RBI Norms on banks' IPO funding

The Reserve Bank of India’s (RBI) move to curb banks’ exposure to the capital markets has come as a big jolt to banks and non-banking finance companies (NBFCs) extending loans against security of shares for subscribing to initial public offers (IPOs).
Foreign banks and NBFCs, who have traditionally been the most active players in financing IPOs are expected to be badly hit, with RBI restricting banks’ capacity to extend loans against shares to a single borrower for subscribing to IPOs to Rs 10 lakh as against Rs 20 lakh permitted earlier. Sundeep Bhandari, regional head, global markets, South Asia, Standard Chartered Bank said, “We have experienced an increase in corporate borrowers availing loans against shares for funding their overseas expansion plans. If the cap on the loans against shares is extended to corporates, our business would be affected.”


The cap of 40% of the networth on the banks’ consolidated exposure to the capital markets is expected to curtail the business expansion plans for many banks, which have been aggressively extending funds to consumers through their subsidiaries. "These guidelines are expected to address the loopholes of the system, which has been exploited by many banks routing funds to sensitive sectors through its subsidiaries," said a senior bank official.
Nicholas Winsor, head personal financial services, HSBC said, “The proposed cap on IPO funding is aimed at controlling the overheating of the domestic IPO market. We have been active in the business of collecting the subscription for IPOs, rather than actual funding of public offers.” Banks have been asked to fix intra-day limits for brokers, while monitoring their limits on an ongoing basis. Broking houses and large corporate houses have been excessively relying on banks and NBFCs for financing equity linked instruments. Fixing of intra-day limits is expected to stifle broking firms’ access to bank funds.
V Vaidyanathan, retail head, ICICI Bank said, “IPO financing constitutes a small fraction of our total banking business. Hence, the impact of the draft guidelines on banks’ exposure to capital markets would not be very huge to our total banking business.”
ICICI Bank has the highest absolute exposure to the capital markets, with its total capital market exposure pegged at Rs 2,819 crore as on March 31, 2005. RBI has also stipulated a uniform margin of 50% on all financing of IPOs/issue of guarantees for capital market operations, which would in turn impact margin financing in the stock markets.
Meanwhile, the public sector banks who have been conservative players in capital market exposure, seem to be unruffled by the revised guidelines of capital market exposure. However, the tightening measures of RBI and a series of cases of benami accounts have compelled banks to revisit their internal controls for prudent risk management.