The Reserve Bank of India (RBI) on Monday for the first time imposed a cap on banks' direct or indirect equity investments in non-financial service companies, seeking to make banks focus more on their core business.

The rules cap equity investments by banks in a non-financial services entity at 10% of a company's paid-up capital or 10% of a bank's paid-up capital and reserves whichever is less.

The new rules will also cap indirect investments in non-financial service companies made by subsidiaries, associates or joint ventures of banks or by asset management companies controlled by banks up to 20% of the share capital of the investee (the entity receiving the investment) company.

Equity investment by a banking group - such as the bank and an insurance company in which it has a stake - in a non-financial services company should not exceed 20% of its paid-up capital and reserves.

The RBI says the rules are meant to check indirect influence or misuse.

"There is no requirement, at present, for obtaining prior approval of the RBI for such investments, except in cases where the investee companies are financial services companies. It is, therefore, possible that banks could, directly or indirectly through their holdings in other entities, exercise control on such companies or have significant influence over such companies and thus engage in activities directly or indirectly not permitted to banks," said the notification.

However, banks could hold in excess of the prescribed limit of 10% and remain within the 30% cap, if the additional acquisition is through restructuring or corporate debt restructuring or CDR, or acquired by the bank to protect its interest on loans/investments made in a company.

The equity investment in excess of 10% of investee company's paid-up share capital in such cases would be exempted from the 20% limit referred to above. However, banks will have to submit to the RBI a time-bound action plan for disposal of such shares within a specified period.