, 1999
Email This Page
Two RBI models for holding firms

Mumbai, Aug. 27: The Reserve Bank of India (RBI) today released a discussion paper on holding company structures that would allow financial entities to seamlessly carry out banking, insurance and other activities under one roof.

Economic reforms are spawning financial conglomerates that are experimenting with structures, which are not common in the country.

This has necessitated a review of holding companies to assess their suitability for the country, especially in the context of the prevailing regulatory environment.

Holding companies exist in the Indian banking system, though in a limited manner. ICICI Bank has formed such an entity for its insurance and asset management businesses. The State Bank of India is also exploring this route for its life insurance and mutual fund businesses. There is, however, no holding company for all activities, including banking.

In this context, the discussion paper has proposed two models banking holding company and financial holding company.

A banking holding company can have only banks as subsidiaries, while the other entity can have non-banking companies in its fold.

There are also restrictions on investments in non-banking entities for a banking holding company.

Such holding companies will help in overcoming problems of capital constraints in subsidiaries. Current rules limit investment by banks in subsidiaries to 20 per cent of paid-up capital and reserves.

In the new structure, this restriction will not apply because investments in subsidiaries will be made directly by the holding company. Therefore, once subsidiaries are separated from banks, their growth will not be constrained by capital.

The RBI said if India adopted the model of a financial holding company, a separate act would be required on the lines of Gramm-Leach-Bliley Financial Services Modernisation Act of 1999 in the US. For a banking holding company, the apex bank has proposed a minimum capital threshold.

Focus on safeguards

As certain challenges could arise from such structures, the RBI paper has called for safeguards. The paper has warned of the threats posed by intermediate holding companies.

If an intermediate holding company confines its investments to shares of group companies and does not carry out any other financial activities a likely scenario it will not require registration under Section 45-I A of the RBI act.

This means the intermediary holding company will be outside the regulatory purview of the RBI and the apex bank may face difficulties in obtaining information from it and enforcing prudential rules.

The paper said a proper legal framework needed to be created before such structures were floated. The norms should do away with entities unregulated by the RBI.

Email This Page