Mumbai: To ensure arm’s-length distance between banking activities and investment advisory services, the Reserve Bank of India (RBI) has asked Indian banks to offer such services through a separate subsidiary instead of through a department within them.

“It is advised that henceforth, banks cannot undertake IAS (investment advisory services) departmentally. Accordingly, banks desirous of offering these services may do so either through a separate subsidiary set up for the purpose or one of the existing subsidiaries after ensuring that there is an arm’s-length relationship between the bank and the subsidiary," the central bank said in a circular on Thursday.

Banks that currently offer such services through an internal department will have to reorganize their operations within three years, the RBI said.

Banks will have to get specific approval from the RBI to set up the subsidiary, the circular said, adding that these approvals will be based on the guidelines governing para-banking activities.

The subsidiary should also be registered with the Securities and Exchange Board of India (Sebi) and will be regulated by the capital markets regulator, the RBI said.

“IAS provided by bank-sponsored subsidiaries should only be for products and services which banks are permitted to deal in as per the Banking Regulation Act, 1949," the circular said.

RBI had issued draft guidelines on wealth management and marketing and distribution services offered by banks in June 2013 and had sought comments from the market.

In the draft guidelines, it was proposed that banks must set up a separate subsidiary or an identifiable department for providing wealth management services to avoid misselling and maintain an arm’s-length distance from the main banking business.

Close