ICICI may have to reduce stake in Firstsource Solutions to 10%

MUMBAI: India's biggest private lender ICICI Bank may have to cut its holding in Firstsource Solutions - the global business process outsourcing firm, which it originally promoted a decade ago - to comply with new norms announced by the Reserve Bank of India. The central bank seeks to restrict equity investments by banks in non-financial services.

ICICI Bank, which still controls 18.1% of the company's equity, may have to pare its holding to 10% in line with the guidelines issued by the banking regulator late on Monday.

The new rules say that banks can hold only up to 10% of the capital of the investee company or 10% of its paid-up capital and reserves, which is less.

The bank, while confirming it will have to dilute its stake in the BPO, said the RBI norms do provide a room for holding investments in excess of the limit with regulatory approval. An ICICI Bank spokesperson said there is a three-month window during which the bank can approach the RBI with a proposal on its existing investments. "We will deal with it appropriately in due course," the spokesperson said.

The RBI has capped the equity investment of a bank and its subsidiaries in non-financial services at 20% of the investee company's paid-up share capital. According to the banking regulator, the new norms were aimed at checking indirect influence or misuse and to ensure that banks focus on their core banking activities. The new rules may not impact other banks, the state-owned lenders, who hardly have any investments in non-financial services.

"The RBI guideline covers investments in non-financial companies, which by definition exclude investments in insurance and other subsidiaries of the bank, which are financial companies. Further, the bank's insurance subsidiaries are not expected to require significant capital infusion going forward based on the current regulations and guidelines. The guidelines would not have any material impact on ICICI Bank," the bank's spokesperson said.

The new norms also cap the investment of a bank, entities which are the bank's subsidiaries, associates or JVs or entities directly or indirectly controlled by the bank and mutual funds managed by Asset Management Companies controlled by banks at 20% of the investee company's paid up share capital.

"The Reserve Bank of India norms are aimed at ensuring that banks do not go bust on account of exposure to a single group," said a senior banker. According to this banker, who declined to be identified, the new rules were based on a recommendation of the Board for Financial Supervision (BFS) to check the loophole wherein prior approval of the RBI was not required when it came to investment in non financial services. On the Bombay Stock Exchange, the ICICI Bank scrip ended the day down 0.33% at 705.30.

Source: EconomicTimes