Capital Rising by Banks – Perpetual Cumulative Preference Shares (PCPS),

Redeemable Non-Cumulative Preference Shares (RNCPS) & Redeemable Cumulative

Preference Shares (RCPS)

 These instruments can be perpetual or dated instruments.

 If dated, they should be with a fixed maturity of minimum 15 years.
 The perpetual instruments should be cumulative in nature. The dated instruments could
be cumulative or non-cumulative.
 The outstanding amount of these instruments alongwith other components of Tier 2
capital should not exceed 100% of Tier 1 capital at any point of time.
 The Tier 1 capital for calculation should be exclusive of goodwill and other intangible
assets but before deduction the deduction of these investments.
 Banks should get the approval of the Board for raising the amount through these
instruments mentioned the amount that is going to be raised.
 Options permitted:
o Call option permitted subject to:
 After the instrument has run for at least 10 years.
 Call option to be exercised only with the prior approval of RBI. RBI will give
permission only after taking into consideration the Bank’s CAR position both at the time of
exercise of call option and after exercise of the call option.

o Step-up option permitted subject to:

 Option can be exercised only once during the whole life of the instrument
in conjunction with call option after lapse of ten years from the date of issue.
 The step option shall not be more than 100 bps. The limits on step-up apply
to the all-in cost of the debt to the issuing banks.
 These instruments will be classified as ‘Borrowings’ under Schedule 4 of the Balance Sheet
under item Borrowings in India.
 The coupon payable to the investors may be either at a fixed rate or at a floating rate
referenced to a market determined rupee interest benchmark rate.
 The interest will be serviced only if:
o Bank’s CAR is above the minimum regulatory requirement prescribed by RBI.
o The impact of such payment does not result in Bank’s CAR falling below or
remaining below the minimum regulatory requirement prescribed by RBI.
o The Bank does not have a net loss. Net loss means as either the accumulated loss
at the end of the previous financial year/ half year as the case may be or the loss incurred
during the current financial year.
o In case of PCPS and RCPS, the unpaid coupon will be treated as a liability. The
interest amount due and remaining unpaid may be allowed to be paid in later years subject
to the bank complying with the above requirements.
o In the case of RNCPS, deferred coupon will not be paid in future years, even if
adequate profit is available and the level of CAR conforms to the regulatory minimum.
 All instances of non-payment of interest should be notified to RBI by the issuing banks.
 Redemption:
o The RNCPS and RCPS shall not be redeemable at the initiative of the holder.
o Redemption of these instruments at maturity shall be made only with the prior
permission of RBI subject to the following conditions:
 Bank’s CAR is above the minimum regulatory requirement prescribed by
RBI.
 Impact of such payment does not result in bank’s CAR falling below or
remaining below the minimum regulatory requirements prescribed by RBI.

 Seniority of Claim:
o Claims of the investors in these instruments shall be senior to the claims of
investors in instruments eligible for inclusion in Tier 1.
o Subordinate to the claims of all other creditors including those of Lower Tier 2
(subordinated bonds) and investors.
o With investors of Upper Tier 2 bonds, the claim shall rank pari passu with each
other.

 Amortization for the purpose of computing CAR:

o The Redeemable Preference Shares (both Cumulative and Non-Cumulative) shall be
subjected to a progressive discount of 20% for capital adequacy purpose when the
instruments enter the last five-year cycle.

 These instruments should be fully paid up, unsecured and free of any restrictive clauses.
 Investments by FIIs and NRIs shall be within an overall limit of 49% and 24% respectively
subject to the investment by each FII not exceeding 10% of the issue and investment by
each NRI not exceeding 5% of the issue.
 Investment by FIIs in these instruments shall be outside the ECB limit for rupee
denominated corporate debt as fixed by Government of India from time to time.
 The money collected under these instruments is subject to CRR and SLR preemptions.
 Bank should not grant advances against the security of these instruments issued by them.
 Investment in these instruments issued by other Banks:
o Banks are eligible to invest in all the capital raising instruments (like perpetual
bonds, subordinated bonds, Upper Tier 2) including the instruments discussed upto a limit of
10% of investing banks’ total capital funds.
o Bank’s investments in these instruments issued by other banks / financial
institutions will attract risk weight for capital adequacy purposes as per the table given
below:

Level of CAR All Scheduled Banks All Non-Scheduled Banks

9% and above 100% RW or Risk Weight % 100% RW or Risk Weight % as
as per the rating of the per the rating of the
instrument, whichever is instrument, whichever is
higher. higher.
6% to less than 9% 150% 250%
3% to less than 6% 250% 350%
0% to less than 3% 350% 625%
Negative 625% Full deduction at the rate of
50% from Tier 1 and 50%
from Tier 2