Allow Banks To Float Subsidiaries To Fund Equity: ASSOCHAM

June 02, 2010: Assocham has proposed to Finance ministry and Reserve Bank of India (RBI) to evolve guidelines to permit Commercial Banks for floating subsidiaries to fund Equity up to 5% of their total lending limits. This will enable holding banks to fund mega projects and also create parallel competition to Private Equity (PE) players, exploring massive scope for investments in India.

Currently, Commercial Banks are discouraged in the absence of explicit policy guidelines to extend funds in Equity for fears against risk while the entire domestic banking system has been successfully playing with risk in meeting working capital requirements of corporate both in public and private domain, argued ASSOCHAM.

According to ASSOCHAM, the proposed subsidiaries would be able to generate fair amount of funds which can significantly reduce requirement of foreign direct investment as these would follow risk control policies with regard to geographical, industry segmental, promoter exposure limits and have over-all policy control of promoter banks. The total PE investment from abroad in a year generally is in the region of 8-10 Bn $ i.e. 50,000 crore.

Indian banking industry can fund 10% of this i.e. 5000 crore from its own lendable resources (by way of capital in the subsidiaries) and remaining 45,000 crore can be garnered by them from High Net Investors (HNIs) of the country willing to participate in higher risk, higher return domain. Thus FDI upto this level can be curtailed. FDI will thus be left for further growth appetite. Moreover these FDI investors will have to compete with the proposed domestic PE players; thus forced to reduce their offer price.

The proposed subsidiaries can effectively meet growing requirements of capital without being a decisive stakeholder in enterprises that these will extend finances and conveniently facilitate capacities expansion of Indian economy in manufacturing as well as infrastructure , said the ASSOCHAM spokes man.

The chamber in communication sent to Ministry of Finance and RBI has pointed out that most of the time, Indian banks have sufficient available funds pending for deployment. They either park these funds with RBI or mutual fund and therefore this channel can easily get funded within the funds available in banking.

Additionally, these subsidiaries should raise funds from high net worth individuals and closely held investment companies/houses to fund requirements with a cap of 10X of their capital. There are large number of local HNIs that are willing to take higher risks for higher returns but they do not have enough channels within the country to deploy the funds.

The ASSOCHAM has also pointed out Indian promoters are wary of seeking PE from Indian HNIs due to strategic reasons which include fear of take-over/interference and leakage of confidential information to the competitors. Channelizing these available funds through such PE subsidiaries can insulate them from those risks.

Further risks mitigating factors can be introduced like limiting single investor stake to not more than 10-15% and the suggested subsidiaries should not be allowed to fund capital requirement of promoters of companies having credit facilities from the promoter bank. This is to avoid over-exposure of a bank in one company. They should look at funding capital of companies dealing with other banks. This would expose these companies to independent scrutiny for debt and for equity ; just like any other foreign equity case.

The subsidiary should not employ any bank staff and should recruit PE skilled persons from the market like any other private equity player. This is important since banking staff is not oriented to equity play and vice a versa.

The chamber has concluded that it should be endeavour of policy makers to create good domestic market for availability of capital to such companies. Presently private equity in domestic market exists in very limited way. This is due to the fact that Indian banks are not encouraged to fund equity requirements. The reasons for restricting them are generally well founded but the ASSOCHAM is of the view that there is fair scope to revisit this policy without increasing risks to the banking system.

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