The Reserve Bank of India has made a strong case against intermediate holding companies. The regulator said that any clearance for foreign investment in such a holding company by other regulators could be subject to "legal review". This move by the RBI could upset plans of ICICI Bank and the State Bank of India to float holding companies for their insurance and mutual fund business. SBI and ICICI Bank have recently proposed to set up intermediate holding companies. An intermediate holding company is a subsidiary of an operating company as well as the parent of another operating company.
Although both ICICI Bank and SBI could consider floating their insurance ventures directly, such a move will not provide them access to deep-pocketed foreign investors because of the 26% cap on foreign holding in insurance.
ICICI Bank has gone ahead and got investors (Goldman Sachs, Nomura, Swiss Re and Sequoia) to commit to a 5% stake in the proposed holding company for over $ 500 million. Although SBI has not progressed much, the country's largest bank needs to diversify its funding sources, given the restrictions it face on raising fresh equity capital. However, RBI's announcement had no big impact on the stock counters, with both scrips rising by around 6% on Monday. RBI has highlighted its concerns over a holding company in a discussion paper. The central bank has invited comments on the discussion paper following which a policy decision will be taken.
The thrust of the central bank's opposition is that intermediate holding companies are unregulated entities and this structure has been used for regulatory arbitrage. Allowing foreign investment in a holding company for the insurance business could give rise to complications on account of legal restrictions on foreign holding, said RBI.
Although RBI has not given any deadline for mailing comments, it is likely that the one-month validity for the commitments by foreign investors would expire before RBI takes a policy decision. "The problem of the regulators becomes accentuated if the intermediate companies do not fall within their (the supervisors') regulatory ambit," RBI said.
ICICI Bank officials refuted RBI's claim, saying that the proposed holding company will be subject to RBI regulation. In the past, RBI has said banks that are considered part of a financial conglomerate would have to report activities of group companies even if they are not regulated by RBI.
Although both ICICI Bank and SBI could consider floating their insurance ventures directly, such a move will not provide them access to deep-pocketed foreign investors because of the 26% cap on foreign holding in insurance.
ICICI Bank has gone ahead and got investors (Goldman Sachs, Nomura, Swiss Re and Sequoia) to commit to a 5% stake in the proposed holding company for over $ 500 million. Although SBI has not progressed much, the country's largest bank needs to diversify its funding sources, given the restrictions it face on raising fresh equity capital. However, RBI's announcement had no big impact on the stock counters, with both scrips rising by around 6% on Monday. RBI has highlighted its concerns over a holding company in a discussion paper. The central bank has invited comments on the discussion paper following which a policy decision will be taken.
The thrust of the central bank's opposition is that intermediate holding companies are unregulated entities and this structure has been used for regulatory arbitrage. Allowing foreign investment in a holding company for the insurance business could give rise to complications on account of legal restrictions on foreign holding, said RBI.
Although RBI has not given any deadline for mailing comments, it is likely that the one-month validity for the commitments by foreign investors would expire before RBI takes a policy decision. "The problem of the regulators becomes accentuated if the intermediate companies do not fall within their (the supervisors') regulatory ambit," RBI said.
ICICI Bank officials refuted RBI's claim, saying that the proposed holding company will be subject to RBI regulation. In the past, RBI has said banks that are considered part of a financial conglomerate would have to report activities of group companies even if they are not regulated by RBI.
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