The Reserve Bank of India (RBI) has set an upper limit of 10% for the investments made by banks in private equity funds. Banks will also be completely prohibited from investing in hedge funds. Additionally, RBI has allowed subsidiaries of banks to offer commodity broking services that are subject to prudential norms and risk control measures.
The RBI notification mentioned that bank subsidiaries will not be allowed to invest more than 10% of the paid-up capital in categories I and II of Alternative Investment Fund (AIF). This indicates that subsidiaries of banks that invest in private equity funds above 10% of the capital will be required to get approval from the banking regulator to do so.
AIFs fall into 3 categories:
- Category I – This includes social venture funds, venture capital funds, infrastructure funds, and SME funds.
- Category II – This includes debt funds and private equity funds.
- Category III – These funds correspond to short-term investments. Hedge funds are an example of category III funds.
RBI has also stated that banks will be allowed to offer broking services to clients on commodity exchanges such as NCDEX and MCX. This could boost the participation of corporates on the commodity derivatives segment (CDS). Banks can provide broking services through an existing subsidiary or even a subsidiary that is configured for the express purpose.
Banks are not authorised to run trades on CDS or proprietary trades. However, they can offer settlement and clearing services to clients and members of the exchange based on the policy approved by the board.
The Reserve Bank has also requested banks to put prudential norms and risk control measures in place for each of its trading members after considering their business turnover and net worth. The bank is responsible for ensuring strict compliance in this respect, considering various approved margin requirements.