RBI Tightens Ban on Bank Loans for Promoters' Equity Contribution

RBI/2010-11/214 DBOD.No.BP.BC.42 /21.04.141/2010-11  September 27, 2010 The Chairmen and Managing Directors/ Chief Executive Officers of All Commercial Banks (excluding Regional Rural Banks)   Dear Sir/Madam, Bank loans for financing promoters contribution In terms of para 8 of Master Circular No. DBOD.Dir.BC.90/13.07.05/98 dated August 28, 1998 on ‘Bank Finance against Shares and Debentures’, promoters’ contribution towards the equity capital of a company should come from their own resources and banks should not normally grant advances to take up shares of other companies (A few exceptions have been made viz. allowing banks to extend financial assistance to Indian companies for acquisition of equity in overseas joint ventures / wholly owned subsidiaries or in other overseas companies, to successful bidders for acquisition of shares of the PSUs under the Government of India's disinvestment programme, etc.). 2. In this connection, we advise that the above mentioned restriction on grant of bank advances for financing promoters’ contribution towards equity capital would also extend to bank finance to activities related to such acquisitions like  payment of non compete fee, etc. 3. It is further advised that these restrictions would also be applicable to bank finance to such activities by overseas branches/subsidiaries of Indian banks. Yours faithfully, (B. Mahapatra) Chief General Manager –in-Charge

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2010-11/214 · issued 27 Sep 2010. The plain-English explanation above is BankPulse’s own independent summary.

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