Executive Summary:
This circular from the Reserve Bank of India clarifies the coupon discretion on Additional Tier 1 Debt Capital Instruments under Basel III Capital Regulations. It revises the wording of Para 1.8e of Annex 4 in the Master Circular to remove ambiguity regarding coupon payments from revenue reserves. The instructions are effective immediately.
Key Points / Main Content:
* **Coupon Payments on Perpetual Debt Instruments (PDIs):**
* Coupons must be paid from distributable items, including current year profits.
* If current year profits are insufficient, coupons may be paid from available revenue reserves (not created for specific purposes) or credit balance in the profit and loss account.
* **Conditions for Coupon Payments from Revenue Reserves:**
* Issuing bank must meet minimum regulatory requirements for CET1, Tier 1, and Total Capital ratios at all times.
* The bank must adhere to the requirements of capital buffer frameworks (capital conservation buffer, countercyclical capital buffer, and D-SIBs).
* **Full Discretion to Cancel Distributions:**
* Banks must maintain full discretion to cancel distribution payments at all times.
* This discretion must be clearly stated in the offer document to meet eligibility criteria for perpetual debt instruments.
* **Rewording of Master Circular Para 1.8e, Annex 4:**
* The circular provides the revised wording for clarity on coupon payments, emphasizing the availability of sufficient revenue reserves if current year profits are not sufficient.
Impact Analysis:
Scheduled Commercial Banks (Excluding Local Area Banks and Regional Rural Banks):
Impact: Banks are subject to revised guidelines for coupon payments on Additional Tier 1 Debt Capital Instruments. They must adhere to the new clarification regarding the use of revenue reserves for coupon payments and ensure full discretion to cancel distributions is maintained and documented.
Action Required: Banks must immediately implement the revised guidelines, review their existing practices for coupon payments on PDIs, and ensure compliance with the updated requirements for capital ratios and buffer frameworks. They also need to verify that offer documents for PDIs clearly state the bank's full discretion to cancel distributions.
Key Entities Referenced
Reserve Bank of India: The central bank of India, the primary regulator in this context.
Basel III Capital Regulations: An international regulatory framework for banks.
Scheduled Commercial Banks: Banks in India that are listed in the 2nd schedule of the RBI Act, excluding Local Area Banks and Regional Rural Banks.
Additional Tier 1 Debt Capital Instruments: A type of debt instrument that can be included in a bank's regulatory capital.
CET1: Common Equity Tier 1 capital, a component of regulatory capital for banks.
Tier 1: A component of regulatory capital for banks.
Total Capital ratios: A component of regulatory capital for banks.
Mumbai, Maharashtra: The city and state where the RBI Central Office is located.
भारतीय �रजव र् बक�
________________RESERVE BANK OF INDIA _________________
www.rbi.org.in
RBI/2015-16/285
DBR.No.BP.BC.71/21.06.201/2015-16 January 14, 2016
All Scheduled Commercial Banks
(Excluding Local Area Banks
and Regional Rural Banks)
Madam / Sir,
Master Circular – Basel III Capital Regulations - Clarification
Please refer to para 7: Coupon Discretion on Additional Tier 1 Debt Capital
Instruments of the Circular DBOD.No.BP.BC.38/21.06.201/2014-15 dated
September 1, 2014 on ‘Implementation of Basel III Capital Regulations in
India – Amendments’. The amendments have been incorporated in the latest
Master Circular DBR.No.BP.BC.1/21.06.201/2015-16 dated July 1, 2015 on
‘Basel III Capital Regulations’ also.
2. Para 1.8(e) of Annex 4: ‘Criteria for Inclusion of Perpetual Debt
Instruments (PDI) in Additional Tier 1 Capital’ of the Master Circular states 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 i.e. payment of coupon is likely to result in
losses during the current year, the balance amount of coupon may be
paid out of revenue reserves (i.e. revenue reserves which are not
created for specific purposes by a bank) and / or credit balance in profit
and loss account, if any.
However, payment of coupons on PDIs from the revenue reserves is
subject to the issuing bank meeting minimum regulatory requirements
for CET1, Tier 1 and Total Capital ratios at all times and subject to the
requirements of capital buffer frameworks (i.e. capital conservation
buffer, countercyclical capital buffer and Domestic Systemically
Important Banks).
Banks must ensure and indicate in the offer document that they have
full discretion at all times to cancel distributions / payments in order to
meet the eligibility criteria for perpetual debt instruments.”
ब��कंग �व�नयमन �वभाग, 12वीं मंिज़ल, भारतीय �रजव र् ब�क, क�द्र�य कायार्लय भवन, शह�द भगत �सहं मागर्, फोटर्, मुंबई – 400 001
Department of Banking Regulation, 12th floor, RBI, Central Office Building, Shahid Bhagat Singh Marg, Fort, Mumbai – 400 001
Tel No: 2260/Fax No: 2270 5691 E-mail: cgmicdbr@rbi.org.in3. In order to remove any potential ambiguity and to fully reflect the intent
of the amendment, para 1.8(e), Annex 4 of the Master Circular is re-worded
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
sufficient revenue reserves (those which are not created for specific
purposes by a bank) and / or credit balance in profit and loss account,
if any.
However, payment of coupons on PDIs from the revenue reserves is
subject to the issuing bank meeting minimum regulatory requirements
for CET1, Tier 1 and Total Capital ratios at all times and subject to the
requirements of capital buffer frameworks (i.e. capital conservation
buffer, countercyclical capital buffer and Domestic Systemically
Important Banks).
Banks must ensure and indicate in the offer document that they have
full discretion at all times to cancel distributions / payments in order to
meet the eligibility criteria for perpetual debt instruments.”
4. These instructions are applicable with immediate effect.
Yours faithfully,
(Sudarshan Sen)
Principal Chief General Manager