the bank itself may own only 5 % of an investee company, but the insurance fund of the insurance company may own another 15 %, giving a total stake of 20 %. this is not satisfactory, because it presents the same problems of contagion, non - transparency and dilution of management focus as the bank itself investing directly in these companies. mas will study the appropriate investment limits of insurance funds for both bank - related and independent insurers. the limits set should protect the interests of policyholders through adequate diversification, and ensure that the investments do not amount to controlling stakes. these measures will be developed in consultation with the industry, and are expected to be finalised by the end of the year. whatever the precise portfolio investment limits for the insurance funds, mas will take the governance and deployment of these insurance funds into consideration, when assessing whether the banking group has de facto control of an investee company, and thus whether an investment meets the portfolio investment criteria for the banking group. time frame and potential impact the separation of the financial and non - financial activities will be a major change for the banking groups. there will be significant corporate restructuring and divestment of assets. we must do this in an orderly manner, over a reasonable period. there is no reason to force a fire sale, which would weaken the banks and diminish confidence, and would be against the interests of shareholders and depositors. local banks will be given three years to complete the restructuring and comply with the new requirements. the three years will commence from the passage of the relevant legislation, which should take place by the end of the year. mas will work with the banks on a phasing and schedule, so that the restructuring and divestments can take place in an orderly manner and be completed within the three - year deadline. tax treatment for divestment the divestment of non - permitted assets will have significant tax implications. in order to avoid uncertainty as to how iras will treat these transactions, and to minimise the tax impact on the banks of changes which have been mandated by mas, the government has decided on a set of one - off administrative concessions to facilitate this exercise. all gains arising from disposals of shares and real properties which have been held for more than 10 years will be treated as non - taxable capital gains. for assets held for less than 10 years, iras would look at the facts of individual cases to decide whether capital or income treatment is appropriate. the

on specific matters, including those arising out of inspection, are to be placed in the public domain. such proactive disclosures by the regulator are expected to have a salutary effect on the functioning of the banking system. in addition to the above, any penal action taken against any foreign bank branches in india are also shared with the home country regulator with a view to enhance the quality of consolidated supervision. these initiatives will be an important supplement to the pillar 3 disclosures prescribed under basel ii, which in our opinion will further the cause of a stable banking system. the way forward on the way forward it has to be recognised that implementation of basel ii will make considerable demands on scarce resources in terms of both economic resources and human resources. banks must take on the challenges and convert these into opportunities. here i would like to quote ms. susan schmidt bies, member of the board of governors of the us federal reserve system : “ banking will remain a highly dynamic industry. supervisors will have to be especially attentive to changing best practices and ensure that basel ii does not inhibit adoption of new banking practices and financial instruments ” “ maintaining financial stability in global banking and financial markets continues to be an important objective of regulators, bankers, and other market participants, particularly because of the negative impact that financial instability has on economies as a whole. basel ii, in my view, will help improve financial stability … even though minimum regulatory capital ratios are likely to be more volatile under basel ii, this reflects greater risk sensitivity. ” some of the issues which emerging economies in particular would need to address on the way ahead are higher capital requirements, improved it architectures, data issues, consolidation, capacity building, external ratings, use of national discretion, validating the concept of economic capital and corporate governance. 4 / 7 higher capital requirements – the basel document prescribes the minimum capital requirements and banks need to be encouraged to hold more capital than the minimum. as a part of their strategy, banks are expected to operate at levels above the minimum to take care of the fluctuations in capital requirements in response to the fluctuations in the quality of risk exposures. further, it will be necessary to ensure that all elements of expected losses should be fully met by provisioning and that capital is available exclusively to support unexpected losses. higher capital requirements could pose difficulties if there are state owned banks. this may require consideration of options such as preference shares and other innovative tier - i instruments, hybrid tier - ii capital instruments and tier - iii capital