Issue and regulation of share capital and securities – Primary (Urban) Co-operative Banks
The Banking Regulation (Amendment) Act, 2020 (No. 39 of 2020), notified in the Gazette of India on September 29, 2020 (vide Notification No. 64 of that date), is deemed to have come into force with effect from June 29, 2020 for Primary (Urban) Co-operative Banks (UCBs).
2. The extant instructions for UCBs on issue and regulation of capital funds have been reviewed keeping in view, inter alia, the provisions of Section 12 read with Section 56 of the amended Banking Regulation Act, 1949 (BR Act).
Augmentation of capital funds
3. UCBs are permitted to raise share capital, as hitherto, by way of (i) issue of shares to persons within their area of operation, in accordance with the provisions of their bye-laws, and (ii) issue of additional shares to the existing members.
4. UCBs are also permitted to issue the following instruments to augment their capital:
I. Preference Shares
- Perpetual Non-Cumulative Preference Shares (PNCPS) eligible for inclusion in Tier I capital
- Perpetual Cumulative Preference Shares (PCPS) eligible for inclusion in Tier II capital
- Redeemable Non-Cumulative Preference Shares (RNCPS) eligible for inclusion in Tier II capital
- Redeemable Cumulative Preference Shares (RCPS) eligible for inclusion in Tier II capital
II. Debt instruments
- Perpetual Debt Instruments (PDI) eligible for inclusion in Tier I capital
- Long Term Subordinated Bonds (LTSB) eligible for inclusion in Tier II capital
5. The guidelines governing the instruments specified in para 4 (I) &(II) above, indicating the regulatory requirements, are enclosed in Annexes I & II respectively.
6. For the purpose of enhancing investor education on the risk characteristics of regulatory capital requirements, UCBs, which issue regulatory capital instruments as specified in para 4 above, shall adhere to the following conditions:
a) For floating rate instruments, banks should not use its Fixed Deposit rate as benchmark.
b) A specific sign-off as quoted below, from the investors, for having understood the features and risks of the instruments, may be incorporated in the common application form of the proposed issue:
“By making this application, I / we acknowledge that I / we have understood the terms and conditions of the issue of [Name of the share/security] being issued by [Name of the bank] as disclosed in the Prospectus and Offer Document”.
c) UCBs shall ensure that all the publicity material / offer document, application form and other communication with the investor should clearly state in bold letters (Arial font, size 14, equivalent size in English / Vernacular version) how a PNCPS / PCPS / RNCPS / RCPS / PDI / LTSB, as the case may be, is different from a fixed deposit, and that these instruments are not covered by deposit insurance.
d) The procedure for transfer to legal heirs in the event of death of the subscriber of the instrument should also be specified.
Refund of share capital
7. In terms of Section 12 (2) (ii) read with Section 56 of the BR Act, a co-operative bank shall not withdraw or reduce its share capital, except to the extent and subject to such conditions as the Reserve Bank may specify in this behalf. Accordingly, it has been decided to permit UCBs to refund the share capital to their members, or nominees / heirs of deceased members, on demand, subject to the following conditions:
a) The bank’s capital to risk-weighted assets ratio (CRAR) is 9 percent or above, both as per the latest audited financial statements and the last CRAR as assessed by RBI during statutory inspection.
b) Such refund does not result in the CRAR of the bank falling below regulatory minimum of 9 per cent.
8. It is clarified that for the purpose of computing CRAR as above, accretion to capital funds after the balance sheet date1, other than by way of profits, may be taken into account. Any reduction in capital funds, including by way of losses, during the aforesaid period shall also be considered.
Share linking to borrowing norms
9. Borrowings from UCBs are linked to shareholdings of the borrowing members as below:
- 5 per cent of the borrowings, if the borrowings are on unsecured basis.
- 2.5 per cent of the borrowings, in case of secured borrowings.
- In case of secured borrowings by Micro and Small Enterprises (MSE), 2.5 per cent of the borrowings; of which 1 per cent is to be collected initially and the balance of 1.5 per cent is to be collected in the course of next 2 years.
10. The above share linking norm may be applicable for member’s shareholdings up to the limit of 5 per cent of the total paid up share capital of the bank. Where a member is already holding 5 per cent of the total paid up share capital of a UCB, it would not be necessary for him / her to subscribe to any additional share capital on account of the application of extant share linking norms. In other words, a borrowing member may be required to hold shares for an amount that may be computed as per the extant share linking norms or for an amount that is 5 per cent of the total paid up share capital of the bank, whichever is lower.
11. In terms of the extant norms2, UCBs which maintain CRAR of 12 per cent on a continuous basis, are exempted from the mandatory share linking norms outlined in para 9 above. On a review, it has been decided that the share-linking to borrowing norms shall be discretionary for UCBs which meet the minimum regulatory CRAR criteria of 9 per cent and a Tier 1 CRAR of 5.5 per cent as per the latest audited financial statements and the last CRAR as assessed by RBI during statutory inspection. Such UCBs shall have a Board-approved policy on share-linking to borrowing norms, which shall be implemented in a transparent, consistent and non-discriminatory manner. The policy may be reviewed by the Board at the beginning of the accounting year. UCBs which do not maintain the minimum CRAR of 9 percent and Tier 1 CRAR of 5.5 per cent, shall continue to be guided by the norms on share-linking to borrowing as specified in paragraph 9 above.
12. Perpetual Non-Cumulative Preference Shares (PNCPS) held by members / subscribers, may be treated as shares for the purpose of compliance with the extant share linking to borrowing norms.
Repeal
13. The list of circulars, that stand repealed fully or partially, is furnished in Appendix to the circular.
Effective Date
14. These instructions shall come into force with immediate effect.
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