RBI panel suggests holding company model for financial sector

The new model, which seeks to align the Indian structure with international best practices, is expected to provide greater flexibility to FHCs in raising capital and ensuring better utilisation of funds

Mumbai: A Reserve Bank of India (RBI) panel on Monday suggested a new financial holding company (FHC) structure to allow business conglomerates to operate banks, insurance companies and NBFCs as subsidiaries through an umbrella organisation, reports PTI.

The new model, which seeks to align the Indian structure with international best practices, is expected to provide greater flexibility to FHCs in raising capital and ensuring better utilisation of funds.

“The FHC model should be pursued as a preferred model for the financial sector in India,” said the report of the RBI working group headed by deputy governor Shyamala Gopinath on which the apex bank has invited comments by stake holders by June-end.

India mainly follows the bank-subsidiary model under which the non-banking activities are carried out by the subsidiaries of a bank or parent company.

The RBI panel has suggested that the FHC model should be extended to all large financial groups, irrespective of whether they contain a bank or not.

“There can be banking FHCs controlling a bank and non-banking FHCs which do not contain a bank in the group,” the panel said.

Making a case for enactment of a separate law to regulate financial holding companies, the panel said, “RBI should be designated as the regulator for FHCs.”

The FHCs, according to the RBI panel’s report, should be allowed to carry out all financial activities through their subsidiaries.

The RBI, it added, could come out with a list of permitted activities as well as the exposure limits with regard to different kinds of businesses.

The RBI panel has also made a case for amending the tax laws to encourage transition to the FHC model in a revenue neutral manner.

“Suitable amendments to various taxation provisions may be made to make the transition from bank-subsidiary model to FHC model,” the report said.

It further said that dividends paid by subsidiaries to the FHC should be exempt from payment of the Dividend Distribution Tax (DDT).

All financial conglomerates having a bank, it said, should be asked to switch to the FHC model in a time-bound manner.

As regards the new banks and insurance companies, it said, they should be mandatorily asked to operate under the FHC framework.

The RBI panel suggested that a separate unit should be set up within the central bank to regulate FHCs.

Referring to the issue of listing of holding companies, the RBI report said that FHCs should be encouraged to tap capital market for their subsidiaries.

“If the holding company is to function as an anchor for capital support for all its subsidiaries, requisite space would need to be provided to the holding company for capital raising for its subsidiaries,” the report added.

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