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RBI-SEBI panel cautions banks on IPO financing

The five-member informal working group of Reserve Bank of India, or RBI, and the Securities and Exchange Board of India, or SEBI, to review the process of bank lending against shares has said that it was imperative that banks arrive at a sound and reasoned judgement on initial public offering, or IPO, financing.

The group said the liberal funding of IPOs can lead to over subscription and in turn to high premium when listed. On the other hand, poor opening of shares under IPOs can lead to a situation where banks may face problems in realisation of dues if the borrowers are not able to offload the shares allotted to them.

Therefore, it is necessary that banks arrive at a sound judgement on IPO financing.

Finance Minister Yashwant Sinha said that banks usually offer credit facility to their high net worth customers for the purpose of subscribing to IPOs by means of clean loans and overdrafts, while some other banks make a joint application as a second allottee.

The group has recommended that the quality of shares accepted by banks for such financing should be based on the criteria as liquidity, average trading volume and market depth as against the practice of accepting listed and quoted shares.

The groups said for advances against securities which are in compulsory demat trading, only demat shares should be accepted. Higher margins for advances against demat shares as well as for volatile shares may be considered.

The share portfolios should be marked to market frequently. Since locked in shares cannot be disposed off they should not be accepted as security.

The letter said the working group has suggested that since there was some doubt, as to whether existing guidelines will cover such types of advances, it may be worthwhile to reiterate the guidelines for financing of IPOs including stipulation of suitable margin requirements for financing of IPOs, fomulation of an appropriate lending policy, prescription of an individual limit of Rs 2 million and banning of corporates from accessing this facility .

UNI

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