Plans of the country’s biggest commercial bank State Bank of India (SBI) and largest private sector lender ICICI Bank Ltd to float intermediate holding companies for their insurance and asset management businesses are set to face a regulatory dead end when the Reserve Bank of India (RBI) releases its policy paper on 30 November, people familiar with the development said.
The apex bank had released a discussion paper on holding companies on 27 August. Under Indian law, banks cannot invest more than 20% of their net worth in their non-banking subsidiaries, including venture funds. Since the insurance business is heavily capital-intensive, the two banks planned to float holding companies for their insurance, as well as asset management businesses.
The move, if successful, would have freed up the banks’ capital.
ICICI Bank, for instance, has already infused Rs2,500 crore in its two insurance outfits— ICICI Prudential Life Insurance Co. Ltd and ICICI Lombard General Insurance Co. Ltd. The lender planned to float ICICI Financial Services, a holding company for its insurance and asset management businesses. And it planned to make the holding company public by the year-end and raise money to invest in the insurance business. The bank’s board approved the plan in March and the insurance regulator, Insurance Regulatory and Development Authority (Irda), subsequently approved the proposal. The bank also planned to sell 5% stake of ICICI Financial Services to a few foreign investors at around Rs2,500 crore and received an approval from the Foreign Investment Promotion Board (FIPB), the regulatory authority for such deals. However, RBI never approved the proposal. SBI did not take up the proposal with its board.
People familiar with the development said RBI favours the creation of a holding company for the entire business and not just for non-banking businesses because such an entity would fall outside the supervision of the banking regulator.
RBI cites the example of a holding company of one large conglomerate, which happens to be a non-banking finance company. “This company invests in various group firms but RBI does not have any direct control on it. Can we afford to follow such a model in the banking sector?” said a source, who did not wish to be identified.
RBI’s August discussion paper favoured the eventual move to a structure where all existing businesses, including banking, would be under one holding company—a bank holding company (BHC) or a financial holding company (FHC)—depending on the nature of businesses. BHCs are companies, which own or control one or more banks, while FHCs own or control one or more banks or non-bank financial companies. “The problem of regulators becomes accentuated if the intermediate companies do not fall within their regulatory ambit,” RBI said in its policy paper.
The Indian Banks’ Association, the premier bankers body in the country, in its response to the RBI discussion paper, had said: “While it is not possible to immediately constitute an FHC or BHC structure, the issue of creating an appropriate structure for non-banking financial subsidiaries of banking companies needs immediate attention, given the capital requirements of these businesses, especially the insurance business.”
JPMorgan Chase & Co., in a September research note, said the dilemma of RBI can be addressed if an intermediate holding company could be set up as a non-banking finance company (NBFC), which would be regulated by the apex bank, even if engaged in the business of investment in group companies.