RBI sets equity exposure cap for banks in non-financial firms

RBI sets equity exposure cap for banks in non-financial firms

“Equity investment by a bank in companies engaged in non financial services activities would be subject to a limit of 10 per cent of the investee company’s paid up share capital or 10 per cent of the bank’s paid up share capital and reserves, whichever is less,” RBI said in a notification.

For the purpose of this limit, equity investments held under ‘Held for Trading’ category would also be reckoned. Investments within the above mentioned limits, irrespective of whether they are in the ‘Held for Trading’ category or otherwise, would not require prior approval of the RBI, it said.

As of now investments in non financial services companies did not require prior approval from RBI. Banks were free to acquire substantial equity holding non financial services firms.

The notification further said, banks could through their direct and indirect holdings in other entities exercise control or have significant influence over such companies and thus, engage directly or indirectly in activities not permitted to banks.

“It is, therefore, necessary to limit such investments,” it added. As per the notification, equity investments in any non-financial services company held  by a bank or entities which are bank’s subsidiaries or mutual funds controlled by the bank should in the aggregate not exceed 20 per cent of the investee company’s paid up share capital.

A bank’s equity investments in subsidiaries and other entities that are engaged in financial services activities together with equity investments in entities engaged in non financial services activities should not exceed 20 per cent of the bank’s paid-up capital and reserves, it said.

Exempted investments
The cap of 20 per cent would not apply for investments classified under ‘Held for Trading’ category and which are not held beyond 90 days, it added. The equity investment in excess of 10 per cent of investee company’s paid up share capital in such cases would be exempted from the 20 per cent limit referred to above, it said.

However, it said, banks will have to submit to RBI a time bound action plan for disposal of such shares within a specified period.

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