A Financial Conglomerate is broadly defined internationally as a conglomerate whose regulated entities engage to a significant extent in at least two of the principal financial segment. In regard to quantification of this definition, however, country practices vary with each one adopting its own methodology. In the USA, for example, Large Complex Banking Organisations, which are subjected to risk-focused supervision program, are identified based on a multiple set of parameters including the size of the organization, the extent of international operations, participation in large-value payment and settlement systems, and the extent of custody operations, fiduciary activities, and trading activities. FSA, on the other hand, has quantified the criteria stipulating that a group will be a financial conglomerate if "at least 40% of its business is financial and at least 10% or Euro 6 billion of its financial business is in each of the insurance and the combined banking/investment sectors".

In the Indian context, however, having a set of quantifiable 'blanket' criteria to identify a conglomerate cannot be adopted as of now as most of the financial groups required to be covered by the new framework still have a significant presence in only a single segment (mostly banking) that dominates their consolidated operations. Also, certain segments, specially insurance, are heavily dominated by public sector companies that dwarf the new entrants in terms of size. Any 'blanket' quantitative threshold limit/s, therefore, would in all probability tend to exclude certain groups. However, the future could see the emergence of conglomerates in true sense. Till that time it is considered appropriate to identify a financial conglomerate based on segment-specific parameters.

The other issue in identifying a financial conglomerate relates to defining related parties or affiliates. Accounting Standard 18 prescribed by ICAI defines a related party as a party having the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions.

However, for the purpose of capturing risks inherent in an entity by virtue of its being part of a larger group, the concept of 'related party' may have to be considered at a broader level. In particular, the issue of 'common branding' could involve reputational risks amongst group entities that may otherwise be having an 'arms-length' relationship.

The Group, therefore, proposes the following criteria for identifying a Financial Conglomerate, subject to the explanations/exceptions that follow:

A group would be designated as a ''Financial Conglomerate" if :

• any group entity coming under the jurisdiction of specified regulators and having a significant presence in the respective financial market segment; and

• the group is having operations in at least one more financial market segment.

Group: An arrangement involving two or more entities related to each other through any of the following relationships:

• Subsidiary - parent (defined in terms of AS 21), Joint venture (defined in terms of AS 23), Associate (defined in terms of AS 27), Promoter-promotee

• A related party (defined in terms in AS 18)

• Common brand name

• Investment in equity shares - 20% and above

Group entity: any entity involved in the above arrangement

Specified Regulator: RBI, SEBI and IRDA for the present. The Pension Fund Regulatory Authority may be included subsequently.

It may be clarified that the above framework also covers entities having an overseas parent or holding company (e.g. Foreign banks) and satisfying the specified criteria.

Further, it has been decided by the Group that the following specific entities would be kept out of the framework for the present:

• Regional Rural banks - Inter-linkages with other entities are not considered to be significant.

• Depositories - Systemically important from operational risk perspective but no significant cross-linkage and are regulated by SEBI

• Asset Reconstruction Companies - Still in the development stage; could be included in future.

• SPVs for securitisation deals - Though there are supervisory concerns in regard to the operations of SPVs, these were not included in the framework since these are in the form of trusts.

• Associates of SBI

One of the key issues deliberated upon by the Group was the treatment to be given to cross-border relationships - the feasibility and necessity of including these within the new framework. Such entities could broadly be categorized in two.

1. A constituent (subsidiary/JV/associate) of a domestic group (identified as financial conglomerate) having overseas operations : it was decided all such entities would be incorporated in the reporting framework if they fulfil the relevant materiality criteria.

2. An entity which is part of an overseas group, but operating in domestic markets: In respect of all such entities, it was decided that for reporting purposes, all transactions of financial nature between the domestic entity/ies as well as transactions with overseas parent/holding company/ reporting office booked in the domestic entities' books will have to be included.

There are other standalone financial institutions/intermediaries which may have systemic implications in view of large exposures of other intermediaries such as banks (eg. HUDCO) but are not within the purview of this Group and will need to be addressed separately. It is also important to note that the population of financial conglomerates is fluid and can change as a result of developments affecting a banking organisation or changes in the industry as a whole. The cluster of Financial Conglomerate thus identified, as well as the criteria for identifying them, may be subject to periodic review.

The Group recommends that the exemption of a particular entity for reporting for any reason may be considered on a case-to-case basis. The 'exclusion list' may also be subject to periodic review.