RBI caps bank investments in PE funds at 10%

The Reserve Bank of India (RBI) on Monday barred banks from investing in category III alternative investment funds (AIFs), specified norms for their participation in commodity derivatives clearing and tweaked rules on investing in financial services firms.
Banks may invest as much as 10% in the paid-up capital/unit capital in category I and II funds, but cannot invest in category III funds. So far, there was no specific rule on investing in AIFs.
“No bank shall (make) investment of more than 10% of the paid-up capital/unit capital in a category I/ category II alternative investment fund,” said an updated master circular on financial services offered by banks.
The central bank also said that banks wishing to undertake commodities derivatives clearing must set up a separate subsidiary for the purpose and adhere to membership criteria of stock exchanges and Securities Exchange Board of India (SEBI) regulations.
For this, banks must set up internal risk control measures and take board approvals to decide the extent to which they can fulfil pay-in obligations arising out of trades executed by clients and set prudential norms on risk exposure, among others.
“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,” said the notice.
RBI also notified changes to capital requirements for banks looking to invest in financial services firms. Banks investing in such firms must have a minimum regulatory capital. Here, the capital computation must also include the so-called capital conservation buffer (CCB).
Earlier, the RBI had mandated at least 10% capital adequacy ratio and there was no mention of CCB.

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