The Hindu Business Line : Banks allowed pref share issue

Banks, facing pressure on their capital due to the increasing demand for credit, may soon have another set of instruments to raise funds. The Reserve Bank of India has allowed them to raise Tier I and upper Tier II capital through preference shares. According to the RBI guidelines issued today, banks can raise Perpetual Non-Cumulative Preference Shares (PNCPS) as Tier I capital. They can also raise upper Tier II capital through Perpetual Cumulative Preference Shares (PCPS)

Redeemable Non-Cumulative Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS), in Indian rupees.

The PNCPS will be treated on part with equity, and hence, the coupon payable on these instruments will be treated as dividend (an appropriation of profit and loss account). All other types of preference shares will be treated as liabilities and the coupon payable will be treated as interest (charged to Profit and Loss Account), said the RBI note.

“The above instruments are expected to significantly enhance the range of eligible instruments available to the banks for capital adequacy purposes. Hence, it is not considered, necessary to allow the banks to issue preference shares in foreign currency in overseas market at this stage,” said the circular.

Issuing additional pure equity would impact the earning per share and the return on equity will start shrinking. This will affect valuations of the share, said a senior bank official. Also, in case of preference shares there is no issue of voting rights, he added.

The outstanding amount of Tier I preference shares along with Innovative Tier I instruments shall not exceed 40 per cent of total Tier I capital at any point of time.

The upper Tier II instruments could be with a fixed maturity of minimum 15 years and the outstanding amount along with other Tier II instruments shall not exceed 100 per cent of Tier I capital at any given point of time. –

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