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A working group appointed by the Reserve Bank of India (RBI), headed by the RBI Deputy Governor, Ms. Shyamala Gopinath, has suggested to all the large financial groups to adopt a Financial Holding Company (FHC) framework irrespective of their status as bank. The framework is mandatory for operation of all the new banks and insurance companies, as and when licensed. According to the Group, there could be banking FHCs and non-banking FHCs. Also, all the identified financial conglomerates that include a bank within the group are needs to convert to the FHC model in a phase manner.
The group has recommended a separate regulatory framework for FHCs and a new Act for regulation of FHCs. The recommendations made by the group are as follows:
- The regulator for FHCs will be the RBI.
- The function of regulation will be undertaken by a separate unit within RBI with staff drawn from both RBI as well as other regulators.
- There will be a consolidated supervision mechanism through Memorandum of Understanding between regulators.
- Necessity to impose some limit on the expansion of non-banking business in order to retain the banking business as a dominant activity in the holding company structure (Banking FHCs) after the existing financial groups dominated by banks migrate to it.
- The FHC will be a non-operating entity and should be permitted only limited leverage as stipulated by RBI.
However, it can carry out activities which are incidental to its functioning as an FHC. The FHC will be permitted to carry out all financial activities through subsidiaries.
- Appropriate limits on cross-holding between different FHCs. Also, there shall be limits on cross holding between FHCs on one hand and banks, NBFCs and other financial institutions outside the group.
- Listing of the holding company can be done in any one of the following way.
- The holding company should be listed with all its subsidiaries being unlisted
- Both the holding company with all or some of its subsidiaries being listed depending on the objectives and strategy of the financial group and the prevailing laws and regulations on investment limits.
- Dividends paid by subsidiaries to the FHC may be exempt from the dividend distribution tax to the extent these dividends are used by the FHC for investment in other subsidiaries.