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REGULATORY CAPITAL CHANGES IN CRITERIA IN CASE OF INSTUMENTS WITH A STEP UP OPTION As per current instructions of RBI, banks have

been permitted to issue following types of capital instruments with a ‘step-up’ option i! ii! Innovative "erpetual #ebt Instruments $I"#I% and &pper 'ier ( debt capital instruments "erpetual )umulative "reference *hares $")"*%, Redeemable +on-)umulative "reference *hares $R+)"*% and Redeemable )umulative "reference *hares $R)"*% as part of &pper 'ier ( preference shares and *ubordinated debt as 'ier ( capital

iii!

(! Basel )ommittee on Banking *upervision $B)B*% and the ,inancial *tability Board $,*B% have undertaken an e-tensive review of the regulatory framework in the wake of the sub-prime crisis! Recently B)B* has proposed certain minimum set of criteria for inclusion of instruments in the new definition of regulatory capital! .ne of the criteria is that instruments should not have step-ups or other incentives to redeem! /owever, the B)B* has proposed certain transitional arrangements, in terms of which only those instruments having such features which were issued before *eptember 0(, (101 will continue to be recogni2ed as eligible capital instruments under Basel III which becomes operational beginning 3anuary 0, (104 in a phased manner! 4! In view of the foregoing, RBI has recently has advised banks that henceforth they should not issue 'ier 0 or 'ier ( capital instruments with ‘step-up option’ for the purpose of additions to regulatory capital! /owever, such instruments can be issued with a ‘call option’!

'he above instructions are silent on the point as to the treatment to be given to instruments with a step up option issued upto 0(!15!(10 and also those issued between 0(!15!(101 and (1!10!(100, the date of their latest circular!