Bank Financing of Equities and Investments in Shares: Revised Guidelines - RBI - Reserve Bank of India
Bank Financing of Equities and Investments in Shares: Revised Guidelines
DBOD. BP. BC. 119 / 21.04.137 / 2000-2001 May 11 , 2001 All commercial banks ( excluding RRBs and LABs) Dear Sir, Bank Financing of Equities and Investments in Shares: Revised Guidelines As you are aware, in pursuance of the announcement made in October, 2000 in the Mid-term Review of the Monetary and Credit Policy for the year 2000-2001, the RBI- SEBI Technical Committee has reviewed the RBI guidelines set out in circular DBOD.BP.BC.51/21.04.137/2000-01 dated November 10, 2000 on banks’ investment in shares as also advances against shares and other connected exposures. Based on the feed back received from banks and market participants on the recommendations made by the Technical Committee and on the amendments proposed to the earlier guidelines, Reserve Bank of India has since revised the guidelines on banks’ investment in shares and financing of equities. In this connection, a reference is also invited to paragraph 105 of the Statement on Monetary and Credit Policy for the year 2001-2002. The revised guidelines are enclosed in the Annexure for compliance by banks and are in supersession of earlier circular DBOD. BP. BC. 51/ 21.04. 137/ 2000-01 dated November 10, 2000. 2. The revised guidelines include certain "Transitional Provisions" in order to ensure smooth transition to the new guidelines and to provide sufficient time to banks to adjust their portfolio of investment in shares and advances / guarantees against shares. 3. The CMDs / CEOs of banks are requested to give their personal attention particularly to the provisions relating to putting in place the risk management and internal control systems enunciated in paragraph 12 of the revised guidelines. 4. This circular may please be put up before the Board of Directors at its next meeting. 5. Please acknowledge receipt. Yours faithfully, ( M.R. Srinivasan) Annexure Reserve Bank of India Revised Guidelines on Bank Financing of Equities and Investments in Shares Coverage of the Guidelines 1. Broadly, banks can acquire shares, debentures and units of mutual funds etc., for three different purposes : (a) for making direct investment in shares / debentures etc. at bank’s own risk; (b) for making loans and advances to individuals and sharebroking entities for the purpose of making investment in capital markets on their own account. Here, the investment risk is that of the individual or stock-broking entities. Loans / advances by banks are normally fixed in value and carry the stipulated interest rate, and the risk to banks could arise on account of inadequacy of margins or the inability of borrowers to meet their repayment / interest obligations to banks because of volatility in share prices or other related reasons, and (c) shares/ debentures may be assigned to banks by individuals and corporates as collateral and additional security for certain approved purposes which do not involve stock broking or investment in capital market.
These guidelines cover investments in shares, convertible bonds and debentures and units of equity-oriented mutual funds and advances against equity shares, bonds and debentures, units of mutual funds, etc. for purposes (a) and (b) above. In respect of (c) above, banks are free to accept additional shares, debentures, units of mutual funds etc. as collateral for approved purposes as per the normal banking practice and appraisal procedures. Ceiling on overall exposure to capital market : 2. The ceiling of 5 per cent prescribed for investment in shares will henceforth apply to total exposure including both fund based and non-fund based, to capital market by a bank in all forms. The ceiling will illustratively cover :
3. The 5 per cent ceiling will be computed in relation to the bank’s total outstanding advances (including Commercial Paper) as on March 31, of the previous year. Non-fund based facilities and investment by banks in non-convertible debentures and other similar instruments (excluding Commercial Paper), should not be included in computing the total outstanding advances of the bank. Further, for computing the ceiling on exposure to capital market, direct investment in shares by banks will be calculated at cost price of the shares.
4. As mentioned in paragraph 1 (c) above, it is clarified that the ceiling of 5 per cent will not include collateral of equity shares / bonds and debentures offered to the bank by corporares other than NBFCs, for availing of secured loans for working capital or other productive purposes which do not involve stock broking or investment in capital markets. Advances made by banks to individuals for personal purposes like education, housing, consumption etc., will also be outside the 5 per cent ceiling. Ceiling on direct investment in shares, etc 5. Within the above overall ceiling of 5 per cent for total exposure to capital market, the total investment in shares, convertible bonds and debentures and units of equity-oriented mutual funds by a bank should not exceed 20 per cent of its net worth, as hitherto. While making investment in equity shares etc., whose prices are subject to volatility, the banks should keep in view the following guidelines :
Advances against shares and debentures (a) Advances to individuals : 6. The present maximum ceilings of advances to individuals against security of shares and debentures (i.e. Rs.10 lakhs against physical shares and Rs.20 lakh against dematerialized shares) will continue. Such loans are meant for genuine individual investors, and banks should not support collusive action by a large group of individuals, belonging to the same corporate or their inter-connected entities to take multiple loans in order to support particular scrips or stock-broking activities of the concerned firms. (b) Financing of Initial Public Offerings(IPOs): 7. The maximum amount of finance that can be granted to an individual for IPOs (i.e., Rs.10 lakh) as at present, remains unchanged. The corporates should not be extended finance for investment in other companies’ IPOs and NBFCs should not be provided finance for further lending to individuals for IPOs. Finance extended by a bank for IPOs should be reckoned as an exposure to capital market.
(c) Avoidance of concentration to a few stock broking entities : 8. The banks are free to provide credit facilities to stock brokers and market makers on the basis of their commercial judgment, within the policy framework approved by their Boards. However, in order to avoid any nexus emerging between inter-connected stock broking entities and banks, the Board of each bank should fix, within the overall ceiling of 5 per cent prescribed in paragraph 2 above, a sub-ceiling for total advances to –
(d) Margins on advances against shares / issue of guarantees. 9. A uniform margin of 40 per cent shall be applied on all advances / financing of IPOs / issue of guarantees. A minimum cash margin of 20 per cent ( within the margin of 40%) shall be maintained in respect of guarantees issued by banks. The above margin of 40 per cent will apply to all fresh advances / guarantees issued. The existing advances / guarantees issued may continue at the earlier margins until they come up for renewal. (e) Financing of arbitrage operations 10. Banks should not undertake arbitrage operations themselves or extend credit facilities directly or indirectly to stockbrokers for arbitrage operations in Stock Exchanges. 11. 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. Risk Management and internal control systems: 12. Banks desirous of making investment in equity shares / debentures, financing of equities and issue of guarantees within the above ceiling, should observe the following guidelines: a) Investment policy
b) Investment Committee The decision in regard to direct investment in shares, convertible bonds and debentures should be taken by the Investment Committee set up by the bank’s Board. The Investment Committee should be held accountable for the investments made by the bank. c) Risk Management
d) Separation of functional responsibilities
13. Equity shares in a bank’s portfolio - as primary security or as collateral for advances or for issue of guarantees and as an investment- should be marked to market preferably on a daily basis, but at least on weekly basis. Banks should disclose the total investments made in equity shares, convertible bonds and debentures and units of equity oriented mutual funds as also aggregate advances against shares in the ‘Notes on Account’ to their balance sheets. Transitional provisions: 14. In respect of banks whose exposure to capital market by way of investment in shares and advances against shares is in excess of the ceiling as prescribed in paragraph 2 above, the following transitional provisions are provided in order to ensure smooth transition to the revised guidelines:
Review of the Guidelines 15 A review of the amended Guidelines will again be undertaken by the RBI-SEBI Technical Committee after six months. For this purpose, banks may submit data relating to the actual investment in equity shares, convertible bonds and debentures and equity-oriented mutual funds as also advances against shares to individuals, stock brokers and their associates / inter-connected companies, guarantees issued on behalf of brokers, financing of IPOs, the operational problems if any, faced by banks, etc. to RBI by the end of September, 2001. |