The Reserve Bank of India (RBI) on Wednesday capped banks’ investments in non-financial companies to prevent commercial lenders from taking control of the management of these entities.

Investments are capped at 10% of the equity of the company or equity and reserves of the bank, whichever is lower.

However, banks are allowed to invest in subsidiaries in excess of this limit if the firm is engaged in activities that help spread banking services, such as an infotech company.

Besides, higher stake is permissible in those cases where banks acquire shares by converting debt into equity while restructuring loans.

Current norms do not require banks to obtain RBI approval while investing in non-financial service companies.

“It is, therefore, possible that banks could through their holdings in other entities, exercise control on such companies and thus engage indirectly in activities not permitted to banks,” RBI said.

According to the central bank, it is necessary to limit such investments to ensure that banks do not indirectly undertake activities that are not permitted.

Though most banks including State Bank of India, IDBI Bank Ltd, Bank of Baroda and ICICI Bank Ltd, have investments in various businesses including broking, investment banking, insurance, asset reconstruction, credit information bureaux, etc., bank investments in non-financial services companies are rare.

State Bank has a 5.67% stake in Kingfisher Airlines Ltd and ICICI Bank has a 5.3% in the same airline, but in both the cases the equity holdings were a result of conversion of debt.

“The message is very clear. The regulator does not want banks to go out of their core business,” Partha Mukherjee, head of treasury at Axis Bank Ltd, said.

“The regulator seems to be worried about banks taking stake in other firms. It wants to make sure that banks do not take control over corporates,” Ashvin Parekh, partner at Ernst and Young India Pvt. Ltd, said.

According to another senior banker, who did not want to be named, the regulator’s action is “pre-emptive” to avoid banks taking stake in a corporation, which in turn, runs a non-banking financial company (NBFC).

“There is a possibility that banks invest in such companies, which in turn can have holding in NBFCs. That is what RBI is trying to control,” the banker said.

The new norms said banks should carry out a review of their subsidiaries, associates and joint ventures, in which they have control or significant influence, by applying the test of ownership within a period of three months.

“Wherever investments do not conform to the above-mentioned policy parameters, banks may ensure that their investments are brought down to 10% of the paid-up share capital of the investee company or give up control,” RBI said.