RBI to review IPO funding by banks - Views on News from Equitymaster

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RBI to review IPO funding by banks

Feb 18, 2000

The RBI is reviewing the initial public offering (IPO) financing and the issuance of guarantees on behalf of stockbrokers by banks. This review is consequent to some bankers expressing concern over the role of various banks in financing stock brokers and individuals against shares.Also the concern has been that some banks had been more liberal than others in issuing guarantees to brokers towards the margin requirements of the stock exchanges. This review is being undertaken despite the claim by banks that they have been very active in continuously undertaking internal reviews and safeguard measures.

The availability of finance has resulted in many investors indulging in leveraged investments and has lead to increased activity in the IPO market. This could stem from the fact that the IPO market has picked up considerably with many issues being oversubscribed. Hence RBI is concerned about the quality of issues that could spring up in the future in the IPO market. If this the IPO boom crashes in future the banks would be saddled with bad loans. Hence RBI as a precautionary measure is reviewing this method of financing by banks.

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