What changed
RBI issued a Master Circular consolidating all prior instructions on capital adequacy and risk management for standalone Primary Dealers (PDs) up to June 30, 2012. The major update is the phase-out of Tier-III capital (short-term subordinated debt) as an eligible capital component from July 1, 2012, though existing Tier-III instruments can be recognized until maturity. The circular also updates definitions for Tier-I and Tier-II capital, including deductions for investments in subsidiaries, intangible assets, and deferred tax assets.
What it means for you
Standalone PDs must now rely solely on Tier-I and Tier-II capital for regulatory capital, as Tier-III is no longer an option for new issuances. This tightens capital quality and may require PDs to adjust their capital planning. The consolidated circular simplifies compliance by providing a single reference document, but PDs must ensure their capital structures align with the updated definitions, especially the 1.25% cap on general provisions in Tier-II and the 55% discount on revaluation reserves.
What you must do
- Review your capital structure to ensure Tier-III capital is phased out for new issuances; existing Tier-III can remain till maturity.
- Update internal capital adequacy models to reflect the revised Tier-I and Tier-II definitions, including deductions for intangible assets and deferred tax assets.
- Verify that subordinated debt instruments in Tier-II meet the 5-year minimum initial maturity and are not redeemable without RBI consent.
- Ensure general provisions and loss reserves in Tier-II do not exceed 1.25% of total risk-weighted assets.
- Refer to the Master Circular as the single source for all capital adequacy and risk management guidelines, replacing earlier individual circulars.
Who it affects
Standalone Primary Dealers (PDs) in the Government Securities market, Banks undertaking PD activities departmentally (must follow separate banking guidelines), RBI's Department of Internal Debt Management (IDMD) and Department of Banking Operations and Development
What is the effective date for the phase-out of Tier-III capital?
Tier-III capital (short-term subordinated debt) is phased out as an eligible capital source for standalone PDs from July 1, 2012. However, PDs that already have Tier-III instruments can continue to recognize them until maturity.
What are the key components of Tier-II capital under this circular?
Tier-II capital includes undisclosed reserves, cumulative preference shares (non-compulsorily convertible), revaluation reserves (discounted at 55%), general provisions up to 1.25% of risk-weighted assets, hybrid debt capital instruments, and subordinated debt with initial maturity of at least 5 years and remaining maturity over 1 year.
Does this circular apply to banks that conduct PD activities?
No. Banks undertaking PD activities departmentally must follow the extant capital adequacy and risk management guidelines issued by RBI's Department of Banking Operations and Development, not this Master Circular.