The Reserve Bank of India (RBI) should be the main regulator, for prudential and supervisory functions, for financial holding companies (FHCs). This is part of the draft recommendations of an internal working group of the Reserve Bank, set up to draw a road map for the introduction of a bank holding company structure.
The committee has, however, noted that if the government retains its majority shareholding in State Bank of India and other public sector banks, they cannot move to a holding company model.
The group, headed by deputy governor of RBI Shyamala Gopinath has suggested that the FHC structure should be made mandatory for new entrants to the banking space. An FHC will typically have a bank, an insurance company, an asset management company and others of the sort operating under it.
But, the report says setting up such a structure will require extensive amendments to the Banking Regulation Act, 1949, including giving clear powers to RBI to regulate the holding company. Amendments to the Act are now pending in Parliament, but the Gopinath group says those are not enough.
The Gopinath group has also recommended a fully-capitalised model for the holding company instead of an intermediate holding structure as that would make the relations between the operating companies and the holding company, complex. The need for a holding company structure has risen in India as banks have diversified into several lines of business and need more capital from markets to expand further. A holding company model would, among other things, give them the advantage to raise capital riding on the brand value of the group, which is not possible now. On the issue of supervision, the group has apparently recommended consolidated supervision to ensure safety of depositors, investors and creditors. ?However, amendments will have to made to the Banking Regulation Act and even the RBI Act to bring FHCs under a proper regulatory jurisdiction with particular reference to registration, inspection, giving directions and calling information,? said a source in the know of the developments. ? The committee is also expected to suggest two options to financial conglomerates for migration to the FHC model. They could either consider demerging the banking business into a new wholly-owned subsidiary or create a new company altogether and its shares to shareholders of the existing banking company,? said the source. The committee is also expected to take a view that the financial conglomerates should be given the option to choose if they want to migrate to the holding company structure. FHCs, the committee is of the view, should not face any limits while expanding into non-banking financial areas. Several legal changes have been suggested by the committee to make the FHCs happen. This includes the need to amend the ceiling on voting rights for shareholders of banks, which is part of the Banking Regulation Amendment Bill 2010. Currently, irrespective of the shareholding the voting right is capped at 10%. Others include changes in the Companies Act and in the RBI Act.