RBI Proposes Secondary Market For Co-Operative Bank Securities

Investors in urban co-operative banks (UCBs) could soon be able to sell and purchase their stakes with greater freedom. The Reserve Bank of India (RBI) has suggested the development of a secondary market for the securities of UCBs. This move is one aspect of a comprehensive plan to strengthen capital-raising channels for such banks and would potentially make them more attractive to investors.

Currently, the majority of securities issued by co-operative banks such as member shares, special shares, or preference shares provide no convenient means for investors to exit earlier than maturity or redemption. The absence of liquidity has restricted investor interest and given UCBs fewer avenues to mobilise long-term funds.

Understanding Secondary Markets

A secondary market is a marketplace in which current investors can exchange securities with each other following the original issue. Stock exchanges like NSE and BSE are such places. These markets supply liquidity by making it possible for investors to sell early and facilitate price discovery, which assists in finding the fair value of a security.

For UCBs, there isn't such a market now. Investors hold instruments to maturity and depend only on intermittent returns in the form of dividends or interest. RBI feels that enabling secondary trading will provide more flexibility and induce a wider range of investors.

How RBI Aims To Facilitate Trading

RBI has recommended two routes to establish a secondary market:

The first is to permit securities of UCBs to be listed on recognised stock exchanges. This would bring them within the purview of the Securities and Exchange Board of India (SEBI) so that they are subjected to better investor protection and market discipline. But this solution has legal hurdles because co-operative banks are not at present defined as body corporates in the Companies Act. Amendment to the legislation would be required before listing could become feasible.

The second and quicker option is to permit Tier 4 banks with deposits of more than Rs 10,000 crore to have trading platforms on their websites. Investors can purchase or sell securities such as Special Share Certificates (SSCs) or other capital regulatory instruments within a specified price band. This option does not necessitate new legislation and can be introduced sooner.

Advantages For Banks And Investors

RBI lists some advantages of developing a secondary market. For investors, it gives them liquidity and flexibility. They are no longer tied up for long periods and can divest their holdings as and when they desire. It also enables them to gain from price appreciation if the bank goes well.

Challenges On The Ground

Even though there are advantages, there are some challenges which require attention. State co-operative laws differ significantly on issues like the transfer of shares. Some states permit the transfer of shares only among members or for a holding period before the transfer.

Secondly, not all UCBs possess the technical capability to run secure and reliable trading platforms. Moreover, issues of investor protection, resolution of disputes, and market integrity would be a concern without a central regulator such as SEBI.

The RBI has suggested price bands—originally set at ±25 per cent of the book value—to be traded on websites so as to avoid volatility. It also recommends publishing timely financial and trading information to enable investors to make well-informed decisions.