Revised norms for banks' exposure in capital market

By Our Special Correspondent

MUMBAI, MAY 11. The Reserve Bank of India has said that the banks' investment in shares as also advances against shares and other connected exposures should not exceed 5 per cent.

In its final and revised guideline issued here today, the RBI stated that the ceiling of five per cent will also apply to total exposure of a bank to stock markets, including loans and advances to individuals, corporates and stock brokers for investment in shares and debentures.

However, it is also clarified that the ceiling will not apply to shares and convertible debentures assigned to the banks as a collateral by individuals or corporates for availing of bank credit for carrying out normal trade, production and investment or other developmental activities which do not involve stock broking or investment in capital markets.

The RBI has asked banks to avoid concentration to a few stock broking entities. According to RBI each bank should fix, within the overall ceiling of five per cent, a sub-ceiling for total advances to all the stock brokers and market makers 9both fund based and non-fund based and to individual stock broking entities, its associates and interconnected companies.

The existing instructions with regard to advances to individuals and financing of initial public offerings (IPOs) remain unchanged (except with regard to margins).

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 of guarantees, 25 per cent margin for advances against demat shares and 50 per cent for advances against physical shares, 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 has been proposed.

The RBI said stray cases of questionable operations of banks' investments in secondary markets were also noticed warranting a clear enunciation of policy on arbitrage operations. Hence, the revised guidelines make certain stipulations. These are that Banks should not undertake arbitrage operations themselves or extend credit facilities directly or indirectly to stockbrokers for arbitrage operations in stock exchanges. Secondly, while banks are permitted to acquire shares from the secondary market, they should ensure that no sale transaction is undertaken without actually holding the shares in its investment account.

As a further safeguard to prevent any nexus from emerging, the revised guidelines emphasise that there should be clear separation of decision making in regard to investments in shares or advances against shares, which will be done by the investment committee to be set up by the board. The surveillance and monitoring of investments and advances against shares have to be done by the separate and independent audit committee of the board, which will review the total exposure of the bank to capital market, both fund based and non fund based, in all forms. The Audit committee should ensure that the guidelines issued by the RBI, and the board of the bank are complied with, and adequate risk management and internal control systems are in place.

The revised guidelines include certain `transitional provisions' in order to ensure smooth transition to the new rules and to provide sufficient time to banks to adjust their portfolio of investment in shares and advances or guarantees against shares.

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