RBI frowns at bank holding cos

ICICI Financial, State Bank plans unlikely to pass muster for now

MUMBAI: The Reserve Bank of India says it is worried about intermediate holding companies being set up by banks to manage their non-core businesses such as insurance and asset management.

In other words, structures such as those of ICICI Financial Services (IFS) are unlikely to get the regulator’s approval — at least not in the near-term future.

That would also mean similar plans by the State Bank of India will remain a stillborn.

In a discussion paper put up for public feedback, the RBI said concerns are that the holding company may not fall into the regulatory ambit or that large and diversified financial conglomerates may be difficult to supervise.

Also, the multi-layering may not be in the interest of investors because they may not know where their money is ultimately invested.

“If the intermediate holding company confines its investments to the shares of group companies only and does not carry out any other financial activities, it would not require registration under Section 45-I A of the RBI Act and would therefore not come under the regulatory purview of Department of Non-Banking Supervision of Reserve Bank of India. Presence of an unregulated intermediate holding company will raise concerns about the supervision of banking groups,” the RBI said.

The review is because India is witnessing the emergence of ‘financial conglomerates’.

“With the enlargement in the scope of financial activities…some players are experimenting with structures so far unfamiliar with India,” the RBI said.

The different holding structures have to be assessed for their suitability to the country’s current legal, regulatory and accounting framework, the RBI said.

Currently the RBI is looking at the bank holding company (BHC) model and financial holding company (FHC) model which are popular internationally for managing large financial conglomerates.

BHCs are companies that control one or more banks while FHCs are a larger entity controlling banks as well as non-banking finance companies (NBFCs).

Intermediate companies are also a regulatory headaches in the currency subsidiary model in India according to the RBI.

"These subsidiaries will be regulated by different regulators (IRDA,SEBI and NHB) on solo basis, (but) the overall supervisory will rest with RBI. Thus, while the bank will be able to avoid the present 20% regulatory limit on investment in the financial services companies, RBI's regulatory concerns, will continue," RBI said.

It could also create complication on foreign direct investment especially in insurance where FDI limit is at 26% and the proposition of foreign holding in the banking company is not taken into account while calculating the insurance limit.

The RBI paper comes just ten days after ICICI Bank got a long pending approval from the foreign investment promotion board (FIPB) to sell 24% stake in its newly formed subsidiary ICICI Financial Services.

The ICICI Bank board of directors on March 3, had approved the incorporation of a new wholly owned subsidiary, ICICI Holdings, and the transfer of its investments in ICICI Prudential Life Insurance Company, ICICI Lombard General Insurance Company, Prudential ICICI Asset Management Company and Prudential ICICI Trust to the new company. The proposal has yet to get the RBI's nod.

Besides ICICI Bank, the State Bank of India has also sought RBI approval to create a holding company to transfer its shareholding in its life insurance and asset management business.

Following the FIPB nod, ICICI said it had received interest from five investors to buy 5.9% stake in the bank for $650 million.

That was enough for Aashish Agarwal and Rahul Jain of CLSA Asia Pacific Markets to upgrade the bank's share price target by 45% to Rs 1,200 on August 20.

The biggest advantage for the banks of creating a holding company is that it will free them from the burden of financial subsidiaries.