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RBI rules against advances for badla transactions

The Reserve Bank of India has issued a master circular containing guidelines relating to grant of advances against shares, debentures, units and public sector bonds by commercial banks to individuals, stock brokers and market makers.

The new circular, which supersedes all previous instructions issued by the apex bank with regard to lending against securities, reiterates the ban on granting advances to stock brokers to finance badla transactions.

The RBI has continued its lenient policy on norms governing lending against dematerialised securities. The limit on advances to individuals against demat securities is Rs 2 million as against Rs 1 million for securities in physical form. Also, the minimum margin to be maintained is stipulated at 25 per cent as compared to 50 per cent for physical shares.

The RBI has further stipulated that in case of demat shares, banks can avail of the stock pledging facility and the shares need not be transferred in the bank's name regardless of the holding period. Brokers are free to substitute the shares pledged by them and in case of default, the bank can exercise the option and get the shares transferred in its name.

Under the pledging system, the pledged securities held in demat form 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 securities get transferred in the bank's name immediately, it stated.

On the lending policy of the banks, the circular states that the banks should insist on disclosures from borrowers indicating extent of loans availed by him from other banks as an input for credit evaluation. It is necessary to ensure that such accomodation is not obtained from different banks against shares of a single company or a group of companies. In this regard, banks should lay down a limit on aggregate advances.

The central bank has also emphasised that banks should be concerned with what the advances are for rather than what the advances are against.

The circular says that need-based overdraft facilities / line of credit against shares and debentures held as stock-in-trade be provided to brokers. Large-scale investment in shares and debentures on own account by brokers on bank finance should be discouraged.

Also, the advances should be given to only those brokers who fulfil the capital adequacy norms prescribed by the Securities and Exchange Board of India and stock exchanges.

On working capital facilities to brokers, the circular states that such financing should be made available to finance cash flow gap between delivery and payment for transactions undertaken on ''behalf of the FIIs, FIs, mutual funds and banks''.

On bank finance to market makers, the circular says that commercial banks should lay down appropriate norms like exposure limits and methods of valuation. Market makers may not only be for equity but also debt securities including state and central government securities, the circular adds.

For advances to market makers, banks have been allowed to accept as collateral, scrips other than those in which the market making operations are underataken and also bonds and Unit Trust of India units. However, banks have been cautioned on advances being diverted towards investment in scrips other than the one earmarked for market making purpose.

Non-banking finance companies have not been allowed to borrow against securities, though the RBI has no reservations on banks extending credit to other corporate and industrial borrowers against shares, debentures including promoter's shares.

To prevent bank loans being used for takeover purposes, the RBI has said that advances should not be granted for such purposes.

The RBI has stated that loans granted to corporates for meeting Promoters' contribution should be treated as bank's investment in shares and would thus come under the ceiling of five per cent of the incremental deposits of the previous year prescribed for investment in securities.

In case of units of mutual funds including Unit-64 scheme of UTI, advances should not be granted for subscribing to or boosting up the sales of another scheme of the mutual fund or purchasing securities.

The RBI has stipulated that banks should submit details of advances granted by them against shares and debentures as on the last reporting Friday of each quarter.

UNI