Government

September 27, 2017

Bank investments in private equity funds capped at 10%: RBI


RBI

The Reserve Bank of India (RBI), while completely prohibiting investments into hedge funds, capped bank investments in private equity funds at 10%. The banks’ subsidiaries to provide commodity broking services and be a professional clearing member which are subject to risk control measures and prudential norms were also permitted.

The RBI has said that subsidiaries of banks will “not investment of more than 10% of the paid up capital in a category I and category II of Alternative Investment Fund (AIF).” This primarily means that banking subsidiaries making investments in private equity above 10% of the capital will need approval from the banking regulator.

There are 3 categories of AIFs in which Category I includes social venture funds, infrastructure funds, venture capital funds and SME funds, category II includes private equity funds and debt funds and category III are funds that make short-term investments such as hedge funds.

RBI has said that banks can offer broking services to clients on Sebi registered commodity exchanges like MCX and NCDEX, in a parallel plot which could potentially boost corporate participation on the commodity derivatives segment (CDS).

This can be done through a subsidiary which is already an existing or by setting up for the express purpose of the bank. For instance, HDFC Securities, a subsidiary of HDFC Bank, which so far offered trading in shares and fixed income could now offer trading in CDS, if it’s parent so decides. This will be subject to risk, net-worth and other parameters laid down by Sebi.

“This is an extension to a prior RBI circular nudging bank to advise their clients to hedge their commodity price risk on Sebi recognised commodity exchanges,” said Samir Shah, MD & CEO, NCDEX. “In that sense, our attempts have fructified and this is a move that could dramatically raise hedger participation on the bourses.” However, banks cannot run proprietary trades, or trade on commodity derivatives segment, RBI has stated.

RBI has banned banks from undertaking proprietary trading on its own account, while allowing banks to be professional members in clearing of commodity derivative trades. Banks can, however, offer clearing and settlement services to members and clients of the exchange as per the board approved policy.

RBI has guided banks to put in place risk control measures and prudential norms on risk exposure in lieu of each of its trading members, considering their net worth and business turnover. The bank shall ensure strict compliance with various margin requirements as approved by their board or the commodity exchanges.

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