The Reserve Bank of India (RBI) on Wednesday capped banks’ equity investment ceiling in companies and subsidiaries to prevent lenders from having any significant influence.Banks cannot invest more than 10% 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%, the RBI said in a draft guideline on equity investments by scheduled commercial banks in subsidiaries and other companies.
“It is possible that banks could through their holdings in other entities, exercise control on such companies or have significant influence over such companies and thus, engage indirectly in activities not permitted to banks,” the RBI said.
However, the regulator clarified that the cap of 20% would not apply if investments in financial services companies are held under ‘Held for Trading’ category, and are not held beyond 90 days.
“Wherever investments do not conform to the above mentioned policy parameters, banks may ensure that their investments are brought down to 10% of the paid-up share capital of the target company or give up control or exercising significant influence as the case may be,” the regulator said.
The RBI wants banks to conform to the new guidelines within three months.
“Banks should also carry out a review of their subsidiaries, associates, joint ventures by applying the test of ownership and control parameters as stated above, within a period of three months,” the statement said.
In a similar move, the central bank on Tuesday capped bank’s investments into liquid schemes of mutual funds to 10% of the bank’s net worth as on March 31 of the previous fiscal year in order to prevent circular flow of funds between banks and mutual funds that could lead to systemic risk in times of liquidity crunch.