What changed
RBI reviewed guidelines and decided to phase out short-term subordinated debt (Tier-III bonds) as eligible capital for standalone PDs. From July 1, 2012, PDs cannot raise fresh funds through Tier-III bonds. Existing Tier-III capital remains eligible until the debt matures.
What it means for you
Standalone PDs lose a flexible, short-term capital instrument for meeting market risk charges. They must now rely on higher-quality capital like Tier-I or Tier-II, potentially increasing funding costs or requiring capital restructuring. This aligns with global trends favoring loss-absorbing capital.
What you must do
- Stop issuing new Tier-III bonds effective July 1, 2012.
- Review existing Tier-III capital and track maturities for continued eligibility.
- Plan alternative capital raising (e.g., Tier-I or Tier-II) to cover market risk requirements.
- Update internal capital adequacy and risk management policies to reflect the phase-out.
Who it affects
Standalone Primary Dealers (PDs), Treasury and risk management teams at PDs, RBI's financial stability and supervision departments
Can we still count existing Tier-III bonds as capital?
Yes, if you already have Tier-III capital issued before July 1, 2012, you can continue to recognize it as eligible capital until those bonds mature.
What happens if we need more capital for market risk after the phase-out?
You must raise capital through other eligible instruments, such as Tier-I or Tier-II capital, as Tier-III bonds are no longer an option for fresh issuance.
Does this apply to all Primary Dealers or only standalone ones?
This circular specifically addresses standalone Primary Dealers. Bank-sponsored PDs may have different capital rules.