RBI plugs holes in norms for NBFCs in insurance biz

MUMBAI: The Reserve Bank of India has plugged a loophole in its rules for nonbanking finance companies getting into the insurance business. Under the revised guidelines, promoters of an NBFCcannot route their investments through unregulated group firms to work around guidelines that block them form holding a majority stake. 

When it first allowed NBFCs to promote insurance companies in 2000, RBI had said that they cannot hold more than 50% stake. This ensured that the insurance arm was not a subsidiary and its results did not significantly dent the financials of the parent upon consolidation of balance sheet. This also limited the capital strain on the NBFCs, which are subject to capital adequacy requirements. 

Since then promoters of some finance companies managed to work around this by investing 50% through the NBFC, and an additional 24% through other group companies. The same 50% limit is applicable for banks; however, a few like SBI and ICICI Bank have been given special dispensation.

"It is clarified that in case more than one company (irrespective of doing financial activity or not) in the same group of the NBFC wishes to take a stake in the insurance company, the contribution by all companies in the same group shall be counted for the limit of 50% prescribed for the NBFC in an insurance JV," RBI said in a circular issued to all finance companies. 

For this directive, RBI has used a number of definitions relating to a 'group company'. According to RBI, this shall include two or more entities related to each other through any of the following relationships: subsidiaryparent (defined in terms of AS 21), joint venture (defined in terms of AS 27), associate (defined in terms of AS 23), promoter-promotee (as provided in the Sebi (Acquisition of Shares and Takeover) Regulations, 1997) for listed companies, a related party (defined in terms of AS 18), common brand name, and investment in equity shares of 20% and above.