What changed
RBI issued a master circular that consolidates all previous guidelines on capital adequacy and risk management for standalone Primary Dealers, replacing multiple circulars with one reference document. The circular updates the 2004 guidelines with subsequent capital requirements, but does not introduce new rules.
What it means for you
For standalone Primary Dealers, this master circular simplifies compliance by providing a single source for capital adequacy norms, including detailed definitions of Tier-I and Tier-II capital. Banks that conduct PD activities departmentally must follow separate bank-specific guidelines, not this circular. The circular reinforces existing limits, such as subordinated debt capped at 50% of Tier-I capital and progressive discounting as maturity approaches.
What you must do
- Review the master circular to ensure your PD's capital adequacy framework aligns with the consolidated guidelines.
- Verify that Tier-I capital deductions (e.g., intangible assets, deferred tax assets) are correctly applied.
- Check that subordinated debt included in Tier-II capital does not exceed 50% of Tier-I capital and is discounted per the remaining maturity schedule.
- Ensure general provisions and loss reserves in Tier-II capital are within the 1.25% of risk-weighted assets limit.
Who it affects
Standalone Primary Dealers in the government securities market, Compliance and risk management teams of PDs, RBI's Department of Internal Debt Management (IDMD)
Does this master circular apply to banks that undertake PD activities?
No, banks conducting PD activities departmentally must follow the extant guidelines applicable to banks for capital adequacy and risk management, not this circular.
What is the limit on subordinated debt in Tier-II capital?
Subordinated debt eligible for Tier-II capital is limited to 50% of Tier-I capital. Instruments with less than 5 years initial maturity or remaining maturity of one year are excluded.
How are revaluation reserves treated in Tier-II capital?
Revaluation reserves are included in Tier-II capital after a discount of 55%.