Master Circular on Capital Adequacy for Primary Dealers

RBI/2009-10/55 IDMD.PDRD.02/03.64.00/2009-10 July 1, 2009 All Primary Dealers in the Government Securities Market Dear Sir Master Circular on Capital Adequacy Standards and Risk Management Guidelines for standalone Primary Dealers The Reserve Bank of India has, from time to time, issued a number of guidelines on Capital Adequacy Standards and Risk Management for standalone Primary Dealers (PDs). To enable the PDs to have all the current instructions at one place, a Master Circular incorporating the guidelines on the subject is enclosed as an Appendix . 2. Banks undertaking PD activities departmentally may follow the extant guidelines applicable to banks in regards to their capital adequacy requirement and risk management. Yours faithfully (K.V.Rajan) Chief General Manager Encl : As above APPENDIX RESERVE BANK OF INDIA INTERNAL DEBT MANAGEMENT DEPARTMENT CENTRAL OFFICE BUILDING MUMBAI 400 001 ( Ref: RBI/2009-10/  IDMD.PDRD.02 /03.64.00/2009-10 dated July 1, 2009)                         CAPITAL FUNDS & CAPITAL REQUIREMENTS General Guidelines 1 General 1.1   Capital adequacy standards for Primary Dealers in Government Securities market have been in vogue since December 2000. The guidelines were revised keeping in view the developments in the market, experience gained over time and introduction of new products like exchange traded derivatives. The revised guidelines were issued vide circular IDMD.1/(PDRS)03.64.00/2003-04 dated January 07, 2004. The present circular has been updated with the guidelines on capital requirements issued subsequent to the aforesaid circular. 2 Capital Funds Capital Funds would include the following elements: 2.1 Tier-I Capital Tier-I Capital would mean paid-up capital, statutory reserves and other disclosed free reserves. Investment in subsidiaries where applicable, intangible assets, losses in current accounting period, deferred tax asset (DTA) and losses brought forward from previous accounting periods will be deducted from the Tier I capital. In case any PD is having substantial interest/ (as defined for NBFCs) exposure by way of loans and advances not related to business relationship in other Group companies, such amounts will be deducted from its Tier I capital. 2.2 Tier-II capital Tier II capital includes the following:- (i) Undisclosed reserves and cumulative preference shares other than those   which are compulsorily convertible into equity. Cumulative Preferential shares should be fully paid-up and should not contain clauses which permit redemption by the holder. (ii)  Revaluation reserves discounted at a rate of fifty five percent; (iii) General  provisions  and  loss  reserves  to the extent these are not attributable to actual  diminution in value or identifiable potential loss in any specific  asset and are available to meet unexpected losses, up to the maximum of 1.25 percent of total risk weighted assets; (iv) Hybrid debt capital instruments, which combine certain characteristics of equity and certain characteristics of debt. (v) Subordinated debt: a) To be eligible for inclusion in Tier II capital, the instrument should be fully paid-up, unsecured, subordinated to the claims of other creditors, free of restrictive clauses, and should not be redeemable at the initiative of the holder or without the consent of the Reserve Bank of India. It often carries a fixed maturity, and as it approaches maturity, it should be subjected to progressive discount, for inclusion in Tier II capital. Instruments with an initial maturity of less than 5 years or with a remaining maturity of one year should not be included as part of Tier II capital. Subordinated debt instruments eligible to be reckoned as Tier II capital will be limited to 50 percent of Tier I capital. a) The subordinated debt instruments included in Tier II capital may be subjected to discount at the rates shown below: Remaining Maturity of Instruments

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2009-10/55 · issued 01 Jul 2009. The plain-English explanation above is BankPulse’s own independent summary.

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