RBI opposes FIPB decision in ICICI intermediate holding company

In a discussion paper on holding companies in banking groups, the RBI said, “It will be desirable to avoid intermediate holding company structures.” Assumption is that RBI apprehends loss of control on money laundering and ‘reverse round tripping of FDI’ by the intermediate holding company.

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 , 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 (FHQ model in which bank and non-bank subsidiaries in a banking group will be owned by the holding firm. This is also an ownership structure specified under Basel II, the revised capital adequacy framework for banks. ICICI Bank and the SBI had considered settingup the holding companies to ensure a smooth flow of capital to subsidiaries. An ICICI Bank spokesperson declined to.comment on the-RBI’s suggestion.

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