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Finance Minister P Chidambaram today approved the proposal of ICICI Bank, the country's second largest lender, to set up a holding company for insurance and mutual fund businesses, but the proposal could hit a roadblock at the Reserve Bank of India.
The approval follows clearance from the Foreign Investment Promotion Board subject to a nod from the RBI, which is still to take a view on such a holding structure for banks to own insurance ventures. Banking sources said such a holding subsidiary structure could possibly render RBI's guidelines on "para banking" infructuous.
"The RBI has yet to take a view on this. While considering ICICI Bank's proposal, we will have to take into account the fact that the bank has clarified to the insurance regulator that ICICI Bank will continue to be the promoter of the insurance company (for all practical purposes). So then we have to find out what is the need of the proposed subsidiary other than raising capital. The entire proposal is not so simple as it looks,'' said a senior RBI official.
When asked whether the banking regulator has the power to reject a proposal that has been cleared by the IRDA and the FIPB, the RBI official said, "theoretically, the RBI has the power to reject the application."
Finance ministry officials said the proposal would not go through if the RBI objects to it.
The RBI had earlier rejected Catholic Syrian Bank's proposal to sell a 15 per cent stake to Hong Kong-based AIF Capital, an Asian private equity firm.
The Kerala-based bank then had to amend the plans to sell the stake equally to three private equity firms -- AIF Capital, London's Gartmore and New York-based Siguler Guff.
Senior bankers, who did not want to be named, were surprised that ICICI Bank did not first obtain the approval of the banking regulator for setting up an investment holding company for its insurance and mutual fund businesses.
It went ahead with seeking approvals of the Insurance Regulatory and Development Authority and the Foreign Investment Promotion Board for selling a 24 per cent stake in the holding company, ICICI Financial Services, the formation of which solely rests on the receipt of approval from the RBI.
In contrast, SBI, which has applied to the RBI for forming a similar holding firm for its insurance and mutual fund ventures, would not be approaching both the IRDA and the FIPB till it gets an approval from the banking regulator.
ICICI Bank plans to transfer its stakes in insurance and mutual fund joint ventures to the proposed holding company. This would enable it to transfer the burden of funding the highly capital intensive life insurance business.
The Banking Regulation Act does not prima facie provide for a bank for form a subsidiary specifically to hold downstream companies engaged in permissible activities.
Further, it could also potentially be in conflict with the RBI guidelines which limit the total amount of investment a bank can have in all its subsidiaries to 20 per cent of its paid up share capital and reserves.
Kalpana Morparia, chief strategy and communications officer at ICICI Bank, said "ICICI Financial is a non-banking finance company under the investment company category. We need the Reserve Bank of India's approval since the proposed company will be a subsidiary of ICICI Bank."
Asked why ICICI Bank did not consider getting the RBI's approval first for the holding company, Morparia said, "we need approval from three regulators - IRDA, FIPB and RBI. We have received approval from IRDA. We have not heard anything from FIPB. The RBI approval is also awaited for both setting up the NBFC as well as divesting 24 per cent stake in it."
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