The Reserve Bank of India (RBI) has asked banks to stay away from arbitrage trading on stock exchanges. | |
| "Banks should not undertake arbitrage operations themselves or extend credit facilities directly or indirectly to brokers for arbitrage operations in stock exchanges," RBI said in its master circular on exposure norms that banks are required to follow. |
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| Banks have been told to ensure that no sale transaction is undertaken without actually holding shares in their investment accounts. |
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| The central bank has also stated that the decision in regard to direct investment in shares, convertible bonds and debentures should be taken by an investment committee set up by respective bank's board. |
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| The RBI has said the investment committee should be held accountable for investments made in equity shares, but did not elaborate further. |
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| Loans sanctioned to corporates against security of shares for meeting promoters' contribution to new companies will also be treated as bank's exposure to the capital market. |
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| RBI has capped banks' exposure to capital market, both fund based and non-fund based, at 5 per cent of a bank's total outstanding advances as on March 31 of the previous year. |
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| Such loans to companies will also be subject to individual/group of borrowers exposure norms as well as the statutory limit on shareholding in companies. |
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| In terms of Section 19(2) of the Banking Regulation Act, 1949, no banking company can hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30 per cent of the paid-up share capital of that company or 30 per cent of its own paid-up share capital and reserves. |
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| Banks have been permitted to sanction bridge loans to companies for a period not exceeding a year against expected equity flows/issues. Such loans are also required to be included within the 5 per cent ceiling on capital market exposure. |
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| The 5 per cent ceiling prescribed for investment in shares would apply to total exposure, both fund- and nonfund-based. Within this overall ceiling, banks' investment in shares, convertible bonds and debentures, units of equity-oriented mutual funds and all exposures to venture capital funds cannot exceed 20 per cent of their net worth. The banks are required to adhere to this ceiling on an ongoing basis. |
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