All large financial groups should adopt a holding company model irrespective of their having a bank or not, a Reserve Bank of India appointed working group has suggested.
All new banks and insurance companies, as and when licensed, will also mandatorily need to operate under the Financial Holding Company (FHC) framework, the group headed by the RBI Deputy Governor, Ms Shyamala Gopinath, said. According to the Group, there could be banking FHCs and non-banking FHCs.
According to the Group's report, released on Monday, all identified financial conglomerates having a bank within the group also need to convert to the FHC model in a time bound manner.
The group has recommended a separate regulatory framework for FHCs and a new Act for regulation of FHCs. While the RBI should be designated as the regulator for FHCs, the function of regulation should be undertaken by a separate unit within RBI with staff drawn from both RBI as well as other regulators. The group also recommended a consolidated supervision mechanism through Memorandum of Understanding between regulators.
According to the Group, it would be necessary to put in place some limit on the expansion of non-banking business after the existing financial groups dominated by banks migrate to the holding company structure (Banking FHCs) so that the banking business continues to remain the dominant activity of the group. This is to ensure that the growth of banking is not compromised by these groups in favour of non-banking business. The FHC should primarily be a non-operating entity and should be permitted only limited leverage as stipulated by RBI. However, it could carry out activities which are incidental to its functioning as an FHC.
The FHC should be permitted to carry out all financial activities through subsidiaries.
There should be appropriate limits on cross-holding between different FHCs. There should also be limits on cross holding between FHCs on one hand and banks, NBFCs and other financial institutions outside the group, the report said.
With regard to the listing of the holding company, the Working Group has recommended that requisite space needs to be provided to the holding company for capital raising for its subsidiaries.
Either the holding company should be listed with all its subsidiaries being unlisted, or both the holding company with all or some of its subsidiaries being listed depending on the objectives and strategy of the financial group and the prevailing laws and regulations on investment limits.
The group also recommends that dividends paid by subsidiaries to the FHC may be exempt from the dividend distribution tax to the extent these dividends are used by the FHC for investment in other subsidiaries.