12 may 2001

banks barred from arbitrage operations
mumbai: the country’s apex bank, the reserve bank of india, has categorically banned banks from undertaking short-selling or arbitrage operations. while doing so the bank has, however, relented in its final guidelines and stated that loans against shares to individuals and corporates where the end-use is other than stock broking activities, will not be treated as exposure to capital markets.

earlier the proposal was to treat all loans irrespective of the purpose, where shares are taken as collateral, as exposure to the market.

the final norms also require banks to increase margins on loans against shares to a uniform 40 per cent for loans against dematerialised shares as well as shares held in the physical form.

the final guidelines also incorporate the earlier proposal that each bank should fix within the overall ceiling of five per cent a sub-ceiling for advances to all the stock-brokers and to individual stockbroking entities and interconnected companies.

as a measure of caution to minimise the nexus between the market operators and bankers, the revised guidelines call for a clear separation of decision making in regard to investment in shares and advances against shares which will be done by the investment committee, which in turn will be set up by the board.

the surveillance and monitoring of exposure to capital markets will be done by the separate and independent audit committee of the board which will review the total exposure of the bank to the capital market in all forms.