No 'safety net' to public issues, RBI tells banks

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The Reserve Bank of India, RBI has told banks and their subsidiaries not to offer "safety net" facilities to public issues, reports The Hindu Business Line.

A "safety net" implies commitments to buy shares from the original investors at any time during a stipulated period at a price determined at the time of issue, irrespective of the prevailing market price.

In a circular issued on Tuesday, the central bank said these schemes were often offered without any request from the company. There is also no income for the banks to correspond with the risk of loss built into these schemes, as the investor will take recourse to the safety net only when the market value of the shares falls below the pre-determined price. "Banks/their subsidiaries have, therefore, been advised that they should refrain from offering such `Safety Net' facilities by whatever name they are called," said the RBI.

In cases where the issuers request the banks or their subsidiaries to provide the comfort to small investors, such arrangements should not include commitments to buy the securities at pre-determined prices.

"Prices should be determined from time to time, keeping in view the prevailing stock market prices for the securities. Commitments should also be limited to a moderate proportion of the total issue in terms of the amount and should not exceed 20% of the owned funds of the banks or their subsidiaries," the circular said.

The RBI has also mandated "that the consolidated bank's aggregate exposure to capital markets should not exceed 2% of its total on-balance-sheet assets."

Banks can provide financial assistance to employees to buy shares of their own companies (employee stock option plans) to the extent of 90% of the purchase price of the shares or Rs 20 lakh whichever is lower.

However, banks cannot offer loans to their employees or employee trusts set up by them, for purchasing the banks' own shares under ESOP/IPO or from the secondary market, said the RBI.