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