BANK ADVANCES AGAINST SHARES,  DEBENTURES, UNITS AND BONDS

 

Banks are permitted to grant advances against the security of shares, debentures, units of UTI and other SEBI approved and reputed Mutual Funds and bonds issued by PSUs. Each bank prescribes a list of companies whose shares and debentures can be accepted as security. No loans can be granted to partnership/ proprietorship concerns against the primary security of shares and debentures. Individual loans may be granted for meeting contingencies and personal needs or for subscribing to rights or new issues of shares/debentures/bonds or for making purchases in the secondary market. But banks shall not entertain collusive action of taking multiple loans by a large group of individuals having links with the same corporate or their inter‑connected entities with a view to support particular scrip. Advances are also granted to stock‑brokers and market makers. Individuals and corporates may also assign approved shares/debentures to banks as collateral and additional security for certain approved purposes (i.e. for availing education/housing/consumption loans; working capital loans etc.) which don't involve stock broking or investment in capital market.

 

All Banks have framed their own lending policies for granting advances against the security of shares, debentures, bonds etc. keeping in view the RBI guidelines and follow normal procedures for the sanction, appraisal and post sanction follow‑up. Banks usually obtain a declaration from the borrower indicating the extent of loans availed from other banks as input for credit evaluation.

 

General Guidelines relevant to Borrowers

 

Reserve Bank of India from time to time, issues guidelines applicable to advances against shares, units, debentures and PSU Bonds. The general guidelines as relevant to borrowers are as under1  :

 (a)       Quantitative restrictions have been imposed on the banks to hold shares and grant advance there against as per section 19(2) and (3) of Banking Regulation Act, 1949. Section 20(1)(a) of the said Act does not permit the banks to grant any loan or advance on the security of their own shares.

(b)        The bank must follow the normal procedures for sanction, appraisal and post sanction follow up while granting advance against shares etc.

 (c)       Advances against the primary security of shares/debentures/bonds should be kept distinct and separate and not combined with any other advance.

(d)        Shares/debentures/bonds should be valued at prevailing market prices when they are lodged as security for advances.

(e)        It is to be ensured that advances against shares are not used to enable the borrower to acquire or retain a controlling interest in the company/ companies or to facilitate or retain inter‑corporate investments.

(f)        No advance against partly paid up shares is granted.

(g)        Whenever the limit/limits of advances granted to a borrower exceeds Rs. 10 lacs, it should be ensured that the said shares/debentures/bonds are transferred in the name of the bank and the bank has exclusive and unconditional voting rights in respect of such shares. For this purpose the aggregate of limits against shares/debentures/bonds granted by the bank at all its branches to a single borrower should be taken into account.

(h)        Banks operating in India should not be a party to transactions such as making advances or issuing back‑up guarantees favouring other banks for extending credit to clients of Indian nationality/origin by some of their overseas branches, to enable the borrowers to make investments in shares/debentures/bonds of Indian companies,

 

Pledging of Securities in Dematerialised Form 1 

 

SEBI (Depositories & Participants) Regulations, 1996 facilitate pledge of dematerialised securities also. The securities pledged by the borrower get blocked in favour of the lending FI. In the case of default by the borrower, the Fl may invoke the pledge, subject to the provisions of the pledge document and on such invocation; the depository will register the name of the FI as beneficial owner of such securities. In view of the above position, securities which are held in dematerialised form under the depository system, the requirement that the shares/ debentures should be transferred in FI's name need not be insisted upon provided the securities have been blocked in favour of lending FI. FIs are therefore free to take their own decision in regard to transfer of securities in their name.

 

Revised Guidelines for Advances Against Shares/Debentures etc.

 

After the review undertaken by RBI‑SEBI Technical Committee, RBI issued revised guidelines vide Circular No. DBOD.BP.BC119/21.04.137/2000‑2001 dt. 11.5.20012  for bank financing against shares/debentures etc. to individuals/share broking entities and margin requirement, thereof Revised guidelines are given as under

 

Advances to Individuals

 

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 dematerialised 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 interconnected entities to take multiple loans in order to support particular scripts or stock‑broking activities of the concerned firms.

 

Financing of Initial Public Offerings (IPOs)

 

The maximum amount of finance that can be granted to an individual for IP0s (i.e. Rs. 10 lakh) as at present, remains unchanged. The corporates should not be extended finance for investment in other companies’ IPOs. 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.

 

Advances to Stock Brokers and Market Makers

 

The banks are free to provide credit facilities to stock brokers and market makers on the basis of their commercial judgement, 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 a sub‑ceiling for total advances to

(i)         all the stock brokers and market makers (both fund based and non-fund based, i.e., guarantees ) and

(ii)        to any single stock broking entity, including its associates/interconnected companies.

 

Margins on Advances against Shares/Issue of Guarantees

 

A uniform margin of 50 per cent' shall be applied on all advances/ financing of IPOs/issue of guarantees. A minimum cash margin of 25 per cent1  (within the margin of 50%) shall be maintained in respect of guarantees issued by banks. The above margin of 50 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.

 

Financing of Arbitrage Operations

 

Banks should not undertake arbitrage operations themselves or extend credit facilities directly or indirectly to stockbrokers for arbitrage operations in Stock Exchanges.

 

Policy Regarding Risk Management

 

(i)         Banks should ensure that their exposure to stockbrokers is well diversified in terms of number of broker clients, individual inter‑connected broking entities.

(ii)        While sanctioning advances to stockbrokers, the banks should take into account the track record and creditworthiness of the broker, financial position of the broker, operations on his own account and on behalf of clients, average turnover period of stocks and shares, the extent to which broker's funds are required to be involved in his business operations, etc.

(iii)       While processing proposals for loans to stockholders, banks are also advised to obtain details of facilities enjoyed by the broker and all his connected companies from other banks.

(iv)       While granting advances against shares and debentures to other borrowers also, banks should obtain the details of credit facilities availed by them or their associates/inter‑connected companies from other banks for the same purpose (i.e. investment in shares etc.). This is necessary in order to ensure that high leverage is not built up by the borrower or his associate or inter‑connected companies with bank finance.

 

Banks should review their risk management systems pertaining to capital market exposures and exposures to stock broking entities/market makers, to assess the efficiency of the risk management systems in place in the bank, to assess the extent of compliance with the RBI guidelines and to identify the gaps in compliance with the guidelines for initiating appropriate steps immediately. The review should be placed before the Board of Directors.1  ,

 

Valuation of Shares

 

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.

 

Ceiling on Overall Exposure to Capital Market

 

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.

 

Coverage of Ceiling

 

The ceiling will illustratively cover

 

(i)         direct investment by a bank in equity shares, convertible bonds and debentures and units of equity oriented mutual funds;

(ii)        advances against shares to individuals for investment in equity shares (including IPOs), bonds and debentures, units of equity oriented mutual funds etc.;

(iii)       secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers.

 

Computation of Ceiling

 

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 nonconvertible 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.

 

Exemption from Ceiling

 

The ceiling of 5 percent will. not include collateral of equity shares/bonds and debentures offered to the bank by corporates 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.

 

Bank Loans for Financing Promoters Contribution

 

Banks have been permitted to Sanction bridge loans to companies for a period not exceeding one year against expected equity flows/issues. Such loans should be included within the ceiling of 5 per cent of incremental deposits of the previous year for bank's investments in ordinary shares, convertible debentures of corporates including PSU shares, loans to corporates for meeting promoters' contributions and in units of mutual fund schemes and in equity of dedicated venture capital funds meant for information technology.

 

Banks should formulate their own internal guidelines with the approval of their Board of Directors for grant of such loans, exercising due caution and attention to security for such loans.

 

APPENDIX 33.I

RBI Guidelines on Bank Finance against Shares and Debentures1 

 

As you are aware the Reserve Bank of India has, from time to time, issued a number of guidelines/instructions/directives to banks in regard to advances against shares. To enable banks to have the current instructions at one place, a Master Circular containing all existing guidelines on the subject has been prepared and is enclosed. We advise that this Master Circular supersedes all the previous instructions contained in the Circulars issued by the RBI so far.

 

ADVANCES AGAINST SHARES, UNITS, DEBENTURES AND PUBLIC SECTORUNDERTAKING (PSU) BONDS

 

General Guidelines

 

1.         The Appendix lays down the general guidelines to be followed by banks in all cases of grant of advances against shares and debentures/bonds.

2.         Advances against security of shares/debentures/bonds may be given to individuals, share and stock brokers and market makers, as per guidelines detailed in paragraphs 3 to 6 below. In regard to loans to other borrowers, banks may please refer to paragraphs 7 and 8 below. Paragraph 9 relates to advances against units of mutual funds.

3. Advances to Individuals

Banks may grant advances against the security of shares, debentures or bonds to individuals subject to the following conditions:

 

(i)         Purpose of the loan : Loans against shares, debentures and bonds of public sector undertakings (PSUs) may be granted to individuals to meet contingencies and personal needs or for subscribing to rights or new issues of shares/debentures/bonds or for purchase in the secondary market against the security of shares/debentures/bonds held by the individual.

(ii)        Amount of advance: Loans against the security of shares, debentures and PSU bonds if held in physical form should not exceed the limit of Rs. 10 lakhs per borrower. The limit of Rs. 10 lakhs has been enhanced to Rs. 20 lakhs if the securities are held in dematerialised form.

(iii)       Margin : Banks should maintain a minimum margin of 50 per cent of the market value of equity shares/convertible debentures held in physical form. In the case of shares/convertible debentures held in dematerialised form, a minimum margin of 25 per cent should be maintained. These are minimum margin stipulations and banks may stipulate higher margins for shares whether held in, physical form or dematerialised form. The margin requirements for advances against preference shares/non ‑convertible debentures and bonds may be determined by the Banks themselves.

(iv)       Lending policy: Each bank should formulate with the approval of the Board a Lending Policy for grant of advances to individuals against shares/debentures/bonds keeping in view the general guidelines given in the Appendix as applicable to such advances. Banks should obtain a declaration from the borrower indicating the extent of loans availed of by him from other banks as input for credit evaluation. It would also be necessary to ensure that such accommodation from different banks is not obtained against shares of a single company or a group of companies. As a prudential measure, each bank may also consider laying down an aggregate limit of such advances.

 

4. Advances to share and stock brokers

(i)         Banks and their subsidiaries should not undertake financing of 'Badla' transactions.

(ii)        Share and stock brokers may be provided need‑based overdraft facilities/line of credit against shares and debentures held by them as stock-in‑trade. A careful assessment of need‑based requirements for such finance should be made taking into account the financial position of the borrower, operations on his own account and on behalf of clients, income earned, the average turnover, period of stocks and shares and the extent to which the broker's funds are required to be involved in his business operations. Large scale investment in shares and debentures on own account by stock and share brokers with bank finance, should not be encouraged. The securities lodged as collateral should be easily marketable.

(iii)       The ceiling of Rs. 10 lakhs/Rs. 20 lakhs for advances against shares/ debentures to individuals will not be applicable in the case of share and stock brokers and the advances would be need‑based.

(iv)       Banks may grant working capital facilities to stock brokers registered with SEBI and who have complied with capital adequacy norms prescribed by SEBI/Stock Exchanges to meet the cash flow gap between delivery and payment for DVP transactions undertaken on behalf of institutional clients viz., FIs, FIIs, mutual funds and banks. The duration of such a facility will be short and would be based on an assessment of the financing requirements keeping in view the cash flow gaps, the broker's funds required to he deployed for the transaction and the overall financial position of the broker. The utilisation will be monitored on the basis of individual transactions. Margins may he determined by the banks themselves and banks may institute adequate safeguards and monitoring mechanisms.

(v)        Banks may issue guarantees on behalf of share and stock brokers in favour of stock exchanges in lieu of security deposit to the extent it is acceptable in the form of bank guarantee as laid down by Stock Exchanges. Banks may also issue guarantees in lieu of margin requirements as per stock exchange regulations. The bank should assess the requirement of each applicant borrower, observe usual and necessary safeguards including the exposure ceilings.

(vi)       The requirement relating to transfer of shares in bank's name in respect of shares held in physical form mentioned in paragraph (vii) in the Appendix shall not apply in respect of advances granted to share and stock brokers provided such shares are held as security for a period not exceeding nine months. In the case of dematerialised shares, the depository system provides a facility for pledging and banks may avail themselves of this facility and in such cases there will not be need to transfer the shares in the name of the bank irrespective of the period of holding. The share and stock brokers are free to substitute the shares pledged by them as and when necessary. In case of a default in the account, the bank should exercise the option to get the shares transferred in its name.

(vii)      Banks shall grant advances only to share and stock brokers registered with SEBI and who comply with capital adequacy norms prescribed by SEBI/ Stock Exchanges.

 

5. Bank Finance for Market Makers

Banks may provide need‑based finance to meet the genuine credit requirements of approved Market Makers. For this purpose, they should lay down appropriate norms for financing them including exposure limits, method of valuation, etc. They should also follow the guidelines given below :

 

(a)        Market Makers approved by stock exchange would be eligible for grant of advances by scheduled commercial banks.

(b)        Market Making may not only be for equity but also for debt securities including State and Central Government securities.

(c)        Banks should exercise their commercial judgment in determining the need‑based working capital requirements of Market Makers by taking into account the Market Making operations.

(d)        Banks may prescribe normal prudential margin based on their commercial judgment while extending advances to Market Makers.

(e)        Banks may accept, as collateral for the advances to the Market scripts other than the scripts in which the Market Making opera undertaken.

(f)        Securities offered as collateral may include shares/debenture units of mutual funds including UTI as well as securities of Central and State Governments.

(g)        Banks should ensure that advances provided for Market Making, diverted for investment in shares other than the scrip earning Market Making purpose. For this purpose, a suitable follow monitoring mechanism must be evolved.

(h)        The ceiling of Rs. 10 lakhs/Rs. 20 lakhs for advances against debentures to individuals will not be applicable in the case of Makers.

 

6. Each bank should lay down a detailed loan policy for granting adv Stock brokers and Market Makers and also a policy for grant of guarantees behalf of brokers which should keep in view the general guidelines given in the Appendix and include inter alia, the following :

 

§                     purpose and use of such advances/guarantees

§                     pricing of such advances

§                     control features that specifically recognise the unique characteristics and risks of such financing

§                     margins to be maintained

§                     method of valuation of collateral

§                     frequency of valuation of shares and other securities taken as co, Frequency of valuation of shares may at least be once in a quarter.

§                     guidelines for transfer of shares in bank's name.

§                     maximum exposure for individual credits (within the RBI pre prudential Single Borrower Limit). The Board may also consider down a limit on the aggregate exposure of the bank to this sector.

§                     the aggregate portfolio, its quality and performance should viewed and put up at least on a half‑yearly basis to the Board

 

7.  Advances to other borrowers against shares/debentures/bonds

The question of granting advances against primary security of share debentures including promoter's shares to industrial, corporate or other borrowers should not normally arise. However, such securities can be accepted as collateral for secured loans granted as working capital or for other productive purposes from borrowers other than NBFCs. In such cases banks may increasingly accept shares in dematerialised form, Banks may accept shares promoters only in dematerialised form wherever demat facility is available.

 

In the course of setting up of new projects or expansion of existing business or for the purpose of raising additional working capital required by units other than NBFCs, there may be situations where such borrowers are not able to find the required funds towards margin, pending mobilisation of long‑term resources. In such cases, there would be no objection to the banks obtaining collateral security of shares and debentures by way of margin. Such arrangements would be of temporary nature and may not be continued beyond a period of one year. Banks have to satisfy themselves regarding the capacity of the borrower to raise the required funds and to repay the advance within the stipulated period.

 

8.  Bank Loans for Financing Promoters contribution

The promoters' contribution towards the equity capital of a company should come from their own resources and the bank should not normally grant advances to take up shares of other companies. However, banks are permitted to extend loans to corporates against the security of shares (as far as possible in dematerialised form) held by them to meet the promoters' contribution to the equity of new companies in anticipation of raising resources subject to the following terms and conditions, in addition to the general guidelines given in the Appendix :

 

(i)         The margin and period of repayment of the loans may be determined by the banks.

(ii)        Loans sanctioned to corporates for meeting promoters' contribution should be treated as banks' investments in shares and would thus come under the ceiling of 5 per cent of the incremental deposits of the previous year prescribed for investments in shares/convertible debentures of PSUs, corporate bodies, units of mutual fund schemes and in equity of dedicated venture capital funds meant for information technology.

(iii)       With the approval of the Board of Directors, the banks should formulate internal guidelines with appropriate safeguards for this purpose.

(iv)       Under the refinance scheme of Export‑Import Bank of India, the banks may sanction term loans on merits to eligible Indian promoters for acquisition of equity in overseas joint ventures/wholly owned subsidiaries, provided the term loans have been approved by the EXIM Bank for refinance.

 

9.  Advances against Units of mutual funds

While granting advances against Units of mutual funds including Units of UNIT 64 Scheme of UTI, the banks should follow the guidelines given below:

 

(i)         The Units should be listed in the Stock Exchanges or repurchase facility for the Units of mutual fund should be available at the time of tending.

(ii)        The Units should have completed the maximum in‑term‑period stipulated in the relevant scheme.

(iii)       The amount of advances should be linked to the Net Asset Value (NAV)/ repurchase price or the market value, whichever is less and not to the face value.

(iv)       The advance would attract the quantum and margin requirements as applicable to advance against shares and debentures wherever stipulated. The margin should be calculated on the NAV/repurchase price or market value, whichever is less.

(v)        The advances should be purpose‑oriented, taking into account the credit requirement of the investor. Advances should not be granted for subscribing to or boosting up the sales of another scheme of the mutual funds or for the purchase of shares/debentures/bonds.

 

10.  Reporting of advances against shares/debentures/bonds

Banks should submit in the enclosed Format details of advances granted by them against shares and debentures as on the last Reporting Friday of each Quarter viz., March, June, September and December. The Returns should reach the Reserve Bank of India (DBOD, Central Office) not later than the 15th of the succeeding month of the Quarter to which it relates.

 

APPENDIX

 

General guidelines applicable to advances against shares/debentures/bonds

 

(i)         Statutory provisions regarding the grant of advances against shares contained in sections 19(2) and (3) and 20(1)(a) of the Banking Regulation Act', 1949 should be strictly observed. Shares held in dematerialised form should also be included for the purpose of determining the limits under sections 19(2) and 19(3), ibid.

(ii)        Banks should be concerned with what the advances are for, rather than what the advances are against. While considering grant of advances against shares/ debentures banks must follow the normal procedures for the sanction appraisal and post‑sanction follow‑up.

(iii)       Advances against the primary security of shares/debentures/bonds should be kept distinct and separate and not combined with any other advance.

(iv)       Banks should satisfy themselves about the marketability of the shares/ debentures and the net worth and working of the company whose shares/ debentures/bonds are offered as security.

(v)        Shares/debentures/bonds should be valued at prevailing market prices when they are lodged as security for advances.

(vi)       Banks should exercise particular care when advances are sought against large blocks of shares by a borrower or a group of borrowers. It should be ensured that advances against shares are not used to enable the borrower to acquire or retain a controlling interest in the company/ companies or to facilitate or retain inter‑corporate investments.

(vii)      No advance against partly paid shares shall be granted. Whenever the limit/ limits of advances granted to a borrower exceeds Rs. 10 lakhs, it should be ensured that the said shares/debentures/bonds are transferred in the bank's name and that the bank has exclusive and unconditional voting rights in respect of such shares. For this purpose the aggregate of limits against shares/ debentures/bonds granted by a bank at all its offices to a single borrower should be taken into account. Where securities are held in dematerialised form, the requirement relating to transfer of shares in bank's name will not apply and banks may take their own decision in this regard. Banks should however avail of the facility provided in the depository system for pledging securities held in dematerialised form under which the securities pledged by the borrower get blocked in favour of the lending bank. In case of default by the borrower and on the bank exercising the option of invocation of pledge, the shares and debentures get transferred in the bank's name immediately.

(viii)      Banks may take their own decision in regard to exercise of voting rights and may prescribe procedures for this purpose.

(ix)       Banks should ensure that the scripts lodged with them as security are not stolen/duplicate/ fake/benami. Any irregularities coming to their notice should be immediately reported to RBI.

(x)        The Boards of Directors may decide the appropriate level of authority for sanction of advances against shares/debentures. They may also frame internal guidelines and safeguards for grant of such advances,

(xi)       Banks operating in India should not be a party to transactions such as making advances or issuing back‑up guarantees favouring other banks for extending credit to clients of Indian nationality/origin by some of their overseas branches, to enable the borrowers to make investments in shares and debentures/bonds of Indian companies.

 

Explanatory Notes:

 

(i)         "Shares" mean and include shares and stocks of every description.

(ii)        "Debenture" means the same as defined in the Companies Act, 1956.

(iii)       "Share broke?' means a share broker who is registered with SEBI and is a member of a recognised stock exchange.

(iv)       "Advances" include cash credit, overdraft, loans and advances of every description.

(v)        "Advances" against security of. shares/debentures, include all types of advances against shares/debentures whether by way of principal security or collateral security.

 

 

FORMAT

(Vide Para 10)

 

Statement of Aggregate Credit Limits of Rs. 1 lakh and above against the security/ collateral of shares, debentures and public sector bonds and outstanding there against as on the last Reporting Friday of March/June/ September/December

 

 

Name of the Bank:

           A

 

       B

 

          C

 

          D

(Amt in lakhs of Rs.)

        E

Category of borrowers

 

Aggregate limits sanctioned

Total out standing’s

Of ‘C’ Advances extended for further investments in shares, debentures  and public sector bonds

Other purposes

 

 

 

 

 

 

 

 

 

No of parties

Amount

 

 

 

 

 

 

 

 

No. of parties

Amount

No. of parties

Amount

No. of parties

Amount

 

 

 

 

 

(a) Individuals

(b) Investment firms/ companies

(c) Share and stock brokers

(d) Trust and endowments

(e) Industrial and trading concerns

(f) Others

 

            Total :

Notes:   1.         Only outstandings in respect of limits of Rs. 1 lakh and above need be furnished.

2.         The limits may be by way of loan, overdraft, cash credit, etc.

3.         Figures should relate to the last Friday of the month.

4.         Total of columns (D) and (E) should tally with (C).

5.         'Individual' will include advances to more than one person in their own names.

6.         'Industrial and Trading concerns' will include proprietorship/ partnership firms and private/public limited companies engaged in trade or industry.

           

 

Revised Guidelines on Bank's Investment in Shares1 

 

The following revised guidelines, are issued for compliance by banks

 

1. Coverage of the Guidelines ‑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 share‑broking 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 as per the normal banking practice and appraisal procedures.

 

2. Ceiling on overall exposure to capital market..

 

(a)        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:

(i)         Direct investment by a bank in equity shares, convertible bonds and debentures and units of equity‑oriented mutual funds;

(ii)        Advances against shares to individuals for investment in equity shares (including IPOs), bonds and debentures, units of equity oriented mutual funds etc.;

(iii)       Secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers.

(b)        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.

(c)        As mentioned in para 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 corporates 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.

 

3. Ceiling on direct investment in shares, etc. ‑ 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 :

(i)         The ceiling for investment in shares, etc, as stated in the above paragraph (i.e, 20 per cent of net worth), is the maximum permissible ceiling and a bank's Board of Directors is free to adopt a lower ceiling for the bank, keeping in view its overall risk profile and corporate strategy.

(ii)        Banks may make investment in shares directly taking into account the in‑house expertise available within the bank as per the investment policy approved by the Board of Directors subject to compliance with the risk management and internal control systems indicated below.

(iii)       Banks may also make investment in units of UTI and SEBI ‑ approved other diversified mutual funds with good track records as per the investment policy approved by the Board of Directors. Such investments should be in specific schemes of UTI/Mutual Funds and not by way of placement of funds with UTI/Mutual Funds for investment in the capital market on their behalf.

(iv)       Underwriting commitments taken up by the banks in respect of primary issues through book building route would also be within the above overall ceiling.

(v)        Investment in equity shares and convertible bonds and debentures of corporate entities should as hitherto, be reckoned for the purpose of arriving at the prudential norm of single‑borrower and borrower‑group exposure ceilings.

 

4. Financing of arbitrage operations ‑ Banks should not undertake arbitrage operations themselves or extend credit facilities directly or indirectly to stockbrokers for arbitrage operations in Stock Exchanges. 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.

 

5. Risk management and internal control systems ‑ 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

(i)         Build up adequate expertise in equity research by establishing a dedicated equity research department, as warranted by their scale of operations;

(ii)        Formulate a transparent policy and procedure for investment in shares, etc., with the approval of the Board;

 

(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

(i)         Banks should ensure that their exposure to stockbrokers is well diversified in terms of number of broker clients, individual interconnected broking entities.

(ii)        While sanctioning advances to stockbrokers, the banks should take into account the track record and creditworthiness of the broker, financial position of the broker, operations on his own account and on behalf of clients, average turn over period of stocks and shares, the extent to which broker's funds are required to be involved in his business operations, etc.

(iii)       While processing proposals for loans to stockbrokers, banks are also advised to obtain details of facilities enjoyed by the broker and all his connected companies from other banks.

(iv)       While granting advances against shares and debentures to other borrowers also, banks should obtain the details of credit facilities availed by them or their associates/inter‑connected companies from other banks for the same purpose (i.e., investment in shares etc.). This is necessary in order to ensure that high leverage is not built up by the borrower or his associate or inter‑connected companies with bank finance.

 

(d)        Separation of functional responsibilities

(i)         There should be clear separation of decision‑making in regard to investment in shares/advances against shares which will be done by the Investment Committee.

(ii)        The surveillance and monitoring of investment in shares/advances against shares shall be done by the Audit Committee of the Board, which shall review in each of its meetings, the total exposure of the bank to capital market both fund based and non fund based, in different forms as stated in para 2 and ensure that the guidelines issued by RBI are, complied with and adequate risk management and internal control systems are in place.

(iii)       The Audit Committee shall keep the Board informed about the overall exposure to capital market, the compliance with the RBI and Board guidelines, adequacy of risk management and internal control systems, etc,

(iv)       In order to avoid any possible conflict of interest, it should be ensured that the stockbrokers as directors on the Boards of banks or in any other capacity, do not involve themselves in any manner with the Investment Committee or in the decisions in regard to making investments in shares, etc., or advances against shares.

 

6. Valuation and Disclosure ‑ 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. Basis 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.

 

7. Transitional provisions ‑ In respect of banks whose exposure to capital market by way of investments in shares and advances against shares is in excess of the ceiling as prescribed in para 2 above, the following transitional provisions are provided in order to ensure smooth transition to the revised guidelines :

(a)        Such banks whose exposure to capital market is in excess of the ceiling prescribed in para 2 above, should formulate a time‑bound plan for gradually reducing their exposure to stock market in line with the prudential ceiling now prescribed. In working out the time bound plan, the advances granted to individuals against shares for investment purposes, may not be recalled and in case of any difficulties arising on this account, the banks may approach RBI for suitable relaxation. This time‑bound plan, along with data. on exposures under investment and various categories of advances/guarantees, should be submitted to the RBI by June 15, 2001.

Meanwhile, these banks should not make any fresh investment in equity shares/advances against shares and issue guarantees.

(b)        The margin of 40% indicated in the Guidelines will apply to all fresh advances/ financing of IPOs/issue of guarantees. Earlier advances/ guarantees may continue at the existing margins until they come up for renewal.

(c)        CMDs/CEOs of all banks should review their present portfolio of investment in shares/advances against shares/guarantees and in case investment/ advances/guarantees are beyond the limits prescribed by its Board or are in violation of the guidelines of November 10, 2000, such investment/advances/ guarantees should be reduced at the earliest. This review should also cover cases of excessive advances/guarantees in favour of any particular entities and their inter‑connected companies.

 

8. Review of the guidelines ‑ A review of the revised 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/ interconnected 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.

1 [In view of the increasing importance of efficiency of the risk management systems, banks are advised to more specifically review their risk management systems pertaining to capital market exposures and exposures to stock broking entities/ market makers. The review, which should be placed before the Board of Directors, should inter alia, assess the efficiency of the risk management systems in place in the bank, assess the extent of compliance with the guidelines issued in this circular and identify the gaps in compliance with the above guidelines for initiating appropriate steps immediately.]

 

 

 


 [R1]As per Circular No. DBOD Dir. BC. 90/13.07.0.5/98 dt. 28.8.1998, text given in Appendix 33.1.

 [R2]As per Notification No. DBS. FID C.5/02.01.00/2000‑2001 dt. 19.9.2000.

 [R3]Text given in Appendix 33.1

 [R4]D.B.O.D. No., Dir. BC : 61/13.07.05/2003‑04, dt. 3.1.2004. w.e.f. 3.1.2004. Earlier, the margin requirement was 40% of which 20% was required in respect of guarantees issued by banks

 [R5]Inserted vide Circular No. DBOD.Dir.IBC.63/13.07.05/2002‑03, dt. 29.1.2003

 [R6]Circular No. DBOD.DIR.BC. 90/13.07.05/98, dt. 28.8.1998

 [R7]Circular No. DBOD BP.BC.9/21.04.137/2000‑01, dated 11.5.2001.

 [R8]Inserted by Circular No. DBOD.Dir/BC.63/13.07.05/2002‑03, dated 29.1.2003.