Mumbai, Dec 15 (UNI) Foreign institutional investors from now on cannot avail of gurantees from their banks for their payment obligations at the stock exchanges.
In a circular issued to the banks on capital market exposure, the Reserve Bank of India has said, entities such as FIIs are not permitted to avail of fund or non fund based facilities such as irrevocable payment commitments (IPC) from banks, under the provision of Foriegn Exchange Management Act (FEMA).
Banks have been asked to unwind all such gurantees given on behalf of FIIs within six months.
RBI said the annual inspection reports of certain banks and an analysis of the Consolidated Prudential Return (CPR) of some banks have revealed that these banks have extended large loans to various mutual funds and have also issued IPC's to stock exchange on behalf of mutual funds and FIIs.
The banking regulator said IPCs issued by banks to stock exchange on behalf of mutual funds would have to be included for calculation of their capital market exposures.
Foreign banks providing custodian services would benefit from this restriction as FIIs would now ensure they have enough cash balance in their account with custodians to support their level of trading activity.
Industry sources said the RBI directive is unlikely to have a major impact as only a few large FIIs were actually availing of bank gurantees.