Banks can no longer hold more than a 10 percent stake in a deposit taking non-banking finance company, with the exception of lenders owning equity in housing finance companies, and also regulated their commodity derivatives play, according to a Reserve Bank of India circular.
In amendments to the Master Direction - Reserve Bank of India (Financial Services provided by banks) Directions, 2016, the central bank said banks should not invest more than 10 percent of the unit capital of a real estate investment trust (ReIT) or an infrastructure investment trust (InvIT) subject to overall ceiling of 20 percent of its net worth.
The master directions first issued in May last year did not provide for investments in the ReITs and InvITs, both newly introduced instruments.
Banks will not be allowed to hold more than 10 percent of the paid up capital of a company, not being its subsidiary and engaged in non-financial services or 10 percent of the bank’s paid up capital and reserves, whichever is lower.
The RBI will also not allow holding more than 20 percent stake through the bank’s subsidiaries, associates or joint ventures or entities directly or indirectly controlled by the bank; and mutual funds managed by Asset Management Companies (AMCs) controlled by the bank.
RBI notified that banks investing in such firms must have a minimum regulatory capital. Here, the capital computation must also include the so-called capital conservation buffer (CCB).
Earlier, the RBI had mandated at least 10 percent capital adequacy ratio and there was no mention of CCB.
Similarly, banks looking to undertake insurance and pension fund management business must also have minimum prescribed capital. Before this circular, RBI had mandated 10 percent capital adequacy of ratio for banks post such investments. Banks must have minimum total capital including CCB, of 10.875 percent by March 2018.
The banking regulator also barred banks from investing in category III alternative investment funds (AIFs), specified norms for their participation in commodity derivatives clearing.
Category III AIFs employ complex trading strategies sometimes on borrowed money, while category II funds do not use leverage other than to meet daily requirements. category I AIFs invest in start-up ventures, SMEs and other sectors preferred by the government or regulators.
Banks may invest as much as 10 percent in the paid-up capital/unit capital in category I and II funds, but cannot invest in category III funds. So far, there was no specific rule on investing in AIFs.
“No bank shall (make) investment of more than 10 percent of the paid-up capital/unit capital in a category I/ category II alternative investment fund,” said an updated master circular on financial services offered by banks.
The central bank also said banks wishing to undertake commodities derivatives clearing must set up a separate subsidiary for the purpose and adhere to membership criteria of stock exchanges and Securities Exchange Board of India (SEBI) regulations.
For this, banks must set up internal risk control measures and take board approvals to decide the extent to which they can fulfil pay-in obligations arising out of trades executed by clients and set prudential norms on risk exposure, among others.
“The bank shall not undertake trading in the derivative segment of the commodity exchange on its own account and shall restrict itself only to clearing and settlement transactions done by the trading members/clients on the exchange,” said the RBI circular.(With agency inputs.)