The Reserve Bank of India on Wednesday asked banks to conform to equity investments ceiling of up to 20 per cent in companies and subsidiaries within 3 months to prevent lenders from having significant influence over them.Banks should strictly observe prudential guidelines while investing in companies undertaking non-financial services activities, RBI said in a draft guidelines on equity investments by scheduled commercial banks in subsidiaries and other companies.
"Banks should also carry out a review of their subsidiaries, associates, joint ventures (i.e. entities in which they have control or significant influence) by applying the test of ownership and control parameters as stated above, within a period of three months," it said.
As per the draft guideline, banks cannot invest more than 10 per cent of their paid-up capital in a subsidiary or financial services company, while total investments made in all subsidiaries and non-subsidiary financial services companies shall not exceed 20 per cent.
"Wherever investments do not conform to the above mentioned policy parameters, banks may ensure that their investments are brought down to 10 per cent of the paid-up
share capital of the investee company or give up control or exercising significant influence as the case may be," it said.
A bank's equity investments in subsidiaries and other entities that are engaged in financial services together with equity investments in entities engaged in non-financial services activities should not exceed 20 per cent of the bank's paid-up share capital and reserves, it said.
The cap of 20 per cent would not apply for investments classified under 'held for trading' category and are not held beyond 90 days, it said.
While the above measures will limit the investments of banks in non-subsidiary companies engaged in non-financial services activities, it is possible that even with limited investment, banks may exercise control or significant influence in companies through other arrangements, it noted.
It is, therefore, necessary to limit such investments so as to ensure that banks do not indirectly undertake activities not permitted to them, it said.
