Reserve Bank of India revises guidelines on Basel III capital regulations

Reserve Bank of India’s (RBI) has released revised guidelines on Basel III capital regulations on 1st September 2014, applicable with immediate effect.The existing guidelines have been revised with a view to facilitate raising of non-equity regulatory capital instruments by banks under Basel III framework. Accordingly, certain specific eligibility criteria of such instruments have been amended. These are also intended to incentivise investors and to increase the investor base.

Banks can now issue tier II capital instruments with a minimum maturity of at least 5 years compared to 10 years at present. Banks can issue tier 2 debt capital instruments to retail investors, subject to the board approval.

Banks may now additional tier 1 capital instrument with the principal loss absorption through either conversion into common shares or write-down mechanism (temporary or permanent) which allocates losses to the instruments

However terms and conditions of all non-equity capital instruments (both additional tier I & II) issued by banks must have a provision that requires such instruments to either be permanently written off or converted into common shares upon the occurrence of the 'point of non-viability (PONV)' trigger event.

Banks shall ensure the non-common equity capital instruments issued by them meet all the eligibility criteria such as legal, accounting and operational, to qualify for recognition as regulatory capital instruments.

The call option on additional tier I instruments- perpetual non-cumulative preference shares (PNCPS) and perpetual debt instruments (PDIs) will be permissible at the initiative of the issuer after the instrument has run for at least five years.

The loss absorbency features of the instrument should be clearly explained, and the investor's sign-off for having understood these features and other terms and conditions of the instrument should be obtained