Advances to individuals
As per RBI guidelines, Banks may grant advances against the security of shares, debentures or bonds to individuals subject to the following conditions:
(i) Purpose of the Loan : Loan against shares, debentures and bonds may be granted to individuals to meet contingencies and personal needs or for subscribing to new or rights issues of shares / debentures / bonds or for purchase in the secondary market, against the security of shares / debentures / bonds held by the individual.
(ii) Amount of advance : Loans against the security of shares, debentures and bonds should not exceed the limit of Rupees ten lakhs per individual if the securities are held in physical form and Rupees twenty lakhs per individual if the securities are held in dematerialised form.
(iii) Margin : Banks should maintain a minimum margin of 50 percent of the market value of equity shares / convertible debentures held in physical form. In the case of shares / convertible debentures held in dematerialised form, a minimum margin of 25 percent should be maintained. These are minimum margin stipulations and banks may stipulate higher margins for shares whether held in physical form or dematerialised form. The margin requirements for advances against preference shares / non-convertible debentures and bonds may be determined by the banks themselves.
(iv) Lending Policy: Each bank should formulate a Loan Policy for grant of advances to individuals against shares / debentures / bonds keeping in view the RBI guidelines.
Banks should obtain a declaration from the borrower indicating the extent of loans availed of by him from other banks as input for credit evaluation.
Advances to Individuals against shares to Joint holders or third party beneficiaries
While granting advances against Shares held in joint names to joint holders or third party beneficiaries, banks should be circumspect and ensure that the objective of the regulation is not defeated by granting advances to other joint holders or third party beneficiaries to circumvent the above limits placed on loans/advances against shares and other securities.
Financing of Initial Public Offerings (IPOs)
Banks may grant advances to individuals for subscribing to IPOs. Loans/advances to any individual from banking system against security of shares, convertible bonds, convertible debentures, units of equity oriented mutual funds and PSU bonds should not exceed the limit of Rs. 10 lakh for subscribing to IPOs. The corporate should not be extended credit by banks for investment in other companies’ IPOs. Similarly, banks should not provide finance to NBFCs for futher lending to individuals for IPOs.
Bank Finance to assist employees to Buy shares of their own companies
(i) Banks may extend finance to employees for purchasing shares of their own companies under Employees Stock Option Plan (ESOP)/ reserved by way of employees’ quota under IPO to the extent of 90% of the purchase price of the shares or Rs. 20.00 lakh, whichever is lower. Banks are not allowed to extend advances including advances to their employees/ Employees’ Trusts set up by them for the purpose of purchasing their own banks’ share under ESOPs/IPOs or from the secondary market. This prohibition will apply irrespective of whether the advances are secured or unsecured.
(ii) Banks should obtain declaration from the borrower indicating the details of the loan/advances availed against shares and other securities specified above, from any other bank/s in order to ensure compliance with the ceilings prescribed for the purpose.
(iii) Follow – on Public Offers (FPOs) will also be included under IPO.
Advances to other borrowers against shares / debentures / bonds
(i) The question of granting advances against Primary Security* of shares and debenture including promoters’ shares to industrial, corporate or other borrowers should not normally arise. However, such securities can be accepted as collateral for secured loans granted as working capital or for other productive purposes from borrowers other than NBFCs. In such cases, banks should accept shares only in dematerialised form. Banks may accept shares of promoters only in dematerialised form wherever demat facility is available.
(ii) In the course of setting up of new projects or expansion of existing business or for the purpose of raising additional working capital required by units other than NBFCs, there may be situations where such borrowers are not able to find the required funds towards margin, pending mobilisation of long term resources. In such cases, there would be no objection to the banks obtaining collateral security of shares and debentures by way of margin. Such arrangements would be of a temporary nature and may not be continued beyond a period of one year. Banks have to satisfy themselves regarding the capacity of the borrower to raise the required funds and to repay the advance within the stipulated period.
* Primary security – the asset created out of the credit facility extended to the borrower.
General guidelines applicable to advances against shares / debentures / bonds
(i) Statutory provisions regarding the grant of advances against shares contained in Sections 19(2) and (3) and 20(1) (a) of the Banking Regulation Act 1949 should be strictly observed. Shares held in dematerialised form should also be included for the purpose of determining the limits under Section 19(2) and 19(3) ibid.
(ii) Banks should be concerned with what the advances are for, rather than what the advances are against. While considering grant of advances against shares / debentures banks must follow the normal procedures for the sanction, appraisal and post sanction follow-up.
(iii) Advances against the primary security of shares / debentures / bonds should be kept distinct and separate and not combined with any other advance.
(iv) Banks should satisfy themselves about the marketability of the shares / debentures and the networth and working of the company whose shares / debentures / bonds are offered as security.
(v) Shares / debentures / bonds should be valued at prevailing market prices when they are lodged as security for advances.
(vi) Banks should exercise particular care when advances are sought against large blocks of shares by a borrower or a group of borrowers. It should be ensured that advances against shares are not used to enable the borrower to acquire or retain a controlling interest in the company / companies or to facilitate or retain inter-corporate investments.
(vii) No advance against partly paid shares shall be granted.
(viii) No loans to be granted to partnership / proprietorship concerns against the primary security of shares and debentures.
(ix) Whenever the limit/limits of advances granted to a borrower exceeds Rupees ten lakhs, it should be ensured that the said shares / debentures / bonds are transferred in the bank’s name and that the bank has exclusive and unconditional voting rights in respect of such shares. For this purpose the aggregate of limits against shares / debentures / bonds granted by a bank at all its offices to a single borrower should be taken into account. Where securities are held in dematerialised form, the requirement relating to transfer of shares in bank’s name will not apply and banks may take their own decision in this regard. Banks should, however, avail of the facility provided in the depository system for pledging securities held in dematerialised form under which the securities pledged by the borrower 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 shares and debentures get transferred in the bank’s name immediately.
(x) Banks may take their own decision in regard to exercise of voting rights and may prescribe procedures for this purpose.
(xi) Banks should ensure that the scrips lodged with them as security are not stolen / duplicate / fake / benami. Any irregularities coming to their notice should be immediately reported to RBI.
(xii) The Boards of Directors may decide the appropriate level of authority for sanction of advances against shares / debentures. They may also frame internal guidelines and safeguards for grant of such advances.
(xiii) Banks operating in India should not be a party to transactions such as making advances or issuing back-up guarantees favouring other banks for extending credit to clients of Indian nationality / origin by some of their overseas branches, to enable the borrowers to make investments in shares and debentures / bonds of Indian companies.
(xiv) A uniform margin of 50% shall be applied on all advances against shares/financing of IPOs/issue of Guarantees. A minimum cash margin of 25% (within margin of 50%) shall be maintained in respect of guarantees issued by banks for capital market operations. These margin requirements will also be applicable in respect of bank finance to stock brokers by way of temporary overdrafts for DVP transactions.
Guidelines regarding Advances to Share and Stock Brokers/ Commodity Brokers, Bank Finance for Market Makers, Bank Loans for Financing Promoters Contributio, Advances against Units of Mutual Funds, Margin Trading, Financing for Acquisition of Equity in Overseas Companies are given separately.