Guidelines on Bank Financing of Equities and Investments in Shares
The Standing Technical Committee on Bank Financing of Equities, comprising officials of RBI and SEBI, set up to develop operating guidelines for a transparent and stable system of bank financing of equities and investments in shares submitted its report on August 30, 2000. The report was released for public comments. On the basis of the comments received from the media and other market participants on the proposals made by the Committee as well as the views expressed by banks in the meeting taken by RBI with the Chief Executives of major banks on September 19, 2000, RBI prepared new draft guidelines. These draft guidelines were again circulated among select banks and also placed on the RBI website for comments from banks, financial institutions and other market participants.
Based on the feed back received from banks and others, the guidelines on bank financing of equities and investments in shares have now been finalised. These are given below.
1. Bank financing of equities
(i) Financing of Initial Public Offerings (IPOs)
(a) The financing of Initial Public Offerings (IPOs) should be treated as advances against shares to individuals. Accordingly, banks may grant advances for subscribing to IPOs only to individuals. Further, the terms and conditions for financing of IPOs should be the same as those applicable to advances against shares to individuals, set out in our Master circular DBOD.No.Dir.BC.90/ 13.07.05/1998 dated August 28, 1998. The maximum amount of finance that can be extended to an individual against IPOs should 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
A minimum margin of 25 per cent inclusive of cash margin, should be obtained by banks for issue of guarantees on behalf of share brokers. Banks may, at their discretion, obtain margin higher than 25 per cent 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 its overall risk profile. Boards of each bank should also take a view on the exposure on a particular corporate either through primary or secondary market or through book building route, keeping in view its overall risk management policy. The bank's exposure should, however, meet the statutory requirements regarding holding of shares of a company contained in sections 19(2) and (3) and 20(1)(a) of the Banking Regulation Act, 1949, as also the single borrower and borrower-group exposure norms stipulated by the RBI. 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.
2. Banks' investments in shares and debentures
(i) In terms of circular DBOD No.Dir.BC..61/13.07.05/94 dated May 18, 1994, banks are free to acquire shares, convertible debentures of corporates and units of equity oriented mutual funds, subject to a ceiling of 5 per cent of the incremental deposits of the previous year. The RBI-SEBI Technical Committee has recommended 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. It has, therefore, been decided that within the overall exposure to sensitive sectors, a bank's total exposure to capital market by way of investments in shares, convertible debentures and units of mutual funds (other than debt funds) should not exceed 5 per cent of the banks' total outstanding credit as on March 31 of the previous year. It is further clarified that the ceilings for investments in shares, etc., are maximum permissible ceiling and a bank's Board of Directors is free to adopt a lower ceiling for an individual bank, keeping in view the bank's overall risk profile and volatility in equity prices. In respect of those banks where the present outstanding investments in equities are relatively small and well below the 5 per cent overall ceiling, as a prudential measure, the Board should also lay down an annual ceiling for fresh investments in equities so that any increase in fresh investments in equities take place in a phased, gradual and cautious manner, within the absolute ceiling fixed by the Board for each year.
(ii) Banks may make investment in shares directly or through UTI and SEBI approved other diversified mutual funds with good track records. Investment in UTI/mutual funds will be as per the investment policy approved by the Board of Directors, taking into account the in-house expertise available within the bank. It is advised that the decisions in regard to investments in shares, etc., should be taken by the Investment Committee set up by the bank.
(iii) Underwriting commitments taken up by the banks in respect of primary issues through book building route would also be within the above norms.
(iv) Loans sanctioned to corporates for meeting promoters' contributions and bridge loans sanctioned to companies for a period not exceeding one year against expected equity flows/issues, expected proceeds of non-convertible debentures, external commercial borrowings, GDRs and/or funds in the nature of foreign direct investments, (which are now within the ceiling of 5 per cent of the incremental deposits of the previous year), would also continue to be within the above overall ceiling.
(v) The decision on investments in shares, debentures, etc., maybe made by the Board/ALCO of each bank keeping in view the permitted tolerance levels of mismatch. The quantum and tenure of such investments may be decided by Boards of each bank.
(vi) Banks whose investments in shares, etc., are now in excess of 5 per cent of outstanding credit as on March 31, 2000 may bring down their investments gradually to conform to this prudential norm, by March 31, 2001.
3. Valuation and disclosure
Banks should mark to market their investment portfolio in equities like other investments on a quarterly basis. Further, banks should disclose the total investments made in shares, convertible shares and units of equity oriented mutual funds as also aggregate advances against shares, etc., in the 'Notes on Accounts' to their balance sheets, beginning from the year ending March 2001.
4. Review of Guidelines
The Standing Technical Committee of RBI and SEBI will review the guidelines after six months in consultation with banks, keeping in view the operational mechanism and the experience gained. In case any changes are required in the light of actual experience, the Committee will make appropriate recommendations to the RBI.
The Statement on Mid-Term Review of Monetary and Credit Policy consists of three parts:
I. Mid-Term Review of Macro-economic and Monetary Developments in 2000-01;
II. Stance of Monetary Policy for the second half of 2000-01;
III. Financial Sector Reforms and Monetary Policy Measures.
Click here to read AnnexureI for:
Summary of Guidelines for Issue of
Commercial Paper (CP)
Click here to read AnnexureII for:
Summary of Guidelines on Categorisation
& Valuation of Banks'Investments/a>