The Reserve Bank of India is working on proposals that would prevent private equity firms from holding a controlling stake in more than one non-bank lender, Reuters reported on Thursday, citing two people with knowledge of the plans.

Source: Reuters via The Hindu BusinessLine

The central bank is concerned that financial stress at a global private equity firm or its affiliates could have a contagion effect across several non-bank lenders in which it has significant investments, the people said.

Under Indian law, control is defined as a large stake — 25 per cent in the case of listed firms — although ownership can be smaller and still count as control if the investor can appoint a majority of the directors or control a firm's management or policy decisions. Holdings of 15 per cent or less would be treated as financial investments and attract less scrutiny, one of the people said.

A draft of the rules would be finalised after public consultation, and the rules could be formally issued early next year, according to the report. The Reserve Bank did not respond to Reuters' requests for comment, and the proposals have not yet been confirmed by the central bank.

The RBI has at times moved to prevent controlling investments in multiple non-bank lenders. US private equity firm Bain Capital's purchase of 41.7 per cent of Manappuram Finance last year was approved on condition that it divest its 93 per cent ownership in another non-bank lender, Tyger Capital, formerly Adani Capital.

Japan's Mizuho Financial Group has majority stakes in two non-bank lenders, Mizuho Capsave and Credit Saison India, and has said it plans to acquire KKR-backed financial services firm Avendus. Media reports say the central bank has asked Mizuho to submit a comprehensive plan to integrate or consolidate its existing Indian non-bank financial firms.

The Indian Venture and Alternate Capital Association has lobbied the RBI, seeking permission for different entities within a group to acquire stakes of more than 20 per cent in multiple non-banking financial companies. The next milestone to watch is the RBI's public consultation draft, which would show how the new line between control and financial investment is drawn.