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NBFCs' market exposure worries RBI

February 19, 2008 11:10 IST

The Reserve Bank of India has told parliamentarians that it is concerned over the stock market exposure of various non-banking financial companies (NBFCs) promoted by leading banks in the country.

At a meeting with the Parliamentary Standing Committee on Finance on February 12, the central bank said some banks were circumventing prudential norms for capital market exposure through these NBFCs.

On February 12, the Committee had met officials of the Reserve Bank of India and the State Bank of India, besides representatives of the investor and broker communities.

A member of the Standing Committee, who attended the meeting, said the RBI officials, when questioned about the involvement of banks in the stock market, told them that the central bank was "worried".

Another Committee member said the RBI had pointed out that most banks were within the limits set for capital market exposure, but said some may have breached the norms. "The RBI told us it is monitoring the situation keenly," he said.

Earlier, on January 25, Business Standard had reported that the RBI had sought data from the NBFCs on their investment and financing activities in the capital markets over the last two months.

Estimates peg NBFC exposure to the capital market at Rs 70,000 crore (Rs 700 billion) and it is believed that most NBFCs have far exceeded the stipulated ceiling on capital market exposure to single entities or corporate groups.

Banks have a limit of 5 per cent of incremental deposits to be deployed in the capital market, while NBFCs are not subject to an overall ceiling.

Meanwhile, the Committee, which met in New Delhi on Monday, posed a number of questions to senior finance ministry officials on the recent volatility in the stock market. Cutting across party lines, the MPs demanded greater transparency and accountability in the capital market.

"There is absolutely no transparency in the evaluation and pricing mechanism of initial public offers (IPOs). The rating companies are paid by the IPO companies to do the ratings. We wanted to know from the finance ministry how more transparency can be brought in this process," an MP said, adding that there were reasons to believe that big corporate players were trying to bend rules and manipulate the stock market.

"We want the stock market to become more transparent and there should be more accountability in the stock market. Our report will aim to provide suggestions in this regard," said Rupchand Pal, member of the Committee and chief whip of the CPI(M) in the Lok Sabha.

Committee member C Ramachandraiah of the Telegu Desam Party has written to Prime Minister Manmohan Singh today seeking immediate policy intervention to prevent the Indian capital market from slipping into a meltdown.

"The bigger question is about the role of the stock market regulator. Is it not prudent that Securities and Exchange Board of India (Sebi) be entrusted with the responsibility to inform investors about the pricing of public issues," he said.

Committee members also asked the ministry officials whether the recent volatility in the stock market was on account of the exit of foreign institutional investors (FIIs).

The next meeting of the committee is scheduled for February 28. The committee has asked the ministry to submit written replies to the queries, based on which it will prepare its report.

The Standing Committee, which is headed by BJP MP Ananth Kumar, also queried officials about some of the proposals mooted by Sebi that are yet to get clearance from the corporate affairs ministry.

"There was a proposal to create investors protection fund but the corporate affairs ministry is sitting on it. We wanted to know from the government what happened to these proposals," a member of the committee said.

Saubhadra Chatterji & Asit Ranjan Mishra in New Delhi