In pursuance of the announcement made in the Monetary and Credit Policy for the year 2000 – 2001, a Standing Technical Committee on Bank Financing of Equities, comprising officials of RBI and SEBI, was set up to develop operative guidelines for a transparent and stable system of bank financing of equities and investment in shares. The Report of the Committee submitted on 2nd August, 2000 was placed on the RBI Website soliciting comments on the proposals made by the Committee from banks, financial institutions and other market participants. A meeting with Chief Executives of major banks was also taken by the Deputy Governor, Shri S. P. Talwar, on 19th September, 2000 to elicit the views of the banks on the recommendations made by the Committee. Keeping in view the views expressed by the bankers in the meeting as also by other market participants, the following draft guidelines on bank financing of equities and investment in shares, based on the report of the RBI-SEBI Committee are being issued, for comments from banks, financial institutions and other interested participants.
(i) Financing of Initial Public Offerings (IPOs)
[a] The financing of IPOs should be treated as advances against shares to individuals. Accordingly, as recommended by the RBI-SEBI Committee, the terms and conditions for financing of IPOs should be the same as those applicable to advances against shares to individuals. The maximum amount of finance that can be extended to an individual against IPOs should, however, be Rs.10 lakh, as applicable to advances against physical shares. The corporates should not be extended credit by banks for investment in other companies’ IPOs. Similarly, banks should not provide finance to NBFCs for further lending to individuals for IPOs.
[b] Finance extended by a bank for IPOs should be reckoned as an exposure to capital market.
(ii) Issue of guarantees on behalf of brokers
Banks should obtain a minimum margin of 25% inclusive of cash margin, for issue of guarantees on behalf of share brokers. Banks may, at their discretion, obtain margin higher than 25% as per the policy approved by their Board of Directors.
(iii) Total exposure
The Board of Directors of banks may lay down a prudential ceiling on the bank’s aggregate exposure to capital market, keeping in view the overall risk profile. The following may be excluded for reckoning the bank’s aggregate exposure to capital market :
[a] Advances against collateral security of shares,
[b] Advances to individuals for personal purposes like education, housing, consumption, etc. against the security of shares.
[c] Credit substitutes like Commercial Paper, non convertible debenture, etc. may not be reckoned as part of credit portfolio for arriving at the bank’s exposure to capital market.
(iv) Banks’ investments in shares and debentures
[a] In terms of circular DBOD. No. Dir. BC.61/13.07.05./94 dated May 18, 1994, banks are free to acquire shares and /or convertible debentures of corporates subject to a ceiling of 5% of the incremental deposits of the previous year. This is an annual ceiling and no cumulative ceiling has been prescribed for banks’ aggregate investments in shares and convertible debentures. As recommended by the RBI-SEBI Committee, it is proposed that the ceiling prescribed for banks’ investments in shares, convertible debentures, etc. should be related to outstanding advances and not to incremental deposits of the previous year and that within the overall exposure to sensitive sectors, the exposure to capital market by way of investments in shares, convertible debentures and units of mutual funds should not exceed 5% of the banks’ total outstanding credit as on 31st March of the previous year. It is clarified that this ceiling for investment in shares is not mandatory. Consequently, it is not obligatory on the part of banks to invest in equity shares, convertible debentures and units of equity oriented mutual funds upto their eligible limit. Keeping in view the volatility of capital market and the bank’s overall risk profile, the Boards of Directors of each bank shall formulate its policy on exposure to capital market.
[b] The extent upto which banks may make investment in shares directly or through UTI and SEBI approved other diversified mutual funds with good track records, will be as per the investment policy approved by the Board of Directors keeping in view the in-house expertise available within the bank. The operational aspects including the decision on investments shall be taken by the Investment Committee set up by the bank.
[c] Under the extant instructions, banks are required to mark to market their investment portfolio in equities like other investments on quarterly basis. Further, banks may disclose their investment in shares in their balance sheets on the same lines as advances against shares.
[d] The Standing Technical Committee of RBI-SEBI will review these guidelines after six months based on the feed back received from banks and other market participants.
The draft guidelines are being put on the RBI web-site, www.rbi.org.in, and are also being forwarded to select banks and other market participants for comments on the above proposals by 30th September 2000 whereafter the Reserve Bank of India will finalise the guidelines. The comments on the proposals may be forwarded to : Shri A Ghosh, Chief General Manager-in-Charge, Department of Banking Operations and Developemnt, Reserve Bank of India, Central Office, World Trade Centre, Cuffe Parade, Mumbai 400 005.
Mumbai-400 005,
21 September, 2000.