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Subordinated debt for inclusion in Tier II capital
DBOD. No. IBS.
BC. 65/23.10.015/2001-02 dated 14th February 2002
Please refer to
our circular DBOD. No. BP. BC. 5/21.01.002/99 dated February 8, 1999 regarding
�Issue of subordinated debt for raising Tier II capital�. In terms of
paragraph II of the guidelines annexed to the circular, foreign banks were
advised to take approval of RBI, on a case by case basis, for raising (a)
subordinated debt in foreign currency and (b) subordinated debt in the form of
foreign currency borrowings from Head office for inclusion in Tier II capital.
2. To ensure transparency and uniformity, as
requested during informal consultations with foreign banks, it is now proposed
to issue detailed guidelines for raising subordinated debt through Head Office
borrowings in foreign currency for inclusion in Tier II capital. The guidelines
are given in the enclosed Annexure.
3. Please acknowledge
receipt.
Encls: 3 sheets.
Annexure
Tier II
capital - Subordinated debt - Head Office borrowings in foreign currency raised
by foreign banks operating in India for inclusion in Tier II capital
In terms of para
II (b) of RBI circular No. DBOD. BP. BC. 5/21.01.002/98-99 dated February 8,
1999 foreign banks are required to obtain the approval of RBI, for raising
subordinated debt in the form of foreign currency borrowings from Head Office.
The requests are presently examined on a case-by-case approach. Detailed
guidelines on the standard requirements and conditions for inclusion of such
Head Office borrowings in foreign currency, as subordinated debt in Tier II
capital are as indicated below: -
2. Amount of borrowing: The total amount
of HO borrowing in foreign currency will be at the discretion of the foreign
bank. However, the amount eligible for inclusion in Tier II capital as
subordinated debt will be subject to a maximum ceiling of 50% of the Tier I
capital maintained in India, and the applicable discount rate mentioned in para
5 below. Further as per extant instructions, the total of Tier II capital should
not exceed 100% of Tier I capital.
3. Maturity period: Head Office
borrowings should have a minimum initial maturity of 5 years. If the borrowing
is in tranche, each tranche will have to be retained in India for a minimum
period of five years. HO borrowings in the nature of perpetual subordinated
debt, where there may be no final maturity date, will not be permitted.
4. Features: The HO borrowings should be
fully paid up, i.e. the entire borrowing or each tranche of the borrowing should
be available in full to the branch in India. It should be unsecured,
subordinated to the claims of other creditors of the foreign bank in India, free
of restrictive clauses and should not redeemable at the instance of the HO.
5. Rate of discount: The HO borrowings
will be subjected to progressive discount as they approach maturity at the rates
indicated below:
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Remaining maturity of borrowing
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Rate of discount
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More than 5 years
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Not Applicable
(the entire amount can be included as subordinated debt in Tier II capital
subject to the ceiling mentioned in para 2)
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More than 4 years
and less than 5 years
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20%
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More than 3 years
and less than 4 years
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40%
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More than 2 years
and less than 3 years
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60%
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More than 1 year
and less than 2 years
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80%
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Less than 1 year
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100% (No amount
can be treated as subordinated debt for Tier II capital)
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6. Rate of interest: The rate of interest
on HO borrowings should not exceed the on-going market rate. Interest should be
paid at half yearly rests.
7. Withholding tax:
The interest payments to the HO will be subject to applicable withholding tax.
8. Repayment: All repayments of the
principal amount will be subject to prior approval of Reserve Bank of India,
Department of Banking Operations and Development.
9. Documentation: The bank should obtain
a letter from its HO agreeing to give the loan for supplementing the capital
base for the Indian operations of the foreign bank. The loan documentation
should confirm that the loan given by Head Office would be subordinated to the
claims of all other creditors of the foreign bank in India. The loan agreement
will be governed by, and construed in accordance with the Indian law. Prior
approval of the RBI should be obtained in case of any material changes in the
original terms of issue.
10. Disclosure: The total amount of HO borrowings may
be disclosed in the balance sheet under the head `Subordinated loan in the
nature of long term borrowings in foreign currency from Head Office�.
11. Reserve requirements: The total amount of HO
borrowings is to be reckoned as liability for the calculation of net demand and
time liabilities for the purpose of reserve requirements and, as such, will
attract CRR/ SLR requirements.
12. Hedging: The entire amount of
HO borrowing should remain fully swapped with banks at all times. The swap
should be in Indian rupees.
13. Reporting & Certification: Such borrowings
done in compliance with the guidelines set out above, would not require prior
approval of Reserve Bank of India. However, information regarding the total
amount of borrowing raised from Head Office under this circular, along with a
certification to the effect that the borrowing is as per the guidelines, should
be advised to the Chief General Managers-in-Charge of the Department of Banking
Operations & Development (International Banking Section), Department of
External Investments & Operations and Exchange Control Department (Forex
Markets Division), Reserve Bank of India, Mumbai.
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