Directive issued by Reserve Bank for obtaining bank loans against security of company shares - Companies Law - No. F/250-A (373),

Circular Letter: No. F/250-A (373), dated 30-9-1970 issued by BCCI to its members. Subject:- Directive issued by Reserve Bank for obtaining bank loans against security of company shares The Reserve Bank issued a directive to all commercial banks to regulate their advances against shares. Henceforth, on September 9, 1970 every commercial, bank, which grants or renews an advance limit of every Rs. 50,000 against the security of shares to a borrower, shall stipulate that the shares shall be transferred to its name and that it shall have exclusive voting rights in respect thereof which it may exercise in any manner whatsoever and get the shares transferred to its name expeditiously. In the case of existing limit of over Rs. 50,000 against shares, the bank shall take immediate steps to have the shares transferred to its name and if there is any restriction on such transfer or on the exercise of voting rights or there is any obligation cast on the bank to issue proxies, the bank shall give notice to the borrowers of its intention to terminate the agreement on the expiry of 35 days from the date of issue of notice, and substitute the same by a fresh agreement without any conditions restraining the transfer of the shares or exercise of voting rights freely or requiring it to issue proxies. Similar action will also be taken where the shares already stand transferred in the name of the bank but there are any restrictions on the exercise of voting rights or any obligation is cast on it to issue proxies. In case the borrower is not agreeable to the revised terms, the bank shall recall the advance forthwith if repayable on demand and, on the expiry of its term, if it is a term loan. If shares form a security composite with any other security, the advance limit against shares shall be segregated and the provisions of the directive will become applicable to the segregated limit. Further, no commercial bank shall hereafter make advances against the security of partly paid shares without the prior approval of the Reserve Bank and where there are any existing advances against such shares, the bank will obtain directions from the Reserve Bank as to whether it should take steps for the transfer of such shares to its name or not. The directive provides that no commercial bank shall exercise voting rights in respect of shares held by it as a pledge except with the prior approval of the Reserve Bank and in accordance with such directions as may be given by the Reserve Bank. In the case of shares lodged by a share-broker as security against advances, the provisions of the directive will apply only if the shares are held for a period longer than three months. This provision is intended to enable the share-brokers to carry on their normal operations without any difficulty. With a view to ensuring that no hardship or inconvenience is caused to genuine investors in raising funds for their bona fide needs limits of advances against shares up to Rs. 50,000 have been exempted from the purview of the directive.