The formation of subsidiaries of banking companies is permitted with some restrictions by Reserve Bank of India. Prior approval of Reserve Bank of India should be taken by a bank to set up a subsidiary company
Subsidiaries of Banking Companies
Following are the rules related to subsidiaries of banking companies:
- A banking company cannot form subsidiary except for the purpose of business permitted in Section 6 (1) (a) to (o) of Banking Regulation Act.
- Under the provisions of Section 19(2) of the Banking Regulation Act, 1949, a banking company cannot hold shares in any company whether as pledgee, mortgagee or absolute owner of an amount exceeding 30 per cent of the paid-up share capital of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less. The banking company may hold equity in both financial services companies as well as companies not engaged in financial services within the ceiling laid down.
- A bank’s equity investments in subsidiaries and other entities that are engaged in financial services activities together with equity investments in entities engaged in non-financial services activities should not exceed 20 per cent of the bank’s paid-up share capital and reserves
- A banking company may form a subsidiary company to carry on the business of credit information in accordance with the Credit Information Companies (Regulation) Act, 2005
- A banking company may form a subsidiary for undertaking business of banking outside India with prior permission of RBI.
- A banking company cannot hold shares of a company in which Managing Director or manager of the banking company is in any manner concerned or interested.
- A banking company may form subsidiary company for business purposes which Reserve Bank of India may, with prior approval of the Central Government, consider to be conducive to the spread of banking in India or to be otherwise useful or necessary in public interest
- Equity investments by a bank in a subsidiary company, or a financial services company including financial institution, stock and other exchanges, depositories, etc., which is not a subsidiary should not exceed 10 per cent of the bank’s paid-up share capital and reserves and the total investments made in all subsidiaries and all non-subsidiary financial services companies should not exceed 20 per cent of the bank’s paid-up share capital and reserves. However, the cap of 20 per cent does not apply, nor is prior approval of RBI required, if investments in financial services companies are held under ‘Held for Trading’ category, and are not held beyond 90 days
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