The Hindu Business Line : Urban co-ops may get to issue bonds, special shares

New sources
Unsecured, subordinated, non-convertible redeemable debentures or bonds, which may be treated as Tier II capital.
Special shares, issued either at a premium or par, as an instrument to raise Tier I capital.
Redeemable cumulative preference shares for a minimum maturity of 10 years.
Investment in Tier II bonds of other UCBs.

Mumbai , Nov 22

Urban co-operative banks (UCBs) may soon be allowed to issue unsecured subordinated bonds and special shares to raise capital. These are part of the recommendations of a working group set up by the Reserve Bank of India to examine the issue of share capital of UCBs and identify alternate instruments or avenues for raising capital.

The working group report, released today, has identified four new instruments to enable UCBs to raise long-term capital.

However, a senior official of a leading UCB said these instruments would be useful only if the State Co-operative Bank Act and Multi-State Co-operative Bank Act are amended. "There is no provision for preference shares, non-voting shares and debentures as of now. So, implementation of these instruments is a long way off," she said.

Considering the financial condition of UCBs, the official said there would be little investor interest unless the banks improve their performance or merge, she added.

Instruments

The first instrument is unsecured, subordinated, non-convertible redeemable debentures or bonds, which may be treated as Tier II capital. It could have a minimum maturity of 10 years. The interest rate can be fixed, floating or a combination of both; floating rates should be linked to factors like rate of dividend declared for ordinary shareholders.

Another instrument that may be permitted are special shares, issued either at a premium or par, as an instrument to raise Tier I capital. Subscription to these shares will be on a non-voting basis, says the report.

The bank's liability to bond holders would rank after the claims of depositors and other creditors but would be placed above that of shareholders.

UCBs can also issue redeemable cumulative preference shares, which may be treated as Tier II capital for a minimum maturity of 10 years.

Instruments issued by UCBs cannot be listed on a stock exchange. The group has suggested that the bonds and special shares be transferable by endorsement and delivery.

The group has suggested that UCBs be allowed to invest in Tier II bonds of other UCBs. Commercial banks may be allowed to invest in these instruments within the ceiling prescribed for investment in unlisted securities, which is 10 per cent of their non-SLR requirements.

None of these instruments would have a put (sell) option but could have a call (buy) option exercisable after five years in case of bonds and preference shares and after 10 years in case of special shares.

Long-term bonds

The group has also suggested that UCBs be allowed to issue long maturity deposits with minimum maturity of 15 years. At present banks are not permitted to raise deposits for periods over 10 years. These long-term deposits can be considered as Tier II capital and should have floating rate of interest. Premature withdrawal will not be permitted, though the banks would have the option to repay anytime after 10 years with permission of RBI. These deposits will not be eligible for insurance cover.

The group has also recommended that the income-tax applicable to UCBs may be deferred for three years and give them time to raise capital using these alternate instruments.