MoF Moots Bank Holding Cos To Help Raise Funds

NEW DELHI: In a move that may set the ball rolling for a significant dose of financial sector reform in the coming months, the finance ministry has said that Indian banks should be enabled to take advantage of bank holding company (BHC) or financial holding company (FHC) structure before April 2009. Use of a BHC or FHC structure helps banks to gain flexibility in raising funds, infusing foreign equity, expanding business and diversify into related segments without having to involve their flagship companies directly in all these activities.

“All considered, while the intermediate holding company structure should be supported with legal structure etc, for the present, there has to be a roadmap for moving to the BHC/FHC structure by private and public sector banks before the banking sector is opened up in April 2009. The latter is an international commitment. Necessary consultations among the various stakeholders must commence as early as possible,” says a note circulated by the capital markets division of the finance ministry.

While intermediate holding company (IHC) structure — approved recently for ICICI by the Foreign Investment Promotion Board (FIPB) after considerable debate since it involved foreign investment in insurance — is considered the solution for the time being, the ministry feels a roadmap for moving to the BHC/FHC structure should be laid down now so that banks are prepared to take on competition. The banking sector is to be thrown open for increased competition from foreign banks in April 2009 and the flexibility of a holding company structure would be a key enabling provision, the finance ministry feels.

As of now, various segments of the financial sector are governed by different regulations, curbing flexibility in raising funds and diversification. Various countries, including the US, allow banks to set up holding companies and enabling provisions as well as a regulatory mechanism have been provided for such operators. Finance ministry officials feel the transition to 2009 provides an opportunity for further reforms in the financial sector over the next 15-18 months.

The proposed move will have a wide-ranging impact since many Indian financial sector companies are engaged in various segments including banking, insurance, housing finance, merchant banking and advisory services.

“In the interim, it is expected that with permitting an intermediate holding structure which really does not appeal to RBI, the IHC could be subjected to such tight regulation that the advantages expected by banks in moving to such a structure could well be minimal. Nevertheless, the fact that the debate itself will trigger a move towards reforms in the financial sector and creation of proper structures in hopefully 15 to 18 months down the line should be viewed as a positive sign,” says the note.


When ICICI sought to infuse foreign equity in an IHC recently, FIPB initially declined to clear the proposal fearing the IHC structure proposed would lead to breach of the sectoral FDI cap set for insurance. After ICICI explained its case in detail to finance minister P Chidambaram and FIPB, the proposal was cleared. Subsequently, RBI circulated a draft discussion paper on holding companies that generated significant interest.