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Under the same roof, but separate

twitter-logo Anand Adhikari        Print Edition: July 10, 2011

What is proposed
The Reserve Bank of India, or RBI, has mooted a holding company structure for the financial sector in India, as well as a separate regulatory framework for financial holding companies, or FHCs. The proposals, which include extending the FHC model to all large financial groups irrespective of whether they contain a bank or not and allowing existing ones with a bank to move to the FHC model in a time-bound manner, were made in a recent report of an RBI working group led by Deputy Governor Shyamala Gopinath.

What exists
Today, banks in India follow the parent-subsidiary model for their various ventures. Each venture's valuation is factored into the bank's valuation, each draws capital from the bank and contributes to its profit and loss, and its future capital need is linked to the health of the bank. All these make it difficult for the bank to raise capital for its nonbanking ventures like life insurance, a very capital-intensive business. This is true of large banks such as ICICI Bank and State Bank of India.

Advantages
Under the FHC model, a holding company will own the bank as well as the non-banking ventures, each being a separate entity in itself. This will enable better regulation of the entities as well as ensure that one venture's bad financials do not impact the others. Today, for instance, if an insurance company folds up, the risk will immediately get transmitted to its parent bank. The FHC model will allow the holding company and its subsidiaries to list individually and raise capital. "Under the FHC model, the responsibility to infuse capital in the subsidiaries will rest with the holding company," says Rajesh Mokashi , Deputy, Managing Director, Care Ratings Ltd.

Implications
Many of the existing players will not switch over to the FHC model until mechanisms to make the transition tax neutral are in place. RBI has given various suggestions to make this entire transition a tax neutral structure. "It may involve amendments to existing tax laws," says Mokashi.

Global experience
Globally, the financial sector follows different models, including the holding company structure, the parent entity and the universal banking model in which all financial activities are taken within a single entity. Except in the United States, where the holding company structure is the dominant model, multiple models prevail everywhere else.

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