In a move that could significantly ease bank investment in their non-banking activities such as insurance and financial services, the Reserve Bank of India has exempted their joint ventures and overseas subsidiaries from an investment limit on affiliates.
Earlier norms on para-banking activities stated that investment by a bank in a subsidiary company, financial services company, financial institutions and stock and other exchanges could not exceed 10 per cent of its paid-up share capital and reserves.
On a cumulative basis, the limit was fixed at 20 per cent of the bank's paid-up capital and reserves.
The liberalised regulations came in the form of a recent clarification to bank chiefs and is a major relief to conglomerates like State Bank of India and ICICI Bank, the country's two largest banks.
Both banks had approached the RBI last year with proposals to set up holding companies that would hold shares of their mutual fund and insurance subsidiaries, among others.
The move was aimed at raising fresh capital but RBI objected to the structure saying it would leave an unregulated entity in the financial system. A final decision on holding companies is awaited.
The central bank's clarification now allows both banks to invest freely in their non-banking businesses.
As an immediate move, ICICI Bank, which said the move has freed up around $700 million (Rs 2,800 crore) to invest in these businesses, has already put plans to raise an initial public offer for its broking subsidiary ICICI Securities (I-Sec) on hold.
"We are evaluating all options but for the time being, we have put the I-Sec listing on hold. Apart from unlocking our value in I-Sec we also had plans to infuse a part of the capital from the IPO into our life insurance venture," said an ICICI Bank executive.
The other five unlisted subsidiaries of the bank are ICICI Ventures, Prudential ICICI AMC, ICICI Prudential Life Insurance, ICICI Lombard General Insurance and ICICI Securities Primary Dealership.
The bank had appointed JP Morgan as the advisor for I-Sec's pre-IPO placement. ICICI Bank was looking to sell 10 to 12 per cent of its equity in the broking firm.
Sources said ICICI Securities has been valued at $7.5 billion (around 30,000 crore) -- the highest valuation commanded by an investment bank in India.
In February 2008, ICICI Bank and Prudential invested around $100 million in ICICI Prudential Life Insurance Company at a company valuation of Rs 55,400 crore, which is close to $14 billion.
Similarly, State Bank of India has plans to list SBI Life, its life insurance venture, to raise capital and continue fuelling its growth.