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RBI may probe FIs' market exposure

Janaki Krishnan

The Reserve Bank of India is planning to probe investments in the stock market made by leading financial institutions including ICICI, the Industrial Finance Corporation of India as well as the Industrial Development Bank of India. A preliminary scrutiny of the FIs' books by the central bank has revealed that advances extended to some of them found their way into the stock market.

These institutions have large exposure to the stock market, especially in the so-called K-10 stocks. However, unlike commercial banks, the FIs are not bound by any rules as far as their stock market exposure is concerned.

"There are no norms for the FIs' capital market exposure. A few of them have huge exposures to the capital market by way of investments in primary issues," said a source.

The RBI has given a detailed note to the joint parliamentary committee on the FIs' advances to some of the companies allegedly involved in the recent stock market scam.

Among others, it has mentioned ICICI's exposure to Himachal Futuristic Communications Ltd and Zee. An RBI team recently examined ICICI's books to trace the movement of money advanced to these two companies.

A senior ICICI executive said the FI had extended a project loan to Zee while HFCL was given a working capital loan. "We make every possible effort to ensure the end use of the funds. While it is possible to make sure that funds are used in a proper way in case of project loans (as it goes into a designated account and there are checks and balances), the use of working capital funds is difficult to track," the source pointed out.

While banks, foreign institutional investors, mutual funds (including the Unit Trust of India) and overseas corporate bodies have been brought into the ambit of the probe into the market crash in March this year, this is the first time that the domestic FIs are being probed.

The Securities and Exchange Board of India has maintained a hands-off approach till now as far as the banks and the FIs are concerned.

In the case of Global Trust Bank, the market watchdog's role is restricted only to identifying how the funds were routed through the various intermediaries and eventually made their way to stockbroker Ketan Parekh, who used it to pump up the prices of his own favourite stocks.

However, Sebi could come in at a later stage of the probe to investigate how exactly the funds were routed.

"The RBI is now taking an active part in the probe. The ambit of the probe is getting wider and wider as more and more financial intermediaries are found to have been involved in playing the market," said a source.

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