Mumbai, July 6: The Reserve Bank of India today capped banks’ investment in the equity capital of non-financial services companies at 10 per cent of the equity capital even as it asked lenders to desist from exercising control or significant influence over such entities.

The RBI fears that under the present dispensation, banks can indirectly undertake activities that is not permitted under the Banking Regulation Act, 1949.

While releasing the draft guidelines for banks’ equity investments in subsidiaries and other companies, the RBI set a rider for banks’ equity investments in companies engaged in non-financial services. The investment will be subject to a limit of 10 per cent of the investee company’s paid-up capital or 10 per cent of the bank’s paid-up capital and reserves, whichever is lower.

Equity investments held by banks under the held-for- trading category will also be included in this limit. Investments made by banks within this 10 per cent limit will not require prior approval of the central bank.

Banks can invest over 10 per cent of the investee company’s paid-up capital, but they will have to approach the RBI. The central bank here added that such a proposal would be considered if the investee company is engaged in activities permitted by banks in terms of Section 6 (1) of Banking Regulation Act. This section specifically details the various activities that can be engaged by banks.

Making it clear that banks are permitted to set up subsidiaries for undertaking activities, which are conducive to the spread of banking, the RBI stipulated that a bank’s equity investments in subsidiaries and other entities that are engaged in financial services together with equity investments in entities engaged in non-financial services activities should not exceed 20 per cent of the bank’s paid-up share capital and reserves.

Equity holding over 10 percent of the investee company’s paid-up capital would be permissible without the RBI’s prior approval if the additional acquisition arises because of corporate debt restructuring (CDR) programmes.

At present, there are norms for bank investments in setting up subsidiaries and also investing in companies that are not subsidiaries and are financial services companies. These require prior approval from the RBI and they are permitted within certain prescribed limits.

However, there is no requirement for obtaining prior approval of the RBI in the case of investments relating to non-financial services companies.

The RBI fears that banks could through their holdings in other entities, exercise control on such companies or have significant influence over them and thus, engage indirectly in activities not permitted to the banks, thereby going against the spirit of the Banking Regulation Act.

The apex bank also feels that such investments are also not considered appropriate from prudential perspective.