Compliance by Subsidiaries
Master Direction- Reserve Bank of India (Financial Services provided by Banks)
Directions, 2016
1. The aggregate of equity investment in factoring subsidiaries and factoring
companies shall not exceed 10% of the bank’s paid up capital and reserves.
2. Factoring Services (a) Factoring business through a subsidiary: A bank intending
to form a subsidiary for undertaking factoring business shall be subject to the
conditions mentioned in Section 5 of Chapter II.
3. The aggregate of equity investment in factoring subsidiaries and factoring
companies shall not exceed 10 per cent of the bank’s paid-up share capital and
reserves as per the last audited balance sheet or a subsequent unaudited balance
sheet, whichever is lower.
4. Hold along with its subsidiaries, associates or joint ventures or entities directly or
indirectly controlled by the bank; and mutual funds managed by Asset
Management Companies (AMCs) controlled by the bank, more than 20 per cent
of the investee company’s paid up share capital engaged in non-financial
services. However, this cap doesn’t apply to the cases mentioned at 5(a)(v)(c)(i)
and (ii) above.3
5. Make any investment in a Category III Alternative Investment Fund (AIF).
Investment by a bank’s subsidiary in a Category III AIF shall be restricted to the
regulatory minima prescribed by SEBI.4
6. The aggregate equity investments made in all subsidiaries and other entities
engaged in financial services and non-financial services, including overseas
investments shall not exceed 20 per cent of the bank’s paid-up share capital and
reserves.
7. The aggregate shareholding of the bank along with shareholdings, if any, by its
subsidiaries or joint ventures or other entities directly or indirectly controlled by
the bank7, is less than 20 per cent of the investee company’s paid up capital.
8. Banks shall ascertain the risks arising on account of equity investments in
Alternative Investment Funds done directly or through their subsidiaries, within
the Internal Capital Adequacy Assessment Process (ICAAP) framework and
determine the additional capital required which will be subject to supervisory
examination as part of Supervisory Review and Evaluation Process. This shall
also be applicable to sponsoring of Infrastructure Debt Funds by banks.10
9. Relationship with Subsidiaries: A parent/sponsor bank shall maintain an "arm’s
length" relationship with the subsidiary sponsored by it and evolve the following
supervisory strategies:
The Board of Directors of the parent/sponsor bank shall review the
working of subsidiaries at periodical intervals.
The parent/sponsor bank shall undertake inspection/audit of the books of
accounts of the subsidiaries at periodical intervals.
The subsidiary shall not set up another subsidiary, or promote a new
company which is not a subsidiary thereof, or undertake any new business without
prior approval of RBI.
10. No bank shall undertake the business of investment advisory services (IAS)
except through a separate subsidiary set up for the purpose or one of its existing
subsidiaries, subject to the following conditions:
Specific prior approval shall be obtained before offering IAS.
IAS shall be provided only for products and services in which banks are
permitted to deal in as per the Banking Regulation Act, 1949. A bank presently
offering IAS shall reorganise its operations in accordance with these Directions
latest by April 21, 2019
11. Broking services for Commodity Derivatives Segment18
(a) No bank shall offer broking services for the commodity derivatives
segment of
SEBI recognised stock exchanges except through a separate subsidiary
set up for
the purpose or one of its existing subsidiaries and shall do so subject to
the following
conditions:
i. The subsidiary shall, with the approval of its Board, put in place
effective risk
control measures including prudential norms on risk exposure in respect of
each of its clients, taking into account their net worth, business turnover, etc.
ii. The subsidiary shall not undertake proprietary positions in the
commodity derivatives segments.
iii. The subsidiary shall ensure strict compliance with various margin
requirements as may be prescribed by SEBI, its own board or the Commodity
Exchanges.”
Summary
1. Board Approval:
Subsidiaries must have a board-approved policy covering their activities, including
risk management measures.
2. KYC/AML Compliance:
Adhere to Know Your Customer (KYC), Anti-Money Laundering (AML), and
Combating Financing of Terrorism (CFT) guidelines as issued by the RBI.
3. Customer Rights:
Follow the principles enunciated in the Charter of Customer Rights issued by the RBI.
4. Specific Conditions:
Comply with specific conditions for respective businesses as outlined in Chapter III of
the Master Directions.
5. Investment Limits:
Equity investments in a subsidiary or financial services company must not exceed
10% of the bank’s paid-up share capital and reserves.
6. Prior Approval for Investments:
Obtain RBI approval for investments exceeding specified thresholds or in non-
financial services companies.
Relationship Management
1. Arm's Length Principle:
Maintain an arm's length relationship between the parent bank and its subsidiary,
ensuring no preferential treatment is given to the subsidiary.
2. Periodic Review:
The parent bank's Board of Directors must periodically review the subsidiary's
operations.
3. Inspection and Audit:
Conduct regular inspections/audits of the subsidiary's books of accounts.
4. Restrictions on New Ventures:
Subsidiaries cannot establish new subsidiaries or engage in new businesses without
prior RBI approval.
5. Investment Restrictions:
Subsidiaries must not make portfolio investments intending to acquire controlling
interests without RBI approval.
6. No Online Access to Customer Accounts:
Subsidiaries should not have online access to customer accounts held with the parent
bank, although information sharing is permitted under certain conditions.
7. Unsecured Advances:
No unsecured advances should be granted to subsidiaries without prior RBI approval.
By adhering to these compliance requirements, subsidiaries can operate within the
regulatory framework established by the RBI, ensuring both operational integrity and
financial prudence.
Draft Circular - Forms of Business and Prudential Regulation for Investments
1. Core business of the bank viz. acceptance of deposits and lending, shall
necessarily be carried out departmentally by the bank unless otherwise notified
by the Reserve Bank. Banks will have the freedom to undertake certain
businesses viz. factoring, primary dealership, credit card business, housing
finance, equipment leasing and hire purchase, either departmentally or through a
separate group entity (associate/joint venture/subsidiary) subject to the respective
conditions stipulated in Chapter - III of the Master Direction.
2. Make any investment in a Category III Alternative Investment Fund (AIF).
Investment by a bank’s subsidiary in a Category III AIF shall also be restricted to
the regulatory minima prescribed by the Securities and Exchange Board of India.
3. Banks held under the NOFHC structure shall not hold more than 10 per cent in
the paid-up equity capital of any financial or non-financial services company,
subject to the limits specified under paragraph 5(a)(i) above. However, this would
not preclude the bank from having a subsidiary or joint venture or associate
where it is specifically permitted by the Reserve Bank
