Friday, August 21, 2015

Exposure Norms

                     

INTRODUCTION
RBI of India has advised the banks to fix exposure limits to specific industry or sectors and has prescribed regulatory limits on banks’ exposure to
·         single or group borrowers in India,
·         advances against shares, convertible debentures /bonds, units of equity-oriented mutual funds
·         investments in shares, convertible debentures /bonds, units of equity-oriented mutual funds
·         Venture Capital Funds (VCFs).

GUIDELINES

Credit Exposures to Single/Group Borrowers

Ceilings
The exposure limits would be 15% of Tier I and Tier II capital in case of a single borrower and 40% in the case of a borrower group.

Bank’s clearing exposure to a QCCP[Qualifying Central Counter party] will be kept out of the exposure ceiling of 15%. Clearing exposure would include trade exposure and default fund exposure. Other exposures to QCCPs such as loans, credit lines, investments in the capital of CCP, liquidity facilities, etc. will continue to be within the existing exposure ceiling of 15%. However, all exposures of a bank to a non-QCCP should be within this exposure ceiling of 15 %.

Credit exposure to a single borrower may exceed 15% by an additional 5% in case of infrastructure projects. Credit exposure to a group may exceed 40% by an additional 10%, in case of infrastructure projects.

In addition to the above concessions, banks may consider enhancement of the exposure to a borrower by further 5% subject to disclosures in the Annual Reports of the Bank.

           The exposure limit in respect of single borrower has been raised to 25% in respect of Oil Companies who have been issued non SLR Oil Bonds by Government of India. In addition to this, banks may consider enhancement of a further 5% of capital funds in exceptional cases.

The bank should make disclosures in the ‘Notes on account’ in their annual balance sheet in respect of the exposures where the bank had exceeded the prudential exposure limits during the year.

           Exposures to NBFCs
The exposure of a bank to a single NBFC / NBFC-AFC (Asset Financing Companies) should not exceed 10% / 15% respectively, of the bank's capital funds as per its last audited balance sheet. Banks may assume exposures up to 15%/20% respectively, where the excess exposure is used for onlending to infrastructure sector. Exposure of a bank to Infrastructure Finance Companies (IFCs) should not exceed 15%, which can be increased to 20% if the same is for onlending to infrastructure sector. Further, banks may also consider fixing internal limits to such exposures. Infusion of capital funds after the published balance sheet date may also be taken into account for reckoning capital funds. Banks should obtain an external auditor’s certificate and submit the same to RBI before reckoning the additions to capital funds.

           Lending under Consortium Arrangements
The exposure limits will also be applicable to lending under consortium arrangements.

            Bills discounted under Letter of Credit (LC)
Where the bills discounting/purchasing/negotiating bank and LC issuing bank are different entities, bills purchased/discounted/negotiated under LC not ‘under reserve’, will be treated as an exposure on the LC issuing bank. However, in cases where the two entities are part of the same bank, then the exposure should be taken on the third party/borrower. In the case of negotiations ‘under reserve’, the exposure should be treated as on the borrower.

             Disinvestment Programme of the Government of India
If any bank, exceeds the regulatory ceiling, due to banks’ financing of acquisition of PSU shares under disinvestment programmes, RBI will consider relaxation on a case by case basis, provided that the bank’s total exposure to the borrower and net of its exposure in this category, should be within the prudential exposure ceiling prescribed by RBI.

Exemptions

Rehabilitation of Sick/Weak Industrial Units
The exposure limits are not applicable to credit facilities granted to weak/sick industrial units under rehabilitation packages.

Food credit
Limits allocated directly by the RBI for food credit, will be exempt from the ceiling.

Guarantee by the Government of India
The exposure limit is not applicable where the dues are fully guaranteed by the Government of India.

Loans against Own Term Deposits
Facilities granted against the lien on bank’s own term deposits should not be reckoned for computing the exposure.

Exposure on NABARD
Exposure limit will not be applicable to Bank’s exposure on NABARD. The individual banks are free to determine the size of the exposure to NABARD. However, banks may note that there is no exemption from the prohibitions relating to investments in unrated non-SLR securities.


Definitions

Exposure
Exposure shall include credit exposure and investment exposure. The sanctioned limits or outstandings, whichever are higher, shall be reckoned for arriving at the exposure limit. However, in the case of fully drawn term loans, the outstanding may be reckoned as the exposure.

Measurement of Credit Exposure of Derivative Products
Banks shall compute their credit exposures, arising on account of the interest rate & foreign exchange derivative transactions and gold, using the 'Current Exposure Method', as detailed below. Banks may exclude 'sold options', provided the entire income is realised.

Bilateral netting of Mark-To-Market (MTM) cannot be permitted. Accordingly, banks should count their gross positive MTM value for the purposes of capital adequacy as well as for exposure norms.

            Current Exposure Method
(i)  The credit equivalent amount of a market related off-balance sheet transaction as per current exposure method is the sum of current credit exposure and potential future credit exposure of these contracts. Banks may exclude 'sold options', provided the entire income is realized.

(ii)  Current credit exposure is the sum of the positive mark-to-market value of these contracts.

(iii)  Potential future credit exposure is determined by multiplying the notional principal amount of each of these contracts by the relevant add-on factor indicated below.
CCF for market related off-balance sheet items
Residual Maturity
Credit conversion factors
Interest Rate Contracts
Exchange Rate Contracts & Gold
One year or less
0.50%
2.00%
Over one to five years
1.00%
10.00%
Over five years
3.00%
15.00%

(iv)   For contracts with multiple exchanges of principal, the add-on factors are to be multiplied by the number of remaining payments in the contract.

(v)  For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates. The residual maturity would be set equal to the time until the next reset date. However, in the case of interest rate contracts which have residual maturities of more than one year and meet the foregoing criteria, the CCF or "add-on factor" applicable shall be subject to a floor of 1.00 per cent.

(vi)  No potential future credit exposure would be calculated for single currency floating /floating interest rate swaps; the credit exposure on these contracts would be evaluated solely on the basis of their mark-to-market value.

(vii) Potential future exposures should be based on effective notional amounts. If the stated notional amount is leveraged or enhanced, banks must use the effective notional amount while determining the potential future exposure.

              Credit Exposure
Credit exposure comprises the following elements:

(a)       all types of funded and non-funded credit limits.
(b)     facilities extended by way of equipment leasing, hire purchase finance and factoring services.


Investment Exposure
a)   Investment exposure comprises the following elements:

(i)  investments in shares and debentures of companies.
(ii)  investment in PSU bonds
(iii) investments in Commercial Papers (CPs).

b)   Banks’ investments in debentures/ bonds / security receipts / pass-through certificates (PTCs) issued by an SC / RC as compensation will constitute exposure on the SC / RC. Banks will be allowed, in the initial years, to exceed the prudential exposure ceiling on a case-to-case basis.

c)   The investment made by the banks in bonds and debentures of corporates which are guaranteed by a PFI will be treated as an exposure by the bank on the PFI and not on the corporate.

d)    Guarantees issued by the PFI to the bonds of corporates will be treated as an exposure by the PFI to the corporates to the extent of 50 per cent, whereas the exposure of the bank on the PFI guaranteeing the corporate bond will be 100 per cent. The PFI before guaranteeing the bonds/debentures should, however, take into account the overall exposure of the guaranteed unit to the financial system.

Capital Funds
Capital funds will comprise Tier I and Tier II capital as per the accounts as on March 31 of the previous year. However, the infusion of capital under Tier I and Tier II, either through domestic or overseas issue, after the published balance sheet date will also be taken into account for determining the exposure ceiling.

Group
a)                  The concept of 'Group' and the task of identification of the borrowers belonging to specific industrial groups is left to the perception of the banks. The group may be decided on the basis of commonality of management and effective control. In so far as public sector undertakings are concerned, only single borrower exposure limit would be applicable.

b)         In the case of a split in the group, if the split is formalised the splinter groups will be regarded as separate groups. If banks and financial institutions have doubts about the bona fides of the split, a reference may be made to RBI for its final view.

Review
An annual review of the implementation of exposure management measures may be placed before the Board of Directors before the end of June.
Credit Exposure to Industry and certain Sectors

Internal Exposure Limits

Fixing of Sectoral Limits
Apart from limiting the exposures to a single or a Group of borrowers, banks may also consider fixing internal limits for aggregate commitments to specific sectors. The limits so fixed may be reviewed periodically and revised, as necessary.

Unhedged Foreign Currency Exposure of Corporates
Foreign currency loans should be extended on the basis of a well laid out policy on hedging. The policy may exclude:
           Where forex loans are extended to finance exports, banks may not insist on hedging as there are uncovered receivables to cover the loan amount.
           Where the forex loans are extended for meeting forex expenditure.

The policy should also cover unhedged foreign exchange exposure of all their clients. Further, for arriving at the aggregate unhedged foreign exchange exposure of clients, their exposure from all sources should be taken into account.

Banks which have large exposures (about US$25 million) should monitor and review the unhedged portion of the foreign currency exposures on a monthly basis, through a suitable reporting system. The review in case of SMEs should also be done on a monthly basis. In all other cases, it should be done on a quarterly basis.

In the case of consortium/multiple banking arrangements, the lead role in monitoring would be assumed by the consortium leader/bank having the largest exposure.

Banks are also advised to adhere to the instructions relating to information sharing among themselves.

Excessive risk taking by corporates could lead to severe distress and credit loss to their bankers. Banks are advised that, they should put in place a proper mechanism to evaluate the risks arising out of unhedged foreign currency exposure of corporates and price them in the credit risk premium while extending credit facilities to corporates. Banks may also consider stipulating a limit on unhedged position of corporates.

Exposure to Real Estate
(i)    Banks should frame board approved prudential norms regarding the ceiling on the total amount of real estate loans, single/group exposure limits, margins, security, repayment schedule and availability of supplementary finance.

(ii)  The exposure to entities for setting up SEZs or for acquisition of units in SEZs would be treated as exposure to commercial real estate for the purpose of risk weight and capital adequacy. Banks would, therefore, have to make provisions, as also assign appropriate risk weights for such exposures. The above exposure may be treated as exposure to Infrastructure sector only for the purpose of Exposure norms.

Exposure to Leasing, Hire Purchase and Factoring Services
Banks may undertake leasing, hire purchase and factoring activities departmentally. Where banks undertake these activities, their exposure to each of these activities should not exceed 10 per cent of total advances.

Exposure to Indian Joint Ventures/Wholly-owned Subsidiaries Abroad and Overseas Step-down Subsidiaries of Indian Corporates
Banks are allowed to extend credit/non-credit facilities to the above referred ventures. Banks are also permitted to provide, buyer's credit/acceptance finance to overseas parties for facilitating export of goods & services from India. The above exposure will be subject to a limit of 20% of banks’ unimpaired capital funds (Tier I and Tier II capital) and would be subject to the conditions laid down in the Master Circular on ‘Loans and Advances.

Banks’ Exposure to Capital Markets – Rationalisation of Norms
The prudential capital market exposure norms prescribed for banks have been rationalized in terms of base and coverage. The revised guidelines are as under:

Components of Capital Market Exposure (CME)
Banks' capital market exposures would include their direct and indirect exposures. The aggregate exposure of banks to capital markets in all forms would include the following:

i.         direct investment in equity shares, convertible bonds, convertible debentures and units of equity-oriented mutual funds the corpus of which is not exclusively invested in corporate debt;

ii.       advances against shares/bonds/debentures or other securities or on clean basis to individuals for investment in shares, convertible bonds, convertible debentures, and units of equity-oriented mutual funds;

iii.     advances for any other purposes where shares or convertible bonds or convertible debentures or units of equity oriented mutual funds are taken as primary security;

iv.     advances for any other purposes secured by the collateral security of shares or convertible bonds or convertible debentures or units of equity oriented mutual funds;

v.       secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers;

vi.     loans sanctioned to corporates against the security of shares / bonds/ debentures or other securities or on clean basis for meeting promoter’s contribution to the equity of new companies in anticipation of raising resources;

vii.   bridge loans to companies against expected equity flows/issues;

viii. underwriting commitments taken up by the banks in respect of primary issue of shares or convertible bonds or convertible debentures or units of equity oriented mutual funds.

ix.     financing to stockbrokers for margin trading;

x.       all exposures to Venture Capital Funds (both registered and unregistered).

xi.     Irrevocable Payment Commitments issued by custodian banks in favour of stock exchanges.

Limits on Banks’ Exposure to Capital Markets
Statutory limit on shareholding in companies
While granting any advance against shares, underwriting any issue of shares, or acquiring any shares on investment account or even in lieu of debt of any company, the statutory provisions of Section 19(2) of the Banking Regulation Act, 1949 should be strictly observed.

Regulatory Limit

A                   Solo Basis
The aggregate exposure of a bank to the capital markets in all forms should not exceed 40 per cent of its net worth, as on March 31 of the previous year. Within this ceiling, the bank’s direct investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds and Venture Capital Funds (VCFs) should not exceed 20 per cent of its net worth.

B                   Consolidated Basis
The aggregate exposure of a consolidated bank to capital markets should not exceed 40 per cent of its consolidated net worth as on March 31 of the previous year. Within this overall ceiling, the direct exposure by way of the consolidated bank’s investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds and Venture Capital Funds (VCFs) should not exceed 20 per cent of its consolidated net worth.

Note: A ‘consolidated bank' is defined as a group of entities, which include a licensed bank, which may or may not have subsidiaries.

The above-mentioned ceilings are the maximum permissible and a bank is free to adopt a lower ceiling, keeping in view its overall risk profile and corporate strategy.

If acquisition of equity shares on account of the restructuring proposal, results in exceeding Capital Market Exposure (CME) limit, the same will not be considered as a breach of regulatory limit. However, this will require reporting to RBI and disclosure in the Annual Financial Statements.

On account of banks financing acquisition of PSU shares under the Government of India disinvestment programmes, if any bank is likely to exceed the regulatory ceiling, RBI will consider requests for relaxation, subject to safeguards regarding margin, bank’s exposure to capital market, internal control and risk management systems, etc. However it is to be ensured that the bank’s exposure to capital market in all forms shall be within the regulatory ceiling limit even after the relaxation.

Definition of Net Worth
Paid-up capital
plus Free Reserves including Share Premium but excluding Revaluation Reserves
plus Investment Fluctuation Reserve
plus credit balance in Profit & Loss account,
less debit balance in Profit and Loss account
less Accumulated Losses and Intangible Assets.

No general or specific provisions should be included. Infusion of capital through equity shares, after the published balance sheet date, may be taken into account. Banks should however, obtain an external auditor’s certificate on completion of the augmentation and submit the same to the RBI.

Items excluded from Capital Market Exposure
The following items would be excluded from the aggregate exposure ceiling of 40 per cent of net worth and direct investment exposure ceiling of 20 per cent of net worth :

i.         Banks’ investments in own subsidiaries, joint ventures, sponsored Regional Rural Banks (RRBs) and investments in shares and convertible debentures, convertible bonds issued by institutions forming crucial financial infrastructure such as National Securities Depository Ltd. (NSDL), Central Depository Services (India) Ltd. (CDSL), National Securities Clearing Corporation Ltd. (NSCCL), National Stock Exchange (NSE), Clearing Corporation of India Ltd., (CCIL), a credit information company which has obtained Certificate of Registration from RBI and of which the bank is a member, Multi Commodity Exchange Ltd. (MCX), National Commodity and Derivatives Exchange Ltd. (NCDEX), National Multi-Commodity Exchange of India Ltd. (NMCEIL), National Collateral Management Services Ltd. (NCMSL), National Payments Corporation of India (NPCI) and United Stock Exchange of India Ltd. (USEIL) and other All India Financial Institutions. After listing, the exposures in excess of the original investment would form part of the Capital Market Exposure.

ii.         Tier I and Tier II debt instruments issued by other banks;

iii.     Investment in Certificate of Deposits (CDs) of other banks;

iv.     Preference Shares;

v.         Non-convertible debentures and non-convertible bonds;

vi.     Units of Mutual Funds under schemes where the corpus is invested exclusively in debt instruments;

vii.   Shares acquired by banks as a result of conversion of debt/overdue interest into equity under Corporate Debt Restructuring (CDR) mechanism;

viii   Term loans sanctioned to Indian promoters for acquisition of equity in overseas joint ventures / wholly owned subsidiaries under the refinance scheme of Export Import Bank of India (EXIM Bank).

ix.    Banks may exclude their own underwriting commitments and the commitments of their subsidiaries, through the book running process.

x.   Promoter’s shares in the SPV of an infrastructure project pledged to the lending bank of the project.

xi    banks exposure to brokers under the currency derivates segment

Computation of exposure
Loans/advances/guarantees issued for capital market operations would be reckoned with reference to sanctioned limits or outstanding, whichever is higher. In case of fully drawn term loans, banks may reckon the outstanding balance. Further, banks’ direct investment in shares, convertible bonds, convertible debentures and units of equity-oriented mutual funds would be calculated at their cost price.

As regards Irrevocable Payment Commitments (IPC) issued by custodian banks in favour of Stock Exchange, the computation of Capital Market Exposure would be as follows:

i.  The maximum risk to the banks issuing IPCs would be reckoned at 50%, on the assumption of downward price movement of the equities bought by FIIs/ Mutual Funds on the two successive days from the trade date (T), of 20% each with an additional margin of 10% for further downward movement.

ii.  Accordingly the potential risk on T+1 would be reckoned at 50% of the settlement amount and this amount would be reckoned as CME at the end of T+1 if margin payment / early pay in does not come in.

iii.  In case there is early pay in on T+1, there will be no Capital Market exposure.

iv.   In case margin is paid in cash on T+1, the CME would be reckoned at 50% of settlement price minus the margin paid. In case margin is paid on T+1 by way of permitted securities to FIIs / Mutual Funds, the CME would be reckoned at 50% of settlement price minus the margin paid plus haircut prescribed by the Exchange on the securities tendered towards margin payment.

v. The IPC will be treated as a financial guarantee with a Credit Conversion Factor (CCF) of 100. However, capital will have to be maintained only on exposure which is reckoned as CME. Thus capital is to be maintained on the amount taken for CME and the risk weight would be 125% thereon. The measures prescribed for IPCs will be applicable to all IPCs issued by custodian banks.

Intra-day Exposures
It has been decided that the Board of each bank should evolve a policy for fixing intra-day limits and put in place an appropriate system to monitor such limits, on an ongoing basis.

Enhancement in limits
Banks having sound internal controls and robust risk management systems can approach the RBI for higher limits.

Prudential Limits on Intra-Group Exposure
To contain concentration and contagion risks arising out of ITEs, certain quantitative limits on financial ITEs and prudential measures for the non-financial ITEs have been imposed as under:

i        Exposure should include credit exposure and investment exposure. However, exposure on account of equity and other regulatory capital instruments should be excluded.
ii      Banks should adhere to the following intra-group exposure limits :

a.       Single Group Entity Exposure ( on  Paid-up Capital and Reserves)

i.       5% in case of non-financial companies and unregulated financial services companies
ii.    10% in case of regulated financial services companies

b. Aggregate Group Exposure

i.   10% in case of all non-financial companies and unregulated financial services companies taken together
ii.   20% in case of the group.
iii. Intra-group Exposures Exempted from the Prudential Limits

The following intra-group exposures would be excluded from the stipulated limits :
a.                 Banks' exposures to other banks / financial institutions in the group in the form of equity and other capital instruments are exempted from the stipulated limits, and the extant instructions will continue to apply, subject to the prohibitions stipulated at iv below.
b.                Inter-bank exposures among banks in the group operating in India. However, prudential limits in respect of call / notice money market for scheduled commercial banks would continue to be governed by extant instructions on Call / Notice Money Market Operations.

c.                 Letters of Comfort issued by parent bank in favour of overseas group entities to meet regulatory requirements.
iv. Prohibited Exposures

Wherever a bank has been set-up under a NOFHC ( non-operative financial holding company) structure,
a.                 Bank cannot take any credit or investments exposure on NOFHC, its Promoters / Promoter Group entities or individuals associated with the Promoter Group.

b.                Bank cannot invest in the equity / debt capital instruments of any financial entities under the NOFHC.  



Financing of equities and investments in shares

Advances against shares to individuals
Loans against security of shares, convertible bonds, convertible debentures and units of equity oriented mutual funds to individuals from the banking system should not exceed the limit of Rs.10 lakh per individual if the securities are held in physical form and Rs. 20 lakhs per individual if the securities are held in demat form. Such finance should be reckoned as an exposure to capital market..
Financing of Initial Public Offerings (IPOs)
Banks may grant advances to individuals for subscribing to IPOs. Loans/advances to any individual from the banking system against security of shares, convertible bonds, convertible debentures, units of equity oriented mutual funds and PSU bonds should not exceed the limit of Rs.10 lakh. Such finance should be reckoned as an exposure to capital market.

Bank finance to assist employees to buy shares of their own companies
Banks may finance to employees for purchasing shares of their own companies under Employees Stock Option Plan(ESOP) upto 90% of the purchase price or Rs.20 lakh, whichever is lower. Such finance would be treated as an exposure to capital market. These instructions will not be applicable for extending financial assistance by banks to their own employees.

Banks should obtain a declaration from the borrower indicating the details of facilities availed against specified securities, from any other bank/s in order to ensure compliance with the prescribed ceilings.

 Follow-on Public Offers (FPOs) will also be included under IPO.


Advances against shares to Stock Brokers & Market Makers
Banks are free to provide credit facilities to stockbrokers and market makers. However, in order to avoid any nexus between stock broking entities and banks, the bank should fix, a sub-ceiling for total advances to
i.                     all the stockbrokers and market makers; and
ii.                   to any single stock broking entity, including its associates/ inter-connected companies.

Further, banks should not extend credit facilities directly or indirectly to stockbrokers for arbitrage operations in Stock Exchanges.

Bank financing 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 advances are not granted to other joint holders or third party beneficiaries.

Advances against units of mutual funds
While granting advances against units of mutual funds, the banks should adhere to the following guidelines:

i)                    The units should be listed in the stock exchanges or repurchase facility should be available.

ii)                  The units should have completed the minimum stipulated lock-in-period.

iii)                The amount of advances should be linked to the Net Asset Value (NAV) / repurchase price or the market value, whichever is less.

iv)                Advances against units of mutual funds would attract the quantum and margin requirements as applicable to advances against shares and debentures. In case the security is exclusively debt-oriented mutual funds, banks will be free to decide on their own quantum and margin requirements.

v)                  Advances should not be granted for subscribing to another scheme of a mutual fund or for the purchase of shares/ debentures/ bonds etc.

Bank Loans for Financing Promoters' Contributions
These loans will also be subject to exposure norms as well as the statutory limit on shareholding in companies.

Margin Trading
             Banks may extend finance to stockbrokers for margin trading. Each bank should formulate detailed guidelines subject to the following parameters:

(i)                 The finance should be within the overall ceiling of prescribed 40% of net worth .

(ii)               A minimum margin of 50 per cent should be maintained on the funds lent for margin trading.

(iii)             The shares purchased with margin trading should be in dematerialised mode under pledge to the lending bank.

(iv)             The bank’s should to ensure that no "nexus" develops between inter-connected stock broking entities/ stockbrokers and the bank. It should be spread out among a reasonable number of entities.

The Audit Committee of the Board should periodically monitor the bank’s exposure to margin trading and ensure that the guidelines are complied with. Banks should disclose the total finance extended for margin trading in the "Notes on Account" to their Balance Sheet.

Cross holding of capital among banks / financial institutions
(i) Banks' investment in the following instruments, issued by other banks and eligible for capital status, should not exceed 10% of the investing bank's capital funds (Tier I plus Tier II):

a.                   Equity shares;
b.                  Preference shares eligible for capital status;
c.                   Subordinated debt instruments;
d.                  Hybrid debt capital instruments; and
e.                   Any other instrument approved as in the nature of capital.

(ii)               Banks should not acquire any fresh stake in a bank's equity shares, if by such acquisition, the investing bank's holding exceeds 5% of the investee bank's equity capital.

(iii)    It is clarified that a bank’s equity holdings in another bank held under provisions of a Statute will be outside the purview of the ceiling prescribed above.

Banks’ investments in the equity capital of subsidiaries are at present deducted from their Tier I capital for capital adequacy purposes. Investments in the instruments issued by banks which are not deducted from Tier I capital of the investing bank, will attract 100% risk weight for credit risk for capital adequacy purposes.


'Safety Net' Schemes for Public Issues of Shares, Debentures, etc.

‘Safety Net' Schemes
Some banks/their subsidiaries provide buy-back facilities under the name of ‘Safety Net’ Schemes under which, large exposures are assumed by way of commitments to buy back the relative securities from the original investors during a stipulated period at a pre-determined price, irrespective of the prevailing market price. Banks/their subsidiaries have been advised to refrain from offering such ‘Safety Net’ facilities by whatever name it is called.

Provision of buy back facilities
In some cases, the issuers provide buy-back facilities to original investors up to Rs. 40,000/-in respect of non-convertible debentures after a lock-in-period of one year. If, at the request of the issuers, the banks or their subsidiaries provide additional facilities to small investors subscribing to new issues, such buy-back arrangements should not entail 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 and should not exceed 25% of the owned funds of the banks/their subsidiaries. These commitments will also be subject to the overall exposure limits.
Based on the Master Circular of 1/7/15.
Please visit www.rbi.org.in  for any further clarification if required…………….. Poppy