RBI Proposes Regulations to Prevent Banks from Using Group Entities to Bypass Rules

The Reserve Bank of India (RBI) has suggested that banks should not use affiliated entities to bypass regulations meant for them. This recommendation appears in a draft circular concerning business forms and prudential investment regulations. The draft highlights that group entities should not be used to conduct activities that are otherwise restricted for the parent bank or other related entities.

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Banks must avoid overlapping lending activities with their group entities, according to the draft. If banks wish to engage in new activities through a group entity, they must seek approval from the RBI's Department of Regulation. For Non-Operative Financial Holding Companies (NOFHC), only one entity within the NOFHC should perform a specific business activity.

Investment Regulations and Restrictions

The draft also outlines guidelines on bank investments, including those in allied businesses. It proposes a cap on the maximum stake a bank can hold in any company at 30 per cent. Additionally, banks are prohibited from investing in Category III Alternative Investment Funds (AIFs). Investments by a bank's subsidiary in such AIFs are limited to the minimum regulatory requirements set by the Securities and Exchange Board of India.

Regarding asset reconstruction companies (ARCs), the proposal limits banks to sponsoring only one entity at any time. Furthermore, it restricts the group's shareholding in an ARC to 20 per cent. Banks must consult the Department of Regulation if they plan to invest 20 per cent or more in the equity capital of any financial services company or Category I or II AIF, either individually or collectively as a group.

Overseas Operations and Risk Management

The draft suggests that Indian banks' overseas branches should refrain from engaging in activities prohibited for Indian lenders. It also advises that risk-sharing activities requiring ring-fencing should not be conducted departmentally but through a group entity, adhering to specific conditions for those activities.

Only one entity within a bank group should engage in a particular permissible business form. Multiple entities within a bank group should not undertake identical businesses or hold/acquire the same category of license/authorisation from any financial sector regulator, as stated in the draft.

This comprehensive proposal aims to ensure that banks operate within regulatory boundaries while maintaining distinct roles for each entity within their groups. By doing so, it seeks to prevent regulatory circumvention and promote transparency and accountability across banking operations.