The Reserve Bank of India has proposed that banks should be barred from using group entities to circumvent regulations applicable to them.

The central bank has made the suggestion in a draft circular on 'forms of business and prudential regulations for investments' released on Friday.

"A group entity shall not be used to circumvent regulations/guidelines applicable to the parent bank or other group entity to carry on any business activity, which is not permitted otherwise," the draft said.

It also said entities should avoid an overlap in the lending activities undertaken by the bank and its group entities, PTI reported.

Banks will have to approach the RBI's Department of Regulation to undertake any new activity through a group entity, other than those already permitted, the draft suggested.

In the case of Non-Operative Financial Holding Companies, it shall be ensured that only a single entity within the NOFHC undertakes a particular activity/form of business.

The draft also proposes measures on banks' investments, including in other allied businesses and caps the maximum stake to be held in any company at 30%.

No bank shall make any investment in a Category III Alternative Investment Fund (AIF), and any investment by a bank's subsidiary in a Category III AIF shall also be restricted to the regulatory minima prescribed by the Securities and Exchange Board of India, it said.

When it comes to asset reconstruction companies, banks are proposed to limit the number of entities they sponsor to just one at any point in time and limit the shareholding of the group in an ARC to 20%.

Banks should approach the Department of Regulation to invest 20% or more in the equity capital of any financial services company or Category I or II AIF either individually or collectively by the bank group, non-financial services company either individually or collectively by the bank group, including bank-controlled mutual funds.

It also proposed that all the overseas branches of the Indian banks should not do any activity prohibited for the Indian lender, PTI reported.

It is also suggested that risk-sharing activities that require ring-fencing shall not be carried out departmentally, but only through a group entity subject to the conditions stipulated for the respective activities.

Only a single entity within a bank group shall undertake a particular form of permissible business. Multiple entities within a bank group shall not undertake the same business or hold/acquire the same category of license/authorisation or registration from any financial sector regulator, the draft said.