Executive Summary:
This circular amends paragraph 1.8e of Annex 4 of the Master Circular on Basel III Capital Regulations, clarifying the sources from which banks can pay coupons on Additional Tier 1 Capital instruments. It specifies the order of utilization of profits and reserves for coupon payments and mandates reporting to the Reserve Bank if statutory reserves are used. The instructions are effective immediately.
Key Points / Main Content:
*Coupon Payments on Additional Tier 1 Capital*
* Coupons must be paid out of distributable items, prioritizing current year profits.
* If current year profits are insufficient, coupon payments can be made from:
* Profits brought forward from previous years.
* Reserves representing appropriation of net profits, excluding share premium, revaluation reserve, foreign currency translation reserve, investment reserve, and reserves created on amalgamation.
* Accumulated losses and deferred revenue expenditure must be netted off from profits brought forward and permissible reserves to determine available balances for coupon payments.
* Appropriation from statutory reserves is permitted only if current year profits, profits brought forward, and permissible reserves are less than the coupon amount.
*Reporting Requirements*
* Banks must report to the Reserve Bank within twenty-one days of appropriating from statutory reserves, in compliance with Section 17(2) of the Banking Regulation Act 1949.
* Prior approval from the Reserve Bank is not required for this appropriation.
*Eligibility and Restrictions*
* Payment of coupons from reserves is contingent on the bank meeting minimum regulatory requirements for CET1, Tier 1, and Total Capital ratios, including additional capital requirements for Domestic Systemically Important Banks.
* Banks must adhere to restrictions under capital buffer frameworks (capital conservation buffer and counter-cyclical capital buffer).
* Banks must retain full discretion to cancel distribution payments to meet the eligibility criteria for perpetual debt instruments.
Impact Analysis:
* **Scheduled Commercial Banks (Excluding Regional Rural Banks)**
* *Impact:* Changes the guidelines for coupon payments on Additional Tier 1 Capital instruments, specifically regarding the utilization of profits and reserves.
* *Action Required:* Ensure compliance with the revised guidelines when making coupon payments on Additional Tier 1 Capital instruments, and report to the Reserve Bank within twenty-one days if statutory reserves are used. Update offer documents to reflect full discretion to cancel distributions.
* **Reserve Bank of India (RBI)**
* *Impact:* Receives reports from banks that appropriate from statutory reserves for coupon payments.
* *Action Required:* Process and monitor reports received from banks regarding the appropriation of statutory reserves.
Key Entities Referenced
Basel III Capital Regulations: A set of international banking regulations to promote financial stability.
Reserve Bank: Referring to Reserve Bank of India (RBI), the central bank of India.
Additional Tier 1 Capital: A component of a bank's capital that is meant to absorb losses.
Scheduled Commercial Banks: Banks in India that are listed in the Second Schedule of the Reserve Bank of India Act, 1934.
Regional Rural Banks: Regional Rural Banks (RRBs) are financial institutions in India that operate at the regional level
Banking Regulation Act 1949: A law in India that regulates the banking industry.
Mumbai, Maharashtra: A city in India where the central office of the Department of Banking Regulation is located.
S S Barik: Chief General Manager-in-Charge at Reserve Bank of India
RBI/2016-17/222
DBR.BP.BC.No.50/21.06.201/2016-17 February 02, 2017
All Scheduled Commercial Banks
(Excluding Regional Rural Banks)
Madam/ Sir,
Basel III Capital Regulations- Additional Tier 1 Capital
Please refer to the paragraph 1.8 on ‘Coupon Discretion’ under Annex 4 on
‘'Criteria for Inclusion of Perpetual Debt Instruments (PDI) in Additional Tier 1
Capital' of the Master Circular, DBR.No.BP.BC.1/21.06.201/2015-16 dated July 1,
2015 on ‘Basel III Capital Regulations’ read with the circular
DBR.No.BP.BC.71/21.06.201/2015-16 dated January 14, 2016 on ‘Master
Circular - Basel III Capital Regulations – Clarification’.
2. It has been decided to amend Para 1.8(e) of Annex 4 of the Master Circular as
under:
“Coupons must be paid out of ‘distributable items’. In this context, coupon may be
paid out of current year profits. However, if current year profits are not sufficient,
coupon may be paid subject to availability of:
(i) Profits brought forward from previous years, and/or
(ii) Reserves representing appropriation of net profits, including statutory
reserves, and excluding share premium, revaluation reserve, foreign currency
translation reserve, investment reserve and reserves created on
amalgamation.
The accumulated losses and deferred revenue expenditure, if any, shall be
netted off from (i) and (ii) to arrive at the available balances for payment of
coupon.
___________________________________________________________________________-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------_______
ब��कंग �व�नयमन �वभाग, क�द्र�य कायार्लय, 12वी ं और 13वी ं मंिज़ल, क�द्र�य कायार्लय भवन, शह�द भगत �सहं माग,र् मंबु ई 400001
टेल�फोन /Tel No: 22661602, 22601000 फैक्स/Fax No: 022-2270 5670, 2260 5671, 5691 2270, 2260 5692
Department of Banking Regulation (formerly Department of Banking Operations and Development), Central Office, 12th & 13th Floor,
Central Office Bhavan, Shahid Bhagat Singh Marg, Mumbai - 400001
Tel No: 22661602, 22601000 Fax No: 022-2270 5670, 2260 5671, 5691, 5692If the aggregate of: (a) profits in the current year; (b) profits brought forward
from the previous years and (c) permissible reserves as at (ii) above,
excluding statutory reserves, net of accumulated losses and deferred revenue
expenditure are less than the amount of coupon, only then the bank shall
make appropriation from the statutory reserves. In such cases, banks are
required to report to the Reserve Bank within twenty-one days from the date
of such appropriation in compliance with Section 17(2) of the Banking
Regulation Act 1949.
It may be noted that prior approval of the Reserve Bank for appropriation of
reserves as above, in terms of the circular, DBOD.BP.BC
No.31/21.04.018/2006-07 dated September 20, 2006 on ‘Section 17 (2) of
Banking Regulation Act, 1949 - Appropriation from Reserve Fund’ is not
required in this regard.
However, payment of coupons on PDIs from the reserves is subject to the
issuing bank meeting minimum regulatory requirements for CET1, Tier 1 and
Total Capital ratios including the additional capital requirements for Domestic
Systemically Important Banks at all times and subject to the restrictions under
the capital buffer frameworks (i.e. capital conservation buffer and counter
cyclical capital buffer in terms of paras 15 and 17 respectively of the Master
Circular on Basel III Capital Regulations dated July 1, 2015 as amended from
time to time).
In order to meet the eligibility criteria for perpetual debt instruments, banks
must ensure and indicate in their offer documents that they have full discretion
at all times to cancel distributions / payments.”
___________________________________________________________________________-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------_______
ब��कंग �व�नयमन �वभाग, क�द्र�य कायार्लय, 12वी ं और 13वी ं मंिज़ल, क�द्र�य कायार्लय भवन, शह�द भगत �सहं माग,र् मंबु ई 400001
टेल�फोन /Tel No: 22661602, 22601000 फैक्स/Fax No: 022-2270 5670, 2260 5671, 5691 2270, 2260 5692
Department of Banking Regulation (formerly Department of Banking Operations and Development), Central Office, 12th & 13th Floor,
Central Office Bhavan, Shahid Bhagat Singh Marg, Mumbai - 400001
Tel No: 22661602, 22601000 Fax No: 022-2270 5670, 2260 5671, 5691, 56923. These instructions are applicable with immediate effect.
Yours faithfully
(S S Barik)
Chief General Manager-in-Charge
___________________________________________________________________________-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------_______
ब��कंग �व�नयमन �वभाग, क�द्र�य कायार्लय, 12वी ं और 13वी ं मंिज़ल, क�द्र�य कायार्लय भवन, शह�द भगत �सहं माग,र् मंबु ई 400001
टेल�फोन /Tel No: 22661602, 22601000 फैक्स/Fax No: 022-2270 5670, 2260 5671, 5691 2270, 2260 5692
Department of Banking Regulation (formerly Department of Banking Operations and Development), Central Office, 12th & 13th Floor,
Central Office Bhavan, Shahid Bhagat Singh Marg, Mumbai - 400001
Tel No: 22661602, 22601000 Fax No: 022-2270 5670, 2260 5671, 5691, 5692