RBI’s Working Group suggested Holding Company Model for Financial Sector

Economy Current Affairs 2011. The Reserve Bank of India's working group on introduction of financial holding structure in India submitted its report on 23 May 2011

Created On: May 24, 2011 18:52 ISTModified On: May 24, 2011 18:52 IST

The Reserve Bank of India's working group on introduction of financial holding structure in India submitted its report on 23 May 2011. The working group suggested that large financial groups should adopt a holding company model irrespective of their having a bank or not.


The working group headed by RBI Deputy Governor, Shyamala Gopinath mentioned that all new banks and insurance companies, as and when licensed, will mandatorily need to operate under the Financial Holding Company (FHC) framework. As per the report of the group there could be there could be banking FHCs and non-banking FHCs.


All identified financial conglomerates which have a bank within the group essentially need to convert to the FHC model in a time bound manner.


The group recommended a separate regulatory framework for FHCs and a new Act for regulation of FHCs. The RBI should be designated as the regulator for FHCs and the function of regulation should be undertaken by a separate unit within RBI with staff drawn from both RBI as well as other regulators. The group also recommended a consolidated supervision mechanism through Memorandum of Understanding between regulators.


Some limit on the expansion of non-banking business need to be put after the existing financial groups dominated by banks migrate to the holding company structure (Banking FHCs) so that the banking business continues to remain the dominant activity of the group. This suggestion was incorporated to ensure that the growth of banking is not compromised by these groups in favour of non-banking business. The FHC should primarily be a non-operating entity and should be permitted only limited leverage as stipulated by RBI. However, it could carry out activities which are incidental to its functioning as an FHC. The group recommended that FHC should be permitted to carry out all financial activities through subsidiaries.


There should be appropriate limits on cross-holding between different FHCs. Also there should be limits on cross holding between FHCs on one hand and banks, NBFCs and other financial institutions outside the group.


With regard to the listing of the holding company, the Working Group recommended that requisite space needs to be provided to the holding company for capital raising for its subsidiaries. Either the holding company should be listed with all its subsidiaries being unlisted, or both the holding company with all or some of its subsidiaries should be listed depending on the objectives and strategy of the financial group and the prevailing laws and regulations on investment limits.


The group also recommends that dividends paid by subsidiaries to the FHC may be exempt from the dividend distribution tax to the extent these dividends are used by the FHC for investment in other subsidiaries.


Recommendation in a nut shell:
•    Large financial groups should adopt a holding company model.
•    New banks and insurance companies need to operate under the Financial Holding Company (FHC) framework.
•    Separate regulatory framework for FHCs and a new Act for regulation of FHCs.
•    Limit on the expansion of non-banking business need to be put after the existing financial groups dominated by banks migrate to the holding company structure.
•    Appropriate limits on cross-holding between different FHCs.
•    Requisite space needs to be provided to the holding company for capital raising for its subsidiaries.
•    Dividends paid by subsidiaries to the FHC may be exempt from the dividend distribution tax to the extent these dividends are used by the FHC for investment.

The Group also recommended two options to warehouse the government's holding in public sector banks.

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