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DBOD.No. Dir.BC.90/13.07.05/98-99 August 28, 1998 Bhadra 6, 1920 (Saka) All Commercial Banks Dear Sir, Bank Finance against shares
and debentures - Master Circular 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. Yours faithfully (Radhe Shyam) Additional Chief General
Manager |
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ADVANCES AGAINST SHARES,
UNITS, DEBENTURES AND PUBLIC SECTOR UNDERTAKING (PSU) BONDS 1. General Guidelines: The Annexure 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 : Loan
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 percent 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 percent 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 Annexure 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, Flls, 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 be 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 be determined by the
banks themselves and banks may institute adequate safeguards and monitoring
mechanisms. |
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(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 Annexure 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 : 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
themincluding exposure limits, methodof valuation, etc. They should alsofollow the fuidelines
given below: a)
Market
Makers approved by stock exchange would be eligible for grant of advances by
schedules commercial banks. b)
Market
Making may not only be for equity but also for debt securities including Sate
and Central Government securities. c)
Banks
should exercise their commercial judgement in determining the need based
working capital requirements of Market Markers by taking into account the
Market Making operations. d)
Banks may
prescribe normal prudential margin based on their commercial judgement while
extending advances to Market Makers. e)
Banks may
accept, as collateral for the advances to the Market Makers, scrips other
than the scrips in which the market making operations are undertaken f)
Securities
offerred as collateral may include shares/debentures/bonds/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 are not diverted for
investment in shares other than the scrip earmarked for Market Making
purpose. For this purpose, a suitable
follow-up and monitoring mechanism must be evolved. h)
The
ceiling of Rs.10 lakhs/Rs.20 lakhs for advances against shares/debentures to
individuals will not be applicable in the case of Market Makers. 6. Each bank should lay down a detailed loan policy for granting
advances to Stock Brokers and Market Makers and also a policy for granting advances to Stock Brokers and Market Makers and
also a policy of brokers which should keep in view the general guidelines
given in the Annexure 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 collateral ·
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 prescribed prudential Single
Borrower Limit). The Board may also
consider laying down a limit on the aggregate exposure of thebank to this
sector. ·
The
aggregate portfolio, its quality and performance should be reviewed and put
up at least on ahalf-yearly basis to the Board. 7.
Advances
to other borrowers against shares/debentures/bonds The
question of granting advances against primary security of shares and
debentures including promoters sharews to industrial, corporate or other
borrowers should not normally arise.
However, such seuciritie can be accepted as collateral for secured
loans granted as working capital or for other productive purposes from
borowers other than NBFCs. In such
cases banks may increasingly accept shares in dematerialised form. Banks may accept shares of promoters only
in dematerialised form. Banks may
accept shares of 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 a 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 Annexure: (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 Boards of Directors, the banks should formulate internal
guidelines with appropriate safeguards for this prupose. (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 lending. (ii)
The Units
should have completed the minimum lock-in-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 share/debentures/bonds. 10.
Reporting
of advances against shares/debentures/bonds Banks shold 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. |
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General guidelines
applicabel to advances againet 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 Section 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 networth 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 scrips 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 broker"
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. |
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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 outstandings thereagainst as on the last
Reporting Friday of March/June/September/December Name of the Bank : (Amount in lakhs of rupees)
a)
Individuals b)
Investment
firms / companies c)
Share and
stock brokers d)
Trust and
endowments e)
Industrial
and trading concerns f)
Others Total
: Note:
1.
Only
outstandings in respect of limts 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 /industry. T |
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