RBI lets banks buy up to 10% in a company's equity without prior permission

Reserve Bank of India (RBI) has allowed banks to make investments of up to 10 per cent in the equity capital of limited companies without having to seek prior permission of the central bank, provided their equity holdings will be within the 10 per cent limit.

This is expected to provide banks more operational freedom and flexibility in decision making. Such banks, however, should have capital to risk-weighted assets (CRAR) of 10 per cent or more and have also made net profit as of 31 March of the previous year.

Banks may also need to approach RBI for prior approval for equity investments in cases where after such investment, the holding of the bank remains less than 10 per cent of the investee company's paid-up capital, and the holding of the bank, along with its subsidiaries or joint ventures or entities continues to remain less than 20 per cent of the investee company's paid up capital.

The investment will continue to be subject to extant prudential limits as well as extant prudential norms, RBI said.

Equity investments by a bank in a subsidiary company, or a financial services company, including financial institutions, stock and other exchanges, depositories, etc, which is not a subsidiary, should not exceed 10 per cent of the bank's paid-up share capital and reserves as per extant RBI rules.

The total investments made by a bank in all subsidiaries and other entities that are engaged in financial services activities 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 cap of 20 per cent will not apply, nor will prior approval of RBI be required, if investments in financial services companies are held under 'Held for Trading' category, and are not held beyond 90 days as envisaged in the RBI guidelines on 'Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks'. They are also subject to extant prudential norms.