New RBI rule has Indian stock market worried

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New RBI rule has Indian stock market worried

The RBI has announced new rules about the extent to which banks can take exposure to the capital markets. This news may have the Indian stock market worried.

According to reports, the Capital Market Exposure (CME) would include investments in shares, convertible debts, equity MFs as well as advances against shares and convertible bonds.

The CME would also include exposure to venture capital funds and intra-day exposures. A uniform margin of 50% is to be given on all advances for IPOs/ Guarantees of CME. The banks' boards have to evolve a policy to fix intra-day limits for brokers where the maximum limit sanctioned forms a part of banks' CME.

Banks with sound risk management systems may seek higher exposure limits from RBI. The new rules on banks' capital market exposures are to come into effect from Jan 1, 2007.
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RBI caps banks’ capital mkt exposure to 40% of net

RBI caps banks’ capital mkt exposure to 40% of net

MUMBAI: The Reserve Bank of India has come out with new capital market exposure for banks, which will come into force from April ’07. While RBI has reiterated the stringent guidelines outlined in its draft proposals, it has said banks having sound internal controls and robust risk management systems can approach the Reserve Bank for higher limits.

In terms of the new guidelines the exposure of a bank to the capital market cannot exceed 40% of its net worth as on March 31 of the previous year.

Within this overall ceiling, the bank’s direct investment in shares, convertible bonds/debentures, units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) should not exceed 20% of its net worth.

On a consolidated basis — which included both fund and non-fund exposures — the total exposure cannot exceed 40% of net worth as on March 31 of the previous year. Within this overall ceiling, the aggregate direct exposure by way of the consolidated bank’s investment in shares, convertible bonds/ debentures, units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) (both registered and unregistered) should not exceed 20% of its consolidated net worth.

RBI has said each bank should appraoch its board and evolve a policy for fixing intra-day limits and put in place an appropriate system to monitor such limits, on an ongoing basis. The position will be reviewed after an year.

Loans against security of shares and other financial instruments to individuals from the banking system cannot exceed the limit of Rs 10 lakh per individual if the securities are held in physical form and Rs 20 lakh per individual if the securities are held in demat form.

For IPO finance, all banks put together cannot lend more than Rs 10 lakh to any individual for subscribing to IPOs. Banks may extend finance to employees for purchasing shares of their own companies under ESOP to the extent of 90% of the purchase price of the shares or Rs 20 lakh, whichever is lower.

These instructions, however, will not be applicable to banks’ extending financial assistance to their own employees for acquisition of shares under ESOPs/IPOs.Banks have also been asked to obtain a declaration from the borrower indicating the details of the loans/advances availed against shares and other securities specified above, from any other banks in order to ensure compliance with the ceilings prescribed for the purpose.
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