The Hindu Business Line : Banks allowed to raise capital through innovative instruments

BANKS have been allowed to raise capital through issue of innovative instruments to meet their increasing business requirement as well as to maintain the capital adequacy ratio under the Basel-II norms.

This will particularly help public sector banks to raise capital without diluting the mandatory 51 per cent government ownership.

The RBI Governor, Dr. Y.V. Reddy, said that banks would be able to raise about Rs 100,000 crore through these innovative instruments.

Banks in which the government holding has reached close to 51 per cent include Dena Bank, Punjab National Bank, Bank of Baroda and Andhra Bank. As per the guidelines issued by the Reserve Bank of India on Wednesday, banks are allowed to issue four additional instruments to raise Tier-1 and Tier-2 capital.

These are: Innovative perpetual debt instruments, perpetual non-cumulative preference shares for Tier-1 and debt capital instruments and redeemable cumulative preference shares for for Tier-2 capital.

The amount raised through innovative instruments should not exceed 15 per cent of the total Tier-1 capital. (Tier- - 1 capital includes shareholders equity, perpetual non-cumulative preference shares and innovative instruments.) Such instruments should be fully paid-up, unsecured and free of any restrictive clause, RBI said.

Investment by FIIs and NRIs in these cannot exceed the overall limit of 49 per cent and 24 per cent of the issue, respectively.

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