The central bank has asked banks which fund bidders in PSU selloffs to ensure that the shares pledged with it can be sold during the lock-in period.

As per the Reserve Bank of India guidelines, the documentation between the government and the successful bidder should contain a provision permitting the pledgee (bank) to liquidate the shares even during the lock-in period in case of a shortfall in margin requirement or default by the borrower.

However, as per the Centre's guidelines, the pledgee bank cannot sell the shares during the first year of the lock-in period. During the second and third years, in case the borrower fails to restore the margin by way of additional security or defaults on payment, the bank has the right to invoke the pledge.

The bank's right to invoke the pledge, however, would be subject to the terms and conditions of the documentation between the government and the bidder, which might also cast certain responsibilities on the pledgee banks.

Further if the documentation does not contain such a specific provision, the borrower (successful bidder) should obtain waiver from the government for disposal of shares during the lock-in period.

The RBI emphasised that the banks must make a proper appraisal and exercise due caution about the credit worthiness of the borrower and the viability of the proposal. The bank must also satisfy itself that the documentation relating to the disposal of shares pledged with the bank is fully acceptable to the bank and do not involve unacceptable risks on its part.

Henceforth, special purpose vehicles, subject to certain conditions, will be eligible for bank finance for selloffs, the RBI said.

SPVs can seek finance provided the former function as holding companies with not less than 90 per cent of their total assets are by way of investment in securities held for the purpose of holding ownership stake.

Further these entities should not trade in these securities except for block sale; and they should not undertake any other financial activities.

The banks are precluded from financing investments of finance firms in other companies and inter-corporate loans/ deposits to other companies.