Reserve Bank of India (RBI) has taken a hardline approach to the country’s largest private bank ICICI’s investments in ICICI Venture — the country’ biggest private equity fund. The regulator feels that ICICI may be using its venture capital arm to make investments which could have been difficult from the bank’s books.
ICICI Venture is a subsidiary of ICICI Bank. Besides owning I-Venture, the bank also invests in some of the funds managed by the VC. Just as in mutual funds, a string of financial investors subscribe to such funds where the bank also joins in.
RBI has told ICICI Bank to include its investments in the VC in fulfilling the exposure limits that the bank has to stick to. Under prudential norms, the maximum exposure a bank can take to a company or a business group is linked to its capital. Earlier, banks used to float non-banking finance companies (NBFCs) to sidestep this regulation and lend to corporates.
This was stopped last year, when RBI asked banks to treat lending by their NBFCs as part of the consolidated financial statement. RBI’s argument has been that an NBFC owned by the bank should not be used to do business which the bank can’t. But in case of I-Venture (which manages assets of $2 billion), RBI is taking a stricter stance.
A VC which manages third-party money is not an NBFC; it’s more comparable to an asset management company of a fund house. Nonetheless, RBI has spelt out its stand in recent meetings with senior officials of the ICICI group, sources told ET.
“VCs are regulated by Sebi…However, if RBI formalises its stand with a new guideline, ICICI Venture may have to rejig some investments or the bank has to arrange more capital to justify such exposures,” said a source.
RBI would be making things tougher for the bank as well as the VC if it insists on a consolidated exposure limit for all investments made by the VC. In other words, these would include not just ICICI’s investments in funds or sub-funds of I-Venture, but all exposures of the VC — even investments through funds where the bank may not have put money.
ICICI Venture has invested in companies in sectors as diverse as pharmaceuticals, information technology, media, manufacturing, logistics, textiles and real estate. While RBI regulations are largely confined to banks, the present development adds to the already-rigid regulatory stance on VCs. For instance, the capital market regulator has veered around to the view that only professionals will be allowed to set up VC funds.
This means that no business house, financial services group or a big corporate will have the flexibility to float a VCF. This was possibly driven by instances where large groups have used VC funds — which enjoy a special status on taxation, foreign capital and investment lock-in — to invest in companies where they have a strategic or business interests.
Source: Economic Times