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Bank Financing of Equities and Investments in Shares
DBOD.
No. Dir. BC. 63 - 13.07.05 - dated 29th January 2003
As
you are aware, revised guidelines on bank financing of equities and investments
in shares were issued vide circular DBOD.No.BP.BC.119/ 21.04.137/ 2000-2001
dated 11th May 2001. These guidelines were issued to address the
risks to banks that could arise on account of inadequacy of margins or the
inability of borrowers to meet their repayment/ interest obligations because of
volatility in share prices or other related reasons. These guidelines
prescribed, among others, the ceiling on overall exposure to capital market, the
ceiling on direct investment in shares etc, prudential limits on advances to
individuals, financing of initial public offerings, margins on advances against
shares/ issue of guarantees. Though banks are free to provide credit facilities
to stockbrokers and market makers on the basis of their commercial judgment
within the policy framework approved by the Boards, banks were advised to put in
place appropriate sub-ceilings, within the overall ceiling prescribed for
capital market exposures, on exposure to all stockbrokers and market makers, and
also to any single stock broking entity including its associates/ interconnected
companies. The CMDs/ CEOs of banks were advised vide the above circular to
bestow their personal attention while implementing the revised guidelines
particularly with reference to the putting in place of appropriate risk
management and internal control systems as enunciated in the revised guidelines.
2.
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 vide circular dated 11th May 2001 referred to
above, and identify the gaps in compliance with the above guidelines for
initiating appropriate steps immediately.
3.
Please acknowledge receipt.
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