Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks – Spreading of MTM losses and creation of Investment Fluctuation Reserve (IFR)

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It has been decided to grant banks the option to spread provisioning for mark to market (MTM) losses on investments held in AFS and HFT for the quarters ended December 31, 2017 and March 31, 2018. The provisioning may be spread equally over up to four quarters, commencing with the quarter in which the loss is incurred.

Banks choosing the above option shall make suitable disclosures in their notes to accounts/ quarterly results providing details of

·        the provisions for depreciation made during the quarter/year and

·        the balance required to be made in the remaining quarters.

All banks are advised to create an Investment Fluctuation Reserve (IFR) with effect from the year 2018-19, as under:

An amount not less than the lower of the following:

·        net profit on sale of investments during the year

·        net profit for the year less mandatory appropriations

shall be transferred to the IFR, until the amount is at least 2 % of the HFT and AFS portfolio, on a continuing basis. This should be achieved within a period of 3 years where feasable.

A bank may, at its discretion, draw down the balance available in IFR in excess of 2 %, for credit to the balance of profit/loss at the end of any accounting year. Where the balance in the IFR is less than 2 %, a draw down will be permitted subject to the following conditions:

·        The drawn down amount is used only for meeting the minimum CET1/Tier 1 capital requirements by way of appropriation to free reserves or reducing the balance of loss, and

·        The amount drawn down is not more than the extent, the MTM provisions made during the aforesaid year exceed the net profit on sale of investments during that year.

IFR shall be eligible for inclusion in Tier 2 capital.

Based on RBI notification dated 2^nd April 2018. For any further clarification, please visit www.rbi.org.in ...............Poppy

Commercial Paper

Eligible Issuers:

·        Companies, including NBFCs and All India Financial Institutions (AIFIs) subject to the condition that any fund-based facility availed from banks or financial institutions are classified as a standard asset at the time of issue.

·        Other entities like co-operative societies, unions, government entities, trusts, LLPs and any other body corporate in India with a net worth of ₹ 100 cr or above subject to the above mentioned condition.

·        Any other entity specifically permitted by RBI.

End use

·        The end use shall be disclosed in the offer document at the time of issue.

Eligible Investors:

·        All residents and non-residents permitted to invest in CPs under FEMA; however, no person can invest in CPs issued by related parties.

·        Investment by regulated financial sector entities will be subject to conditions imposed by the regulator.

Form of the instrument, mode of issuance, rating and documentation procedures

Form

·        A CP shall be issued in the form of a promissory note and held in a dematerialized form through SEBI approved/ registered depositories.

·        A CP shall be issued in a denomination of ₹ 5 lakh and multiples thereof.

·        A CP shall be issued at a discount to face value.

·        No issuer shall have the issue of a CP underwritten or co-accepted.

·        Options (call/put) are not permitted on a CP.

Rating Requirement

·        Effective from 1^st Oct 2017, those Issuers, whose total CP issuance during a calendar year is ₹ 1000 crore or more, shall obtain credit rating from at least two CRAs registered with SEBI

·        Lower of the two ratings should be adopted.

·        Where both ratings are the same, the issuance shall be for the lower of the two amounts for which ratings are obtained.

·        The minimum credit rating shall be ‘A3’ as per rating symbol and definition prescribed by SEBI.

Documentation Procedures

·        Issuers, investors and Issuing and Paying Agents (IPAs) shall follow the standard procedures and documentation prescribed by FIMMDA.

Issue of CP-Credit Enhancement, limits etc.

·        A CP shall be issued as a ‘stand-alone’ product.

·        Banks and FIs may provide stand-by assistance/credit, back-stop facility etc. by way of credit enhancement for a CP issue.

·        Non-bank entities may provide unconditional and irrevocable guarantee for credit enhancement for CP issue provided that

a.     the offer document should properly disclose the net worth of the guarantor company,

b.     the names of the companies to which the guarantor has issued similar guarantees,

c.      the extent of the guarantees offered by the guarantor company,

d.     the conditions under which the guarantee will be invoked.

Secondary market trading and settlement of CP

·        All OTC trades in CP shall be reported within 15 minutes to “F-TRAC” of Clearcorp Dealing System (India) Ltd.

·        The settlement cycle for OTC trades shall be T+0 or T+1.

·        OTC trades in a CP shall be settled through the clearing corporation of any recognized stock exchange or as approved by RBI.

Buyback of CP

·        The buyback of a CP shall be at the prevailing market price.

·        The buyback offer should be extended to all investors.

·        The terms of the buyback should be identical for all investors.

·        The buyback offer may not be made before 30 days from the date of issue.

·        CPs bought back shall stand extinguished.

Duties and Obligations

The duties and obligations of the Issuer, Issuing and Paying Agent (IPA) and Credit Rating Agency (CRA) are set out below:

I. Issuer – The issuer of CP shall

·        Appoint an IPA for issuance of a CP.

·        Comply with all requirements under these directions and furnish a declaration in this regard to the IPA.

·        Ensure that the proceeds from CP issues are for declared end uses.

·        Furnish the board resolution authorizing the company to borrow through issuance of a CP to the IPA.

·        Keep the banks from whom it has outstanding credit facilities informed of its market borrowings, by the end of the month in which a CP was issued.

·        Arrange for crediting the CP to the demat account through the IPA within 7 days of issue.

·        Route all subscriptions/redemptions/buybacks/payments and default details through the IPA.

·        Make disclosures in the offer document.

·        Submit a certificate from the CEO/CFO to the IPAs on quarterly basis that CP proceeds are used for disclosed purposes, and certifying adherence to other conditions of the offer document and the CP directions, within 15 days from the close of the quarter.

·        Inform the CRA and IPA on the same day about any default/delay in CP related payments.

·        The issuer who has defaulted on a CP shall not be allowed to access the CP market for six months from the date of default.

II. Issuing and Paying Agent – The IPA for a CP issuance shall

·        Ensure that the borrower is authorised to borrow through CPs.

·        Verify all information disclosed in the offer document before issuance.

·        Verify all documents submitted by the issuer and issue a certificate that these are in order.

·        Make available the IPA certificate in electronic form on the website of the depositories for the CPs..

·        Verify and hold certified copies of original documents and/or digitally signed documents in its custody.

·        Report the details of issuance of a CP, or its buyback and instances of default on the F-TRAC platform, by close of business hours. Until CCIL advises full operationalisation of F-TRAC, the current reporting arrangements shall continue.

III. Credit Rating Agency

·        A Credit Rating Agency must rate the CP issuances responsibly, continuously monitor the rating and disseminate rating revisions to public.

·        A CRA must publicly disseminate the ratings of the CP and any subsequent change, on the date of rating or change, as the case may be.

Applicability of other directions/regulations etc

Issuers of CPs shall abide by any guideline issued by any regulator or other authority in respect of issue of CPs provided that such guidelines do not conflict with these directions.

Non-applicability of Certain Other Directions

Nothing contained in the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 1998 shall apply to the raising of funds by issuance of CP, by any NBFC when such funds are raised in accordance with these directions.

Based on RBI circular dated 10^th Aug 2017. For any further clarification please refer www.rbi.org.in ........................Poppy