Mumbai: The Reserve Bank of India (RBI) on Monday said it was necessary to place limits on expansion of non-banking business under the new financial holding company (FHC) structure to ensure that banking continues to be the dominant activity.

A working group of the central bank in its recommendations on setting up financial holding company also said the upper limit of allocation of equity capital by banking holding company to its non-banking subsidiaries should be capped.

The RBI has sought feedback on these recommendations by end-June.

“Presently, the banks’ total investment in its subsidiaries is capped at 20% of their net worth. Under the FHC structure, the allocation of equity capital by banking FHCs to non-banking subsidiaries should also be capped at a limit as deemed appropriate by the Reserve Bank to ensure that banking continues to be a dominant activity of the group,” the RBI said.

The RBI said a separate legislative act is however needed to regulate such companies and the central bank should be the regulator.

Pending enactment of a separate act, the FHC model may be operationalized under the provisions contained in the Reserve Bank of India Act, it was suggested.

The RBI had mooted the idea of setting up a financial holding company in June 2010 in line with global practices.

The central bank’s working group had suggested that intermediate holding companies within the FHC should not be permitted due to their contribution to the opacity and complexity in the organizational structure.

“The FHC should primarily be a non-operating entity and should be permitted only limited leverage as stipulated by the reserve Bank.”

The holding company should be permitted to carry out all financial activities through subsidiaries.

The central bank also harped on the need to restrict cross-holding between different holding companies and for diversified ownership.

The RBI was also in favour of allowing subsidiaries of the holding companies to be listed to enable them to raise capital.

“If the holding company is to function as an anchor for capital support for all its subsidiaries, requisite space would need to be provided to the holding company for capital raising for its subsidiaries.”