The Reserve Bank of India has asked banks not to consider raising hybrid tier-I and upper tier-II capital in foreign currency till the external commercial borrowing policy is reviewed.
"A general policy (on hybrid capital in foreign currency) will evolve in due course in consultation with the government as part of the ECB policy. Till then, banks may issue these instruments denominated in rupees, which will facilitate the domestic (creation of a) market for such instruments," RBI said in a communication to the Indian Banks' Association.
The central bank was responding to a clarification sought by the IBA on whether the capital instruments issued in foreign currency would be outside the foreign currency borrowing limit of 25 per cent of tier-I capital.
The RBI, in its January 2006 guidelines for hybrid capital raising, said it would consider on a case-to-case basis banks' requests for raising innovative perpetual debt instruments eligible for tier-I capital and debt capital instruments eligible for upper tier-II capital in foreign currency.
The IBA argued that domestic investors would require more time to understand the features of hybrid instruments, which were well understood in the international markets.
The RBI has accepted banks' plea that the 49 per cent ceiling on the FII investments and the 24 per cent ceiling on the NRI investments should not be applicable on an individual issuance basis.
The banking regulator has now allowed banks to raise amounts through issues to FIIs and NRIs and then raise the remaining amount from domestic investors within a period of one year.
The apex bank has linked the eligibility for raising innovative tier-I capital to the balance sheet position at the end of the previous year.
It has told banks that the investments by FIIs in innovative tier-I instruments would be outside the limit of corporate debt prescribed by the Securities and Exchange Board of India. Their investments in upper tier-II would be within the limit.
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