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Equity investment by a bank in a non-financial service company would be subject to a limit of 10 per cent of the company's paid-up capital or 10 per cent of the bank's paid-up capital and reserves, whichever is less, according to the Reserve Bank of India.
In new guidelines for banks' investments in companies which are not subsidiaries and are not ‘financial services companies', the RBI said that for arriving at this 10 per cent limit, equity investments held under ‘Held for Trading' category would also be reckoned.
Investments within the 10 per cent limit, irrespective of whether they are in the ‘Held for Trading' category or otherwise, would, however, not require the central bank's prior approval.
The RBI issued the guidelines as it felt that it is possible for banks, directly or indirectly through their holdings in other entities, to exercise control on financial service companies or have significant influence over such companies and thus, engage in activities directly or indirectly not permitted to banks.
Equity investments in any non-financial services company held by a bank; its subsidiaries, associates or joint ventures or entities directly or indirectly controlled by the bank; and bank managed mutual funds should in the aggregate not exceed 20 per cent of the investee company's paid-up capital.
A bank's equity investments in subsidiaries and other entities that are engaged in financial service activities together with equity investments in entities engaged in non financial service activities should not exceed 20 per cent of the bank's paid-up share capital and reserves.
In this case, the 20 per cent cap would not apply for investments classified under the ‘Held for Trading' category and which are not held beyond 90 days.
Equity holding by a bank in excess of 10 per cent of non financial services investee company's paid-up capital would be permissible without RBI's prior approval (subject to the statutory limit of 30 per cent) if the additional acquisition is through restructuring/ corporate debt restructuring, or acquired by the bank to protect its interest on loans/investments made in a company.
In such cases, the equity investment in excess of 10 per cent of an investee company's paid-up capital would be exempted from the 20 per cent limit. However, banks will have to submit to RBI a time bound action plan for disposal of such shares within a specified period.
A bank's request for making investments in excess of 10 per cent of a non-financial services company's paid-up capital, but not exceeding 30 per cent, would be considered by RBI if the investee company is engaged in non-financial activities which are permitted to banks.
The RBI said that banks should strictly observe the guidelines while investing in companies undertaking non-financial service activities. They should also carry out a review of their investments in non financial companies as also by subsidiaries and joint ventures, within three months.
Wherever investments do not conform to the new policy guidelines, banks have to ensure that the investments are brought down to the prescribed limits and/or control or the exercise of significant influence is given up as the case may be or seek the RBI's approval.
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