Multi-layered structures tough to regulate: RBI
ICICI bank's proposal to invite foreign direct investment in its holding companies for insurance and mutual- fund ventures may face fresh hiccups after an RBI discussion paper suggested that it was difficult to regulate multi-layered structures.
The 11-page paper said: “Governments and financial sector regulators have always been concerned about the multi-layering of a corporate structure through a web of special-purpose entities and intermediate holding companies. Particularly, the bank supervisors have viewed them as an impediment to effective supervision. The problem of regulators becomes accentuated if the intermediate companies do not fall within their regulatory ambit.”
While, on the one hand, the top holding company begins losing its grip on step-down subsidiaries, regulators sometimes feel the need to extend liquidity support of the financial safety net beyond usual measures to prevent a system-wide financial crisis.
“This gives market participants a feeling that when a crisis hits an institution that is ‘too big to fail’, the regulator would come to the rescue, regardless of the circumstances that led to the crisis,” said the paper.
The RBI argued that such perceptions coupled with the fact that complex financial institutions are also susceptible to the problem of weak internal controls, lack of flexibility and poor integration could ultimately result in weaker regulatory and supervisory control.
The apex bank pointed out that there may be a conflict of regulation as more regulators get involved across different verticals. “The multi-layering of corporate structure is not considered good from investors’ point of view as they do not really know where the money invested by them would be eventually used.”