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K.R. Srivats

New Delhi, Dec. 28 The supervision of financial conglomerates and holding companies may get a much needed boost if the recommendations of the Government-Reserve Bank of India appointed advisory panel to the Committee on Financial Sector Assessment (CFSA) are implemented.

The advisory panel has suggested the enactment of a new law on the lines of the Gramm-Leach-Bliley (GLB) Act of the US to empower the regulator to have regulatory jurisdiction over the holding company. At present, there is no legislation specifically permitting the regulation of financial conglomerates (FC) and holding companies in India.

The panel says that the proposed legislation should be more comprehensive than the GLB and should empower the Reserve Bank of India to have regulatory reach over holding companies that do not even have a subsidiary, which is within its functional regulatory domain.

A “silo plus” regulatory approach has been suggested for holding company supervision. This term describes the supervisory structure in which supervision of each business line, usually described as functional supervision, is combined with an additional level of supervision at the holding company level.

The GLB of US authorises the Federal Reserve Board to have the supervisory oversight over financial holding companies. With financial stability being the overriding objective of a central bank, which is the only entity having lender of last resort powers in times of extraordinary market conditions and crises, the panel was of the view that the RBI should be armed with enough supervisory powers and also monitoring functions in respect of FCs.

In recent years, there has been an increase in the number of FCs in India. Following the intensification of links between various financial markets, a number of cross-sector organisational forms combining banks, insurance companies and investment firms have been created.

The advisory panel has noted that regulation and monitoring of the financial operations of such large complex financial organisations, described as financial conglomerates, had posed significant problems as they often create new prudential risks while exacerbating existing ones.

So far, for the purpose of supervision, 12 institutions, having significant presence in banking, insurance, NBFC, housing finance and capital markets, had already been identified as FCs.

Specifically, the advisory panel has recommended that the responsibility of regulation and supervision of the holding company should lie with the RBI in case of a FC where the apex institution is a bank holding company.

In case of a FC with a non-bank holding company (financial or non-financial) having a bank within its structure, the panel has said that the responsibility for regulation and supervision of the holding company should lie with RBI.

For a FC with non-bank financial holding company whose activity is within the regulatory jurisdiction of the RBI, the responsibility of regulation and supervision of the holding company should lie with the RBI irrespective of whether there is a bank within its structure.

In the case of a FC with non-financial holding company, the holding company should be explicitly within the regulatory outreach of RBI, to the extent that the central bank was empowered to obtain information as relevant from time to time, even if there does not exist a bank within the FC structure.

The advisory panel has also said that allowing “intermediate” holding companies may not be feasible till an appropriate regulatory structure for such an entity was in place.

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