Bank Finance for Market Makers :
Banks may provide need based finance to meet the genuine credit requirements of approved Market Makers. For this purpose, they should lay down appropriate norms for financing them including exposure limits, method of valuation, etc. They should also follow the guidelines given below:
a) Market Makers approved by stock exchange would only be eligible for grant of advances by scheduled commercial banks.
b) Market Making may be for equity as well as for debt securities including State and Central Government securities.
c) A uniform margin of 50 per cent shall be applied on all advances / financing of IPOs / issue of guarantees on behalf of market makers. A minimum cash margin of 25 per cent (within the margin of 50%) shall be maintained in respect of guarantees issued by banks for capital market operations.
d) Banks may accept, as collateral for the advances to the Market Makers, scrips other than the scrips in which the market making operations are undertaken.
e) Banks should ensure that advances provided for Market Making are not diverted for investment in shares other than the scrip earmarked for Market Making purpose. For this purpose, a suitable follow-up and monitoring mechanism must be evolved.
f) The ceiling of Rupees ten lakhs / Rupees twenty lakhs for advances against shares/debentures to individuals will not be applicable in the case of Market Makers.
Each bank should lay down a detailed loan policy for granting advances to Stock Brokers and Market Makers and also a policy for grant of guarantees on
behalf of brokers which should include, interalia, the following:
Purpose and use of such advances / guarantees.
Pricing of such advances.
Control features that specifically recognise the unique characteristics and risks of such financing.
Method of valuation of collateral.
Frequency of valuation of shares and other securities taken as collateral.
Frequency of valuation of shares may at least be once in a quarter.
Guidelines for transfer of shares in bank’s name.
Maximum exposure for individual credits (within the RBI prescribed prudential Single Borrower Limit). The Board may also consider laying down a limit on the aggregate exposure of the bank to this sector.
The aggregate portfolio, its quality and performance should be reviewed and put up at least on a half-yearly basis to the Board.
Advances to Individuals against shares to joint holders or third party beneficiaries While granting advances against Shares held in joint names to joint holders or third party beneficiaries, banks should ensure that no advances to other joint holders or third party beneficiaries is granted to circumvent the above limits placed on loans/advances against shares and other securities.