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RBI announces guidelines on banks' exposure to stocks

The Reserve Bank of India on Friday said that the ceiling of five per cent on a bank's investments in the capital markets will now apply to total exposure of a bank to stock markets, including loans and advances to individuals or corporates and stockbrokers for investment in shares or debentures.

The five per cent ceiling prescribed in November 10, 2000 guidelines on bank's investment in capital market would continue, RBI said in its revised norms on bank's investment in shares and financing of equities, effective from Friday.

However, the apex bank said the ceiling would not apply to shares/convertible debentures assigned to the banks as collateral by individuals/corporates for availing of bank credit for carrying out normal trade/production, investment or other developmental activities (which do not involve stock-broking or investment in capital markets).

Recognising the nexus that has been observed among a few participants in stock markets, it has been proposed that each bank should fix, within the overall ceiling (five per cent), a sub-ceiling for total advances to all stock brokers and market makers (both fund-based and non fund-based), and individual stockbroking entities, its associate/interconnected companies.

RBI said that stray cases of questionable operations of banks' investments in secondary markets were also noticed warranting enunciation of policy on arbitrage operations.

Banks should not undertake arbitrage operations themselves or extend credit facilities directly or indirectly to stockbrokers for such arbitrage transactions in stock exchanges, it added.

On financing of arbitrage operations, RBI said that while banks are permitted to acquire shares from the secondary market, they should ensure that no sale transaction is undertaken without actually holding shares in its investment account.

In case of advances to individuals and financing of initial public offerings, the existing instructions remain unchanged (except in regard to margins), RBI said.

A measure of simplification and rationalisation of margins prescribed has been introduced.

Thus, as against the existing stipulation regarding minimum cash margin of 25 per cent for issue guarantees, 25 per cent margin for advances against demat shares and 50 per cent for advanaces against physical shares, it has now proposed a uniform margin of 40 per cent on all advances/guarantees with a minimum cash margin of 20 per cent (within the margin of 40 per cent) in respect of guarantees issued by banks.

As a further safeguard to prevent any nexus from emerging, the revised norms emphasise that there should be clear separation of decision making in regard to investments in shares/advances against shares, which would be done by the investment committee, to be set up by the board.

The surveillance and monitoring of investments/advances against shares have to be done by the separate and independent audit committee of the board, which would review the total exposure of the bank to capital market, both fund-based and non fund-based, in all forms.

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