What changed
Previously, banks only needed RBI approval for investments in financial services companies. Now, RBI has issued prudential guidelines for investments in non-financial services companies to prevent banks from indirectly controlling or influencing firms engaged in activities not permitted to banks under Section 6(1) of the BR Act.
What it means for you
Banks must ensure their investments in non-financial services companies do not lead to control or significant influence over such entities, which could engage in non-banking activities. This closes a loophole and strengthens prudential oversight, requiring banks to review their equity holdings and indirect stakes.
What you must do
- Review all existing investments in non-financial services companies to ensure no indirect control or significant influence over prohibited activities.
- Implement internal controls to monitor equity holdings and indirect stakes via other entities.
- Ensure new equity investments in non-financial services companies do not exceed 10% of the investee's paid-up capital or 10% of the bank's paid-up capital and reserves (whichever is less); prior approval is not required within this limit.
- Update compliance policies to align with the new prudential guidelines for non-financial services investments.
Who it affects
All Scheduled Commercial Banks (excluding RRBs), Bank investment and compliance teams, Banks with equity holdings in non-financial services companies
What is the 30% limit mentioned in the circular?
Under Section 19(2) of the BR Act, a bank cannot hold shares in any company (as pledgee, mortgagee, or absolute owner) exceeding 30% of that company's paid-up capital or 30% of the bank's own paid-up capital and reserves, whichever is less.