CHENNAI: New guidelines formulated by the Reserve Bank of India in respect of capital market exposure of banks will come into effect from January 1, 2007.

The RBI on Friday issued detailed draft guidelines for revision of capital market exposure norms along the lines indicated by the RBI Governor on October 25, 2005, in his Mid-Term Review of the Annual Policy Statement for 2005-06. Against the existing exposure limit of five per cent of total outstanding advances (including commercial paper), the proposed norms seek to link the ceiling to the net worth of banks.

In terms of the revised draft guidelines (responses to which have been invited from bankers by December 1, 2006), the aggregate exposure of a bank on a "solo basis" to the capital market in all forms (both fund-based and non-fund-based) should not exceed 40 per cent of its net worth (defined as paid-up equity capital plus free reserves, including share premium plus credit balance in the profit and loss account, less accumulated losses, debit balance in the P & L account, intangible assets and revaluation reserves).

The aggregate exposure of a consolidated bank to the capital market (both fund-based and non-fund-based) should not exceed 40 per cent of its consolidated net worth. Within this overall ceiling, the aggregate direct exposure by way of investment in shares, convertible bonds/debentures, units of equity-oriented mutual funds and all exposures to venture capital funds (both registered and unregistered) should not exceed 20 per cent of its consolidated net worth.

Loans/advances to any single borrower "from the banking system" against security of shares, convertible bonds, convertible debentures, units of equity-oriented mutual funds and PSU bonds should not exceed Rs. 10 lakh for subscribing to initial public offerings (IPOs), according to the draft. Advances other than for IPOs to any single borrower against the security of shares and the like held in physical and demat form should not exceed Rs. 10 lakh and Rs. 20 lakh, respectively.

A uniform margin of 50 per cent shall be applied on all advances/financing of IPOs/issue of guarantees for capital market operations. A minimum cash margin of 25 per cent (within the margin of 50 per cent) shall be maintained in respect of guarantees issued by banks to capital market operations.

The RBI draft says bank boards should evolve a policy for fixing intra-day limits for brokers and put in place a system to monitor the limits. The maximum intra-day exposure, sanctioned limit or outstanding, whichever is higher, should form part of the banks' exposure to capital markets.

"Banks having sound internal controls and robust risk management systems" can approach the RBI for higher limits.

Items excluded from capital market exposure limits include banks' investments in other banks' instruments, and convertible debentures and convertible bonds issued by NSDL, CDSL, NSCCL, NSE, CCIL, CIBIL, MCX, NCDEX and NMCEIL. On listing, these exposures would form part of the capital market exposure.

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