The Reserve Bank of India has started the process to regulate large holding companies of business houses that typically have access to public funds, in a move aimed at restricting the recent rush toward raising easy money through the holding company structure. As per the draft guidelines issued by the central bank, holding companies with assets of more than Rs 100 crore, have to mandatorily register with RBI, with the central bank also suggesting the maximum amount that such companies can borrow. These guidelines are typically suggestions and RBI would take a final view after considering all reactions and feedback, said a RBI statement. The move may have been aimed after the recent rush by various companies to form holding company structures as such organisations enable promoters to raise money at various levels without diluting their control in subsidiary companies. The guidelines, however, may not have an impact on existing holding companies. The core investment structure and its resulting taxation benefits have been a popular option for many Indian business houses such as the Tatas, the Aditya Birla group, the GMR Group, the Adanis, Vijay Mallya’s UB group, the Ruia family-controlled Essar Group and had also prompted other mid-sized business families to actively consider the option. Tata Sons, one of the largest holding companies in the country, was cautious in its reaction. “We are yet to study the guidelines, but prima facie, it seems that regulation of such entities seems to be the prime objective,” said Tata Sons director Ishaat Hussain. “The guidelines have laid down norms for borrowing, but its too early to comment,” he added. ET had reported in December last that RBI had been keeping a close watch on the rush to borrow through investment arms and through holding firms with disproportionately low capital base.\ RBI had been concerned about trends, which included overleveraging instances such as when a holding company pledged shares of a group company to borrow from a bank and then funded another group entity. In the second stage, shares of the newly-capitalised entity is pledged for fresh borrowings that would fund yet another company. While such a trend was normal in a large group, for companies with a very low capital base, large exposures posed risks to the lenders. The draft guidelines say such companies need to have a minimum capital ratio whereby its adjusted net worth shall not be less than 30% of its aggregate risk weighted assets. Such holding companies also won’t be allowed to borrow more than 2.5 times their adjusted net worth outside the group, the guidelines said.
