RBI's New Guidelines: Curtailing Regulatory Circumvention

The Reserve Bank of India has proposed new regulations to prevent banks from using group entities to circumvent existing rules. The draft circular suggests stricter oversight of business forms, investment regulations, and lending activities. Banks must now seek approval for new group entity ventures and comply with proposed investment caps.

The Reserve Bank of India (RBI) has issued a draft circular aimed at ensuring banks adhere strictly to regulations without circumventing them through group entities. The guidelines propose that banks be barred from using affiliated companies to bypass any regulatory limitations applicable to the parent bank or other associated entities.

The draft emphasizes the need for banks and their associated companies to avoid duplication in lending activities and to refrain from expanding into new business ventures without explicit approval from the RBI's Department of Regulation. In particular, the framework requires Non-Operative Financial Holding Companies to limit specific activities to a single entity under their umbrella.

Additionally, the proposal sets forth investment restrictions, capping bank stakes in businesses at 30%. Investments in Category III Alternative Investment Funds are limited, and sponsorship of asset reconstruction companies is narrowed to one entity, with a 20% shareholding cap per group. These measures are intended to fortify the banking sector's regulatory compliance and operational integrity.

(With inputs from agencies.)