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RBI issues guidelines for financing margin trading

The Reserve Bank of India on Saturday said banks should maintain a minimum margin of 40 per cent on funds lent while extending finance to stockbrokers for margin trading.

The banks should put in place appropriate systems for monitoring the margin (40 per cent) and if the stockbroker/client fails to meet the margin calls, the lending bank should liquidate the collateral/shares purchased immediately and adjust the loans, RBI said in its circular to all commercial banks in Bombay on Saturday.

Earlier on September 18, the RBI-Sebi technical committee decided to permit banks to extend finance to stockbrokers for margin trading within the overall ceiling of five per cent prescribed for exposure of banks to capital market.

The committee has said banks may provide finance to brokers for margin trading in actively trading scrips forming part of the NSE Nifty and the BSE Sensex.

RBI in its revised guidelines for bank financing of equities and investment in shares has asked the bank boards to come out with necessary safeguards to ensure that no 'nexus' develops between the inter-connected stock-broking entities/stockbrokers and banks in respect of margin trading.

RBI said margin trading should be spread out by a bank among a reasonable number of stockbrokers and stock-broking entities. Shares to be purchased should be in dematerialised mode, under pledge to the lending bank.

Stockbrokers, availing of margin trading facilities from a bank should be prohibited from lending, directly or indirectly, to their own connected entities, relatives or business associates or those of the promoters/directors of the bank through this facility, the apex bank said.

Banks have also to put in place appropriate systems to ensure end-use of funds lent under margin trading, RBI added.

RBI has asked the banks to disclose the total finance extended for margin trading in the 'notes on account' to their balance sheets.

The guidelines would be valid for a period of 60 days (upto November 22, 2001). The working of the guidelines would be reviewed in the light of experience gained and fresh instructions would be issued thereafter.

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