What changed
Previously, banks could only issue lower Tier II subordinated bonds without special features like call or step-up options. Now, RBI has decided to allow these features, subject to strict conditions outlined in the annex. The change aims to align with international practices.
What it means for you
Banks can now structure Tier II capital instruments more flexibly, potentially attracting investors with call and step-up features. However, strict compliance with RBI conditions is mandatory, including prior approval for call options and a 50 bps cap on step-ups. This may improve capital raising efficiency but requires careful planning.
What you must do
- Ensure board approval for the amount and coupon rate of subordinated debt issuance.
- Obtain prior RBI approval before exercising any call option on Tier II bonds.
- Adhere to the step-up limit of 50 bps and exercise it only once in conjunction with a call option after five years.
- Comply with SEBI and Exchange Control Department requirements if issuing to NRIs/OCBs/FIIs.
- Apply progressive discount rates to subordinated debt as it approaches maturity for Tier II capital calculation.
Who it affects
All commercial banks excluding Regional Rural Banks (RRBs) and foreign banks operating in India (as they are not permitted to raise rupee Tier II subordinated debt), Treasury and capital management teams, Compliance and risk management departments
Can we issue subordinated debt with a put option?
No, put options are not permitted. Only call options are allowed, and they can be exercised only after five years with prior RBI approval.
What is the maximum step-up allowed on these bonds?
The step-up cannot exceed 50 basis points (bps) and can be exercised only once during the life of the instrument, in conjunction with a call option after five years.
Are foreign banks operating in India allowed to raise rupee Tier II subordinated debt?
No, foreign banks operating in India are not permitted to raise rupee Tier II subordinated debt under this circular.