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Monday, May 16, 2011

Banks, their holding companies may have to get listed: RBI

Both banks and their holding companies may have to get listed under the rules being considered to introduce a holding company structure for banks. The Reserve Bank of India (RBI) was in favour of allowing only the holding company of a bank to be listed, while the finance ministry wanted the decision to be left to the banks

Reserve Bank of India
A compromise solution could be that both the bank and its holding company get listed. This will mean that financial conglomerates such as HDFC and ICICI Bank will have to bring all their financial services and banks under a holding company and list it. 

"If a bank is a listed entity, it would be under more scrutiny both from inside, like in the form of independent directors, and also the public," a finance ministry official said. In its draft guidelines on new banking licences, the RBI had suggested that a new bank would need to set up whollyowned, non-operative holding company (NOHC), registered as a finance company with it, governed by a separate set of prudential guidelines. Yes Bank's founder and current CEO, Rana Kapoor, says it would not be a problem for banks to set up an operating company. "The new order of banking is to ring fence the bank from capital challenges. And eventually, the holding company will reflect the ownership of the bank," he said. 

An RBI official said listing the holding company of a bank would set the stage

for consolidation of accounts in systemically important financial institutions. But the differences between the government and the central bank may further delay the guidelines for new bank licences, which were expected in March. Unless there is clarity on the rules for existing banks, the RBI cannot issue guidelines for new licences, as it will create two sets of rules - one for existing banks and another for new ones. 

The RBI's draft guidelines on new banking licences also said that the NOHC would need to reduce its shareholding in the bank to 15% within 10 years and retain at that level. The RBI has suggested that the holding company of the bank gets listed while the bank itself remains unlisted. The other options are that both banks and their holding companies get listed or both remain unlisted. 

The finance ministry has argued that if only holding companies get listed, then private shareholders in the bank are stuck with an unlisted company. This means that the only option left is that both the bank and the holding company get listed. Amit Jain, partner, BMR Advisors, who deals in corporate restructuring is of view that listing just the holding company may impact the valuation. 

"From a public perspective, the valuation may dip because the under-lying asset is in a form of downstream investment and people may be hesitant," he said. KPMG's executive director Shashwat Sharma said the Reserve Bank is concerned about holding companies that have multiple entities under them. "Its main aim is to regulate those companies and see that proper corporate governance norms are being followed," he said. 

Even the RBI is keen to have its regulations in place before licences are issued. "The bill which will empower RBI to inspect related arms of banks, such as mutual funds and insurance companies, will be the first step before new licenses are issued," the RBI official said. The Banking Law Amendment Bill 2011, which has been tabled in Parliament, will empower the banking regulator to seek information and returns from associate enterprises of banking companies, besides having the power to inspect them. The Bill will also align voting rights in private banks with shareholding. 


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