RBI/2010-11/381
DBOD.BP.BC.No.75/21.06.001/2010-11
January 20, 2011
The Chairman and Managing Directors/
Chief Executive Officers of
All Scheduled Commercial Banks
(Excluding RRBs)
Dear Sir / Madam,
Regulatory Capital Instruments – Step up option
In terms of extant instructions, banks have been permitted to issue capital
instruments with a ‘step-up’ option viz.
- Innovative Perpetual Debt Instruments (IPDI) and Upper Tier 2 debt
capital instruments (vide circular DBOD.No.BP.BC.57 /21.01.002/2005-2006
dated January 25, 2006);
- Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative
Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS)
as part of Upper Tier 2 preference shares (vide circular DBOD. No. BP.
BC.42/21.01.002/2007-2008 dated October 29, 2007) and;
- Subordinated debt as Tier 2 capital (vide circular
DBOD.No.BP.BC.38/21.01.002/2009-10 dated September 7, 2009).
- As you may be aware, the Basel Committee on Banking Supervision
(BCBS) and the Financial Stability Board (FSB) have undertaken an extensive
review of the regulatory framework in the wake of the sub-prime crisis. In
the document titled ‘Basel III: A global regulatory framework for more
resilient banks and banking systems’, released by the BCBS in December 2010,
it has inter alia proposed certain minimum set of criteria for inclusion of
instruments in the new definition of regulatory capital. One of the criteria
is that instruments should not have step-ups or other incentives to redeem.
However, the BCBS has proposed certain transitional arrangements, in terms
of which only those instruments having such features which were issued
before September 12, 2010 will continue to be recognized as eligible capital
instruments under Basel III which becomes operational beginning January 1,
2013 in a phased manner.
- In view of the foregoing, it is advised that henceforth, banks
should not issue Tier 1 or Tier 2 capital instruments with ‘step-up option’
so that these instruments continue to remain eligible for inclusion in the
new definition of regulatory capital. However, such instruments can be
issued with only ‘call option’ as per existing rules contained in the
circulars mentioned above.
Yours faithfully,
(B. Mahapatra)
Chief General Manager-in-Charge