RBI enhances NBFCs’ capital raising options for capital adequacy purposes
Taking into consideration, the need for enhanced funds for increasing business and meeting regulatory requirements, Reserve Bank of India has decided on 29th October 2008, that Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFCs-ND-SI) may augment their capital funds by issue of Perpetual Debt Instruments (PDI) in accordance with the guidelines. Such PDI shall be eligible for inclusion as Tier I Capital to the extent of 15% of total Tier I capital as on March 31 of the previous accounting year.
2. The minimum investment in each such issue/tranche by single investor shall not be less than Rs 5 lakh. The amount of funds raised by NBFCs-ND-SI shall not be treated as ‘public deposit’ within the meaning of clause 2 (1)(xii) of the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998.
3. The, amount of PDI in excess of amount admissible as Tier I shall qualify as Tier II capital within the eligible limits.
Terms and conditions applicable to Perpetual Debt Instruments (PDI) for being eligible for inclusion in Tier I capital
The Perpetual Debt Instruments (PDI) may be issued as bonds or debentures by NBFCs-ND-SI on the following terms and conditions to qualify for inclusion as Tier I Capital or Tier II Capital, as the case may be, for capital adequacy purposes.
1. Terms of Issue of PDI
i) Currency of issue
PDIs shall be issued in Indian Rupees only.
The aggregate amount to be raised by issue of such instruments shall be within the overall limits of Tier I and Tier II as explained in clause (iii) below. It may be raised in tranches. However, the minimum investment by single investor in each such issue/tranche shall be Rs 5 lakh.
PDI shall be eligible to be treated as Tier I capital upto 15 per cent of total Tier I capital. The above limit will be based on the amount of Tier I capital as on March 31 of previous year after deduction of goodwill and other intangible assets but before the deduction of investments.
The, amount of PDI in excess of amount admissible as Tier I shall qualify as Tier II capital subject to provisions contained in paragraph 2(1)(xxi) of the Non-Banking Financial (Non- Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007.
iv) Maturity period
The PDI shall be perpetual.
v) Rate of interest
The interest 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.
NBFCs-ND-SI shall issue PDI as plain vanilla instruments only.
However NBFCs-ND-SI may issue PDI with a 'call option' subject to strict compliance with each of the following conditions:
(a) that the instrument has run for a minimum period of ten years from the date of issue;
(b) Call option shall be exercised only with the prior approval of RBI. While considering the proposals received from NBFCs-ND-SI for exercising the call option the RBI would, among other things, take into consideration the NBFC's CRAR position both at the time of exercise of the call option and after the exercise of the call option.
vii) Step-up option
The issuing NBFC-ND-SI may have a step-up option for increasing the rate of interest payable on PDIs. Such option may be exercised only once during the whole life of the instrument after the lapse of ten years from the date of issue. The step-up shall not be more than 100 bps in reference to interest rate advertised in terms of offer document under clause (v) above. The limits on step-up apply to the all-in cost of the debt to the issuing NBFCs.
viii) Lock-In Clause
(a) PDI shall be subjected to a lock-in clause in terms of which the issuing NBFCs-ND-SI may defer the payment of interest, if
the NBFC’s CRAR is below the minimum regulatory requirement prescribed by RBI; or
the impact of such payment results in NBFC’s capital to risk assets ratio (CRAR) falling below or remaining below the minimum regulatory requirement prescribed by Reserve Bank of India;
(b) However, NBFCs-ND-SI may pay interest with the prior approval of RBI when the impact of such payment may result in net loss or increase the net loss, provided the CRAR remains above the regulatory norm.
(c) The interest shall not be cumulative except in cases as in (a).
(d) All instances of invocation of the lock-in clause shall be notified by the issuing NBFCs-ND-SI to the Regional Office of Department of Non-Banking Supervision of the Reserve Bank of India in whose jurisdiction NBFC is registered.
ix) Seniority of claim
The claims of the investors in PDI shall be
a) Superior to the claims of investors in equity shares; and
b) Subordinated to the claims of all other creditors.
The PDI instruments shall not be subjected to a progressive discount for capital adequacy purposes since these are perpetual.
xi) Other conditions
a) PDI shall be fully paid-up, unsecured, and free of any restrictive clauses and the issue of PDI and the terms and conditions applicable thereto shall be compliant with the provisions of Companies Act, 1956 and all other laws for the time being in force including the rules, regulations, directions and guidelines issued by the applicable regulatory authorities.
b) Subject to compliance with extant FEMA Regulations, NBFCs shall obtain prior approval of the Reserve Bank of India, on a case-by-case basis, for investment by FIIs/NRIs in PDI to be raised by a NBFC-ND-SI in Indian Rupees.
c) NBFCs-ND-SI shall comply with the terms and conditions, if any, stipulated by SEBI/other regulatory authorities in regard to issue of the instruments.
d) The investment by other NBFCs in such instruments issued by an NBFC-ND-SI shall be governed by the provisions of definition of Net Owned Fund (NOF) as provided in explanation to Section 45-IA of the RBI Act. As such, investment in excess of 10% of the owned fund of NBFC will be deducted from Owned Fund to arrive at NOF of the NBFC.
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