Reliance Cap, ICICI to face scrutiny

NEW DELHI: Reliance Capital, ICICI, Sahara and HDFC figure among the 23 financial conglomerates chosen for coordinated regulation by RBI, Sebi and insurance regulator IRDA. Information is now being sought from these conglomerates for consolidated supervision. These entities are considered “too big to fail”, according to the government. However, depositories NSDL and CDSL, regional rural banks, asset reconstruction companies, special purpose vehicles dealing with securitisation and SBI associates have been left out of this framework of intensive supervision.

While these 23 entities are supervised by their respective regulators, the identified conglomerates are subjected to focused regulatory oversight through exchange of information by the inter-regulatory working group comprising representatives of RBI, Sebi and IRDA.

“A pilot process of obtaining information from the 23 identified financial conglomerates has been initiated. The complexities involved in the supervision of such groups are a challenge not only to RBI but other regulators as well, which need to have a close coordination on an ongoing basis,” RBI deputy governor V Leeladhar said. He was speaking at the Annual Washington Conference of the Institute of International Bankers in March 2007.

The group looks into concerns about regulatory arbitrage and captures intra-group transactions and exposures—both financial and non-financial. This kind of consolidated supervision includes consolidated financial statements intended for public disclosure and prudential reports for assessment of risks.

The regulators meet at least twice a year and take turns in evaluating the group, depending on which is the lead institution. So far, no instances of abuse of regulatory arbitrage have been detected,” IRDA chairman CS Rao told ET.

Authorities were prompted by the possibility of some non-banking institutions in the financial sector acquiring large enough proportions to have a systemic impact. Typically, these conglomerates do both—provide liquidity to other market participants and are also major takers of funds. This makes it possible for capital or income to be inappropriately transferred from the regulated entity and could impact solvency, RBI has said in its report by the working group.

The parameters of size of a conglomerate include banks that are included in the top 70% of the segment in terms of asset base, insurance firms with a turnover more than Rs 100 crore, mutual fund companies included in the top 70% of the segment in terms of asset under management (AUM), deposit-taking NBFCs included in the top 70% of the segment in terms of deposit base, non-deposit taking NBFCs with an asset base of more than Rs 2,000 crore and primary dealers included in the top 70% of the segment in terms of total turnover.

The working group was set up as a part of the mid-term review of the monetary and credit policy for 2003-04. This is also driven by the Core Principles of Banking Supervision issued by the Basel Committee on Banking Supervision.