Mumbai, Oct 6: The Reserve Bank of India may ask banks to waive the requirement of transferring shares against which they extend loans in their names if such shares are in the dematerialised form.

According to banking sources, the RBI is closely studying requests from market participants including some banks, to waive this requirement as there is no risk involved in lending against dematerialised shares.

In the physical paper environment, a bank is required to transfer shares in its name if the value of the loan exceeds Rs 10 lakh. This norm, which is aimed at providing a cover against risk, however, leads to a very tedious process.

"In the physical environment a bank cannot be sure whether or not the shares that have been submitted in lieu of the loan are good title or not. In the absence of a requirement to transfer shares in their names banks could run a grave risk of being saddled with a huge portfolio of bad paper which would be discovered when the damage has already been done," said a source.

Sources say that in such an event the shares are in the name of the bank but the corporate benefits are to be given to the individual who has pledged the shares till such time that the bank invokes the pledge.

This means that while the company sends all corporate benefits to the bank, as the shares have been transferred in its name, the bank in turn transfers these benefits back to the investor who has pledged the shares.

A solution to this entire problem has however been found in the depository environment. The pledging module set up by the National Securities Depository Ltd (NSDL) has a locking facility which eliminates this problem.

When an investor pledges his shares in the dematerialised environment, the shares remain in his account but the right to sell or transfer these shares is taken away from the investor. In other words, a lock is placed on the movement of these set of shares. As a result, all the corporate benefits continue to go to the individual pledging the shares.

The bank, on the other hand, is assured of a good title and can immediately invoke the pledge and have the shares transferred in its name, if such a need arises.

But given the current RBI norms, a bank would need to invoke the transfer of the shares at the outset, which, sources say, would unnecessarily thwart the benefits which can otherwise be provided to both the bank as well as the investor.

At least three banks - Bank of India, IndusInd and Global Trust Bank - have said they are chalking out plans to encourage the system of extending loans against the pledge of dematerialised shares.

It is learnt that BoI has provided loans in excess of Rs 3,000-crore against shares. The bank has already started asking investors who have pledged their shares with it to get them dematerialised and reap the benefits associated with an electronic trading environment.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.