RBI reviews provisions for Issue and Regulation of Share Capital and Securities for Primary Urban Cooperative Banks (UCB)

The RBI reviews the extant instructions for UCBs on the issue and regulation of capital funds keeping in view, inter alia, the provisions of Section 12 read with Section 56 of the amended Banking Regulation Act, 1949 (BR Act). These instructions shall come into force with immediate effect.

OVERVIEW

·????????UCBs are permitted to raise share capital by issuing shares to people within their area of operation and issuing additional shares to existing members.

·????????UCBs are also allowed to issue certain instruments for expansion of capital.

Preference Shares

a)?????Perpetual Non-Cumulative Preference Shares (PNCPS) eligible for inclusion in Tier I capital

b)????Perpetual Cumulative Preference Shares (PCPS) eligible for inclusion in Tier II capital

c)?????Redeemable Non-Cumulative Preference Shares (RNCPS) eligible for inclusion in Tier II capital

d)????Redeemable Cumulative Preference Shares (RCPS) eligible for inclusion in Tier II capital

Debt Instruments

a)?????Perpetual Debt Instruments (PDI) eligible for inclusion in Tier I capital

b)????Long Term Subordinated Bonds (LTSB) eligible for inclusion in Tier II capital

·????????UCBs, which issue regulatory capital instruments shall abide by certain conditions to enhance investor education on the risk characteristics of regulatory capital requirements. The conditions are -

1.??????Banks should not use fixed deposit rates as a standard for floating-rate instruments.

2.??????A specific sign-off from the investors, for having to comprehend the features and risks of the instruments shall be included 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".

3.??????UCBs shall make sure 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, is different from a fixed deposit, and that these instruments are not covered by deposit insurance.

4.??????UCBs shall also specify the procedure for the transfer to legal heirs in the case of the death of the subscriber of the instrument.

·????????With regards to Section 12 (2) (ii) read with Section 56 of the BR Act, a co-operative bank shall refrain from withdrawing or reducing its share capital, except to the extent and subject to such conditions as the Reserve Bank may specify in this behalf.

·????????The UCBs are permitted to refund the share capital to their members, or nominees/heirs of deceased members, on-demand, subject to the certain conditions-

1.???????The bank’s capital to risk-weighted assets ratio (CRAR) shall be 9 percent or above as per the latest audited financial statements and the last CRAR as assessed by RBI during the statutory inspection.

2.???????Such refund does not result in the CRAR of the bank falling below the regulatory minimum of 9 %.

3.???????For the purpose of computing CRAR accumulation to capital funds after the balance sheet date, other than by way of profits shall be taken into account.

·????????Borrowings from UCBs are linked to shareholdings of the borrowing members as below:

?????? ??i.??5 % of the borrowings, if the borrowings are on an unsecured basis.

???????ii.??2.5 % of the borrowings, in case of secured borrowings.

??????iii.?In case of secured borrowings by Micro and Small Enterprises (MSE), 2.5 % of the borrowings; of which 1 % is to be collected initially and the balance of 1.5 % is to be collected in the course of the next 2 years.

·????????Any borrowing member may be required to hold shares for an amount that may be evaluated as per the extant share linking norms or for an amount that is 5 % of the total paid-up share capital of the bank, whichever is lower.

·????????UCBs which meet the minimum regulatory CRAR criteria of 9 % and a Tier 1 CRAR of 5.5 % as per the latest audited financial statements and the last CRAR as assessed by RBI during the statutory inspection shall have voluntary share linking to borrowing norms. 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 which shall be reviewed by the Board at the beginning of the accounting year.

·????????Perpetual Non-Cumulative Preference Shares (PNCPS) held by members/subscribers, shall be treated as shares for the purpose of compliance with the extant share linking to borrowing norms.

·????????Annexure I mentions the guidelines on Issue of Preference Shares

·????????Annexure-II mentions the guidelines on issuance of Debt Capital Instruments

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References: -

https://rbidocs.rbi.org.in/rdocs/notification/PDFs/ISSUEREGULATIONF77B68CCB5C84716BB59279943423EBF.PDF