Banks told to invest only in listed debt instruments

They are however, allowed to invest up to 20 per cent in unlisted but rated securities.

The guidelines have been revised in consonance with the circular issued by the Securities Exchange Board of India (Sebi) on September 30, 2003 whereby it has been stipulated that listed companies planning to issue debt securities on private placement basis are required to comply with full disclosures (initial and continuing) in the manner prescribed in Schedule II of the Companies Act 1956, and the Listing Agreement with the exchanges.

Furthermore, the debt securities shall carry a credit rating of not less than investment grade from a Credit Rating Agency registered with the Sebi.

Under the revised draft norms, the board of banks should fix a prudential limit not exceeding 20 per cent of total non SLR investments for their total investment in non-SLR securities.

This will include unlisted securities and securities issued by SPVs for mortgage backed securities (MBS) and securitisation papers issued for infrastructure projects.

Banks which have exposure to investments in non-SLR securities in excess of the prudential limit prescribed above as on March 31, 2003, should not make any fresh investment in such securities till they ensure compliance with the above prudential limit.

In order to help in the creation of a central database on private placement of debt, a copy of all offer documents should be filed with the Credit Information Bureau (India) Ltd (CIBIL) by the investing banks.

As a matter of prudence, banks should stipulate entry-level minimum ratings and prescribe maturity-wise, duration-wise, issuer-wise etc. limits to mitigate the adverse impacts of concentration and the risk of illiquidity.

Further, banks should ensure that their investment policies duly approved by the board are formulated after taking into account all the relevant issues specified in these guidelines on non-SLR investment. Boards of banks should review the following aspects of non-SLR investment twice a year.