RBI seeks tight caps on equity investments by banks
08 Jul 2011
Seeking to discourage participation by banks in non-financial organisations, the Reserve Bank of India (RBI) has proposed set prudential limits for banks' equity investments in other companies and subsidiaries, in order to prevent banks from having any significant influence over such entities.
As per the draft guidelines issued by the central bank, banks cannot invest more than 10 per cent of their paid-up capital in a subsidiary or financial services company, while total investments made in all subsidiaries and non-subsidiary financial services companies should not exceed 20 per cent.
''Wherever investments do not conform to the above mentioned policy parameters, banks may ensure that their investments are brought down to 10 per cent of the paid-up share capital of the investee company or give up control or exercising significant influence as the case may be,'' RBI said.
Equity investments in companies engaged in non-financial services activities would 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.
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,'' the RBI suggested. The cap of 20 per cent would not apply for investments classified under 'held for trading' category and are not held beyond 90 days.
While these measures will limit the investments of banks in non-subsidiary companies engaged in non-financial services activities, it is possible that even with limited investment, banks may exercise control or significant influence in companies through other arrangements, ''It is, therefore, necessary to limit such investments,'' it said.
''Banks should also carry out a review of their subsidiaries, associates, and joint ventures by applying the test of ownership and control parameters within a period of three months,'' the RBI said.
