The Reserve Bank of India and private sector ICICI Bank are readying for an intense debate. This will be over ICICI Bank?s proposed $11-billion intermediate holding company?ICICI Financial Services?which will hold stakes in its asset management and insurance ventures. The RBI has frowned upon intermediate holding company structures, throwing ICICI Bank?s plans into uncertainty.

ICICI Bank had initiated discussions with foreign investors for offloading about 6% of the proposed holding company?s stake. But that will now have to wait until the RBI, which issued a discussion paper on holding companies in banking groups on Monday, approves of its plan. The country?s largest bank, State Bank of India, has also proposed an intermediate holding firm for investments in asset management and insurance.

ICICI Bank executives are tightlipped on the issue a day after the RBI caught the financial sector off-guard with its discussion paper. The bank is expected to put up a strong case before the banking regulator, arguing in favour of its own holding company structure when it puts up its views on the RBI paper.

ICICI Bank has proposed to set up an intermediate holding company which will hold the investments in asset management and insurance. In fact, this is the second hiccup being faced by ICICI Bank on its holding company. After some shilly-shallying over the extent of foreign stakes that can be permitted in the proposed company, the Foreign Investment Promotion Board (FIPB) only recently cleared the bank?s proposal to bring in 24% foreign holding.

The RBI has clearly expressed its views against intermediate holding company structures of the type proposed by ICICI Bank. But sources say there could still be a window of opportunity if the RBI allows a timeframe for ICICI Bank to comply with its proposed norms. The RBI has favoured a bank holding company or a financial holding company structure, where non-banking activity is undertaken by firms owned by a holding company that also owns a bank itself. The RBI has given a three-week timeframe for feedback, after which it will finalise the norms for such structures.

Sources say the BHC or FHC structure could take years for ICICI Bank to set up, and hence delay the growth plans of its subsidiaries.

Sources arguing in favour of the intermediate holding company structure said the RBI concern that an intermediate holding company structure would be difficult to regulate since it would not require registration under section 45-I A of the RBI Act was also misplaced since ICICI Bank was already proposing to register the company as a non-banking finance company (NBFC) which would clearly be subject to RBI regulation.

?Even the para-banking guidelines set out by RBI make these structures subject to RBI regulation,? sources explained.

An RBI spokesperson declined to spell out what course the central bank would take on the ICICI Bank proposal, saying the discussion paper was still awaiting feedback from the public. ICICI Bank would move to set up the company only after receiving RBI clearance.

Says the RBI paper: ?Since the non-banking entities within the banking group would be directly owned by the BHC, the contagion and reputation risk on account of affiliates for the bank is perceived to be less severe as compared with at present.?

However, the proponents of the intermediate holding company structure say such a structure actually de-risks a bank since the company would not require to be capitalised by the bank and the bank could use its funds for its core banking activities. ICICI Bank has proposed to offload about 6% in its proposed holding firm for about Rs 2,600 crore. The bank would, then, not need to capitalise its insurance businesses from its own funds.

On the other hand, if the holding company structure proposed by ICICI Bank is rejected by RBI, the bank can put in upto Rs 4,000 crore of funds into these insurance companies to fund their growth. This is because, under extant regulations, a bank?s aggregate investment in financial services companies including subsidiaries is limited to 20% of the paid up capital and reserves of the bank. ICICI Bank has recently raised Rs 20,000 crore from the market.