Equity investment of a bank in entities not involved in financial services.

In a move to discourage banks’ participation in non-financial activities, the Reserve Bank of India (RBI) has proposed a limit on the equity investment of a bank in entities not involved in financial services.
RBI has proposed a cap on a bank’s investment in a non-financial company at 10 per cent of the latter’s capital or 10 per cent of the bank’s capital plus reserves. The central bank has issued the draft norms for discussion.
Till now, there is no specified cap of banks’ investment in non-financial entities. Section 19 of the Banking Regulation Act stipulates a cap of 30 per cent on investment in any entity, which could be a financial service one or a company not engaged in this line.
RBI said equity investments made by banks under the ‘held for trading’ category in non-financial companies would be counted for calculating the 10 per cent ceiling. Banks would not require prior approval from RBI if such investments were within the ceiling.
Request for an investment in excess of 10 per cent of a company’s paid-up capital would be considered by RBI only if the company was engaged in activities permitted to banks under the Act.