The RBI proposes to cap banks' equity investments in non-subsidiary companies engaged in non-financials services.
This is to prevent banks from engaging in activities not permitted under the Banking Regulation Act, such as trading in commodities.
Draft guidelines
A bank's equity investments in companies engaged in non-financial services cannot exceed 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, according to the draft guidelines issued by the RBI on such investments.
Overall, a bank's equity investments in subsidiaries and other entities engaged in financial services together with investments in entities engaged in non-financial services should not exceed 20 per cent of its paid-up share capital and reserves, the guidelines issued on Wednesday said.
The latest RBI guideline is unlikely to have an immediate impact on any bank, as not many of them has any big investment in subsidiaries that are non-financial in nature, said Mr Viren Mehta, Director, Ernst & Young India. The RBI may be concerned that banks should not have subsidiaries that are very large, he added.
Bank's request for investments in excess of 10 per cent of an investee company's paid-up capital would be considered by the RBI if the investee company is engaged in activities permitted to banks, which are conducive to the spread of banking or in public interest, under the B.R. Act.
Equity holding in excess of 10 per cent would be permissible without the RBI's approval if the acquisition is through restructuring/ corporate debt restructuring.
Excess equity investment in such cases would, however, be exempted from the overall 20 per cent limit.
The RBI highlighted the fact that it is possible that even with limited investment, banks may exercise control or significant influence on companies engaged in non-financial services by having more than half of the voting rights indirectly through subsidiaries/ joint ventures/ associates or having control over the composition of the board of directors. Banks should carry out a review of their subsidiaries, associates, joint ventures by applying the test of ownership and control parameters within a period of three months.
Wherever investments do not conform to the prescribed policy parameters, banks have to ensure that their investments are brought down to 10 per cent of their paid-up share capital of the investee company and/or give up control or seek the RBI's approval.