RBI spanner in ICICI, SBI holding co plans

Mumbai August 28, 2007

The Reserve Bank of India (RBI) has suggested a holding company
structure for banking groups in which banks do not own any
subsidiaries.

This effectively shelves plans by the country's largest two banks,
State Bank of India (SBI) and ICICI Bank, the country's largest and
second-largest bank, respectively, to form subsidiary holding firms
for their insurance and mutual fund businesses.

In a discussion paper on holding companies in banking groups
circulated today, the RBI said, "It will be desirable to avoid
intermediate holding company structures (a structure in which a bank
owns a holding company for various non-bank businesses)."

The discussion paper, which will be open for public feedback, has been
prompted by applications filed by ICICI Bank and the SBI to set up
holding companies, in which the banks hold the majority stakes, for
the insurance and mutual fund businesses and in which foreign
investors will take stakes.

ICICI Bank had even obtained approval from the Insurance Regulatory
and Development Authority (IRDA) and the Foreign Investment Promotion
Board (FIPB) on its new structure in which Goldman Sachs and other
foreign investors were to take a 24 per cent stake. Its application is
pending with the RBI.

The banking regulator has suggested a bank holding company (BHC) or a
financial holding company (FHC) model in which bank and non-bank
subsidiaries in a banking group will be owned by the holding firm (see
chart). This is also an ownership structure specified under Basel II,
the revised capital adequacy framework for banks.

ICICI Bank and the SBI had considered setting up the holding companies
to ensure a smooth flow of capital to subsidiaries. An ICICI Bank
spokesperson declined to comment on the RBI's suggestion.

Kalpana Morparia, the bank's chief strategy and communications
officer, had said earlier that "both these (insurance and asset
management) companies need a fair amount of capital for growth. Beyond
a point, the bank cannot put in more capital". The central bank has
put a limit of 20 per cent of a bank's net worth on investments in
financial services companies.

A senior SBI official said the RBI discussion paper had come as a
surprise, but added the bank still had room to fund the growth of its
life insurance subsidiary.

The RBI paper also pointed out that an intermediate holding company
would not fall within the regulatory purview of the Reserve Bank of
India Act, being a company that confines its activities to investing
in group companies.

The paper also said a holding company that would own a bank and other
companies in the group would help separate a banking entity from other
group companies and hence the responsibility of funding the growth of
subsidiaries.

It added that the law should ensure that no unregulated entities were
present within the structure. The RBI said the presence of any
unregulated entity within a banking group might prove to be a "weaker
link" in the structure providing scope for regulatory arbitrage.

Another possible complication, the RBI paper said, could arise because
of legal restrictions on foreign holding in subsidiaries like
insurance companies. In insurance companies, direct or indirect
foreign holding cannot exceed 26 per cent.

However, according to IRDA regulations, when the Indian promoter
company is a banking company, the proportion of foreign holding in
such a banking company would not be considered for the purpose of
calculating the 26 per cent foreign holding limit in an Indian
insurance company. The paper said this exemption would not be
applicable to an intermediate holding company.