Conglomerates like ICICI Bank, SBI and HDFC will find it easier to raise capital for new financial activities with the Reserve Bank of India favouring a holding company structure for both banking and non-banking financial groups. The central bank in its proposed norms for holding companies has said that financial groups can list both the holding company as well as the subsidiaries.

The proposed structure is similar to that prevailing in Western countries where holding companies like Citigroup are listed and serve as a vehicle for raising capital. The holding company in turn has subsidiaries in banking, asset management, insurance, investment ban king and non-banking finance.

A panel headed by RBI deputy governor Shyamala Gopinath, which submitted its report on Monday, suggested that the holding company norm should be pursued as a preferred model for the financial sector in India. RBI's proposals could trigger a turf war among regulators as each of them would like to be the designated regulator for all financial holding companies. This proposal might not go down well with other regulators in cases where the dominant business owned by holding company comes outside the purview of RBI.

According to RBI regulations, subsidiaries which could come under multiple regulators can be done by drawing up a memorandum of understanding among regulators.

The first concrete proposal for a holding company was made by ICICI Bank which wanted to put all its insurance businesses under one entity. It had proposed to use the holding company to raise capital for the subsidiaries. RBI had shot down this proposal because ICICI's proposal was for an "intermediate" holding company which would be owned by ICICI Bank. HDFC had for long said that a holding company structure was ideal as it would allow investors to participate in all the group's business which include housing finance, banking, asset management, and life and non-life insurance. However it said that such a structure was not feasible because of multiplicity of regulators and different foreign direct investment guidelines for different businesses.

Also, this option may not be immediately available as RBI has said that recasting conglomerates under the financial holding company structure can be done only after an enabling legislation is passed and the government gives a dispensation that provides a one-time tax exemption on such a recast. Along with the introduction of a new legislation, RBI has said that amendments need to be simultaneously made to other acts governing state-owned banks, the Companies Act and other legislations wherever required.

Pros:
1) Allows capital raising at various levels
2) Investors can chose to hold shares of a group or a company
3) Will give RBI more powers in financial sector

Cons:
1) Foreign investment limits in sectors might become redundant
2) Business structure may become too complex for corporate governance
3) May upset IRDA & Sebi

Times of India