RBI cautions SBI against guaranteeing future NCD issues

RBI cautions SBI against guaranteeing future NCD issues
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First Published: Tue, Jun 02 2009. 05 06 PM IST
Updated: Tue, Jun 02 2009. 05 06 PM IST
New Delhi: Concerned that big banks like State Bank of India guaranteeing debenture issues by corporate entities may send wrong signals to the market, the Reserve Bank of India has has put a blanket ban on the banks giving such guarantees and has sought a strict compliance on its directive.
Clarifying that a direction has been in place for quite some time from the RBI that banks cannot guarantee non-covertible debenture or bonds issue by corporate entities, an official at the central bank said that “certain violations” have been noticed recently.
To make things clearer, RBI had to again issue a notification to all the commercial banks in the country in this regard, the official added.
Days before RBI’s notification, where it said that “certain banks” were issuing guarantees on behalf of corporate entities in respect of their issuance of non-convertible debentures (NCD), the country’s top public sector bank SBI guaranteed a Rs4,200-crore NCD issue of Tata Motors.
Asked if RBI would ask SBI to withdraw this guarantee, the official said as far SBI guarantee to Tata Motors’ NCDs is concerned, the central bank would excercise “regulatory forbearance”.
As a result, no action will be taken against SBI for bypassing the master circular issued in July 2008, on which a clarification was issued by RBI on 29 May 2009, seeking strict compliance of the said circular.
The guarantee issued by any bank distorts price discovery of the debenture or bonds and hampers the development of corporate bond market, official said.
Thus, to safeguard the interest of debenture or bond holders RBI has asked the bank not to issue gurantee in the future, he said.
Pricing of NCDs should be based on the financial strength of the company not on the guarantee of financial institutions, he said.
The guarantee by any public sector bank tantamounts to government guarantee as the Goverment of India is the largest shareholder in these banks, he added.
Tata Motors had raised Rs4,200 crore from non convertible debentures last month. SBI gave master guarantee of Rs 4,900 crore. Ten other banks participated in the facility through counter guarantees provided to SBI.
The money raised will be used for paying the $3 billion bridge loan taken for acquiring the Jaguar Land Rover( JLR) last year. Earlier, Tata had paid Rs1.11 billion for the acquisition, a Tata Motors statement had said.
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First Published: Tue, Jun 02 2009. 05 06 PM IST
More Topics: RBI | SBI | NCD | Tata Motors | Economy and Politics |