From investment in REITs to trading rules in commodity derivates; Here's what RBI directed banks

Key Highlights: 

• Banks can hold over 10% investment in REITs and InvITs
• Banks can only invest 10% in Category I/ Category II Alternative Investment Fund
• No broking services can be offered by banks for the commodity derivatives segment

After receiving queries from the market regulator Sebi, the Reserve Bank of India has decided to make amendments in financial services provided by banks.

Under the master directions, a bank can hold more than 10% in the equity of a deposit taking NBFC (non-banking financial companies, however this does not apply to housing finance company).

Banks are now allowed to make investment of over 10% of the unit capital of a Real Estate Investment Trust (REITs) or Infrastructure Investment Trust (InvITs). 

This investment is included with an overall ceiling of 20% of its net worth permitted for direct investments in shares, convertible bonds/ debentures, units of equity-oriented mutual funds and exposures to Alternative Investment Funds.

Also, banks can invest in over 10% of paid up capital in a Category I/ Category II Alternative Investment Fund. While investment by a bank’s subsidiary in a Category III AIF shall be restricted to the regulatory minima prescribed by SEBI.

Earlier there were no no specific rule on investing in AIFs – which are referred to private equity and hedge funds.

Furthermore, banks cannot become a Professional Clearing Member of the commodity derivatives segment of SEBI recognised exchanges and shall satisfy the membership criteria of the stock exchanges and comply with the norms laid down by the regulator.

In this regard, a bank shall put in place a effective risk control measures and norms taking in account their net worth, business turnover, etc. with approval from respective board.

RBI said, “The bank shall not undertake trading in the derivative segment of the commodity exchange on its own account and shall restrict itself only to clearing and settlement transactions done by the trading members/ clients on the exchange.”

Also banks are banned to offer broking services for the commodity derivatives segment of SEBI recognised stock exchanges except through a separate subsidiary.

Apart from this, banks can also hold more than 10% of the paid up capital of a company, not being its subsidiary engaged in non-financial services or 10% of the bank’s paid up capital and reserves, whichever is lower.

Similarly, banks wanting to adapt insurance and pension fund management business must also have minimum prescribed capital. 

These provisions  are applied to every Scheduled Commercial Bank (excluding an RRB), licensed to operate in India by Reserve Bank of India (hereinafter referred to as “Bank”).