Diesel

12
NIVESHAK
Article Cover of the Story Month
Interestingly, SEBI has no regulations in place
for IBs. There was no demand for such services
in an essentially underdeveloped economy, and
hence the regulator (which was itself a novice in
this field) felt no need to put up the necessary
regulations.
The need for IB was not really felt because
of the largely embryonic capital markets in
the country. The developing country is now
on the fast track of development and is now
seeing fast development of these sectors. The
manacled and demonized capital markets are
now taking roots.
With this background, the need has never
been more urgent to bring in reforms in the
regulatory framework of the RBI or maybe
even a complete overhaul of the system. SEBI
rules have to be drafted from the scratch for
standalone investment banks.
Future Roadmap
The first question that the RBI needs to answer
is whether to continue with the BHC structure
or to embrace the FHC one. The advantages
of the latter are numerous. The first of which
would be the unshackling of the IB industry,
as the capital constraints would no more be
relevant. In the FHC model, a holding company
has subsidiaries that undertake banking,
non-banking operations. Hence, commercial
banking divisions would be protected from the
risks emanating from the riskier activities. The
risks arising from the losses of subsidiary IBs
would be borne by the FHC. The responsibility of
infusing capital into the subsidiaries would also
lie with the FHC and not the bank. Lastly, the
FHC structure would be beneficial in the event
of winding up, as the resolution of different
entities would be easier. As a clear demarcation
would exist between the different components
of the group. In the past, liquidation of the
parent bank usually meant the liquidation of the
subsidiary also. With a stronger FHC structure,
this wouldn’t be the case anymore. Regulatory
oversight could also be more efficient.
Various studies commissioned by the RBI
indicate a strong shift of the revenue pool from
the traditional banking to investment banking.
The acceptance of the FHC model could see
the IB industry rise manifold, as the equity
investment limits in the IB subsidiaries should
not be as restrictive as the existing regulations.
The first question that the RBI needs to answer is whether
to continue with the BHC structure or to embrace the FHC
one. The advantages of the latter are numerous. The first
of which would be the unshackling of the IB industry,
as the capital constraints would no more be relevant.
Regulatory oversight could also be more efficient.
NOVEMBER 2014