Saturday, August 13, 2011

BANKS' EXPOSURE IN NON- FINANCE ENTITIES LIKELY TO BE CAPPED AT 10%

In a move to discourage Banks participation in Non Financial Activities, the Reserve Bank of India (RBI) has proposed a limit on the equity investment of a Bank in the entities not involved in financial services. Reserve Bank of India (RBI) has proposed a cap on Banks investment in Non Financial Companies at 10% of the latter's capital or 10% of the bank's capital plus reserves. The central bank has issued the draft norm for decision. Banks would not require prior approval from Reserve Bank of India (RBI) if such investments were within the ceiling. Request for an investment in excess of 10%
of a company's paid up capital would be considered by Reserve Bank of India (RBI) only if the company was engaged in activities permitted to banks under the Act. A bank's equity investments in the subsidiary entity engaged in Non Financial Services are also to be capped at 20 % of the paid up capital and reserves. The cap of 20% would not apply for investment classified under the "held for trading" category, if not held beyond 90 days. Banks will be permitted to hold stake in excess
of 10% without RBI's prior approval if the additional acquisition (of equity investments) is through
restructuring or corporate debt restructuring or corporate debt restructuring. Such cases would also
be exempted from the 20% ceiling rule.

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