The Reserve Bank of India [vide Master Circular DBOD.No.BP.BC.57/21.01.002/2005-2006 dated 25th Jan, 2006] has allowed banks to raise Capital through issue of Hybrid Instruments as under for augmenting their Capital Adequacy:
1. Innovative Perpetual Debt Instruments for inclusion as Tier 1 Capital
2. Debt Capital Instruments eligible for inclusion as Tier 2 Capital
3. Perpetual Non-Cumulative Preference Shares for inclusion as Tier 1 Capital; and
4. Redeemable Cumulative Preference Shares eligible for inclusion as Tier 2 Capital
Insurance Companies, in general, have long term liabilities and require Instruments of Investment with matching maturities to optimally manage their assets and liability position. The above Instruments, which are likely to be issued by both Public and Private Sector Banks would have a minimum maturity period of 10 and 15 years, and would provide adequate flexibility to the Insurers in their Asset-Liability Management, with reasonable returns and hence provide Insurance Companies with appropriate Investment opportunity.
The Authority had therefore examined the various aspects of these instruments and have decided that the above Instruments may be deemed as a part of ‘Approved Investments’ for the purpose of Section 27A and 27B of Insurance Act, 1938, under powers vested in Section 27A(s) and 27B(j) of Insurance Act, 1938, subject to the following conditions:
1. The Debt Instrument issued by Banks in Private Sector shall be rated not less than ‘AAA’ by an independent, reputed and recognized Rating Agency and those issued by Banks in Public Sector shall have rating not less than AA.
2. Preference shares issued by the Banks shall satisfy the conditions specified under section 27A (1) (i) and 27A (1) (j) of Insurance Act, 1938 in the case of Life Insurers and 27B (1) (e) and 27B (1) (f) of Insurance Act, 1938 in the case of Non-Life Insurers.
3. In the case of a Life Insurer, investments in the various Hybrid Instruments shall at all times not exceed 10% of Investment in Approved Category which are subject to Exposure Norms (i.e., 10% of 35% which is 3.5% of Life Fund) and not more than 5% of respective fund size of other than Life Fund, namely Pension & General Annuity Funds, Groups excluding Group Pension and Group Annuity Funds and Unit Linked Funds.
4. In the case of Non Life Insurers, all Investments in such Hybrid Instruments shall at any point of time not exceed 10% of Investments under Approved Investments which are subject to Exposure Norms (i.e., 10% of 55% which is 5.5% of Investment Assets)
5. All exposure Norms applicable for Approved Investments shall be applicable for these Hybrid Debt Instruments / Preference Shares Issued by the Banks.
6. If the Hybrid Debt Instrument is down graded below AAA, in the case of Private Sector banks and (below AA in the case of Public Sector Banks) such investments shall be re-classified as ‘Other than Approved Investments’ apart from reporting in FORM 2 of IRDA (Investment) Regulations, 2000.
7. In case the Interest on the Instrument is not serviced on due dates, the Investment in such Hybrid instruments are to be re-classified as ‘Other than Approved Investments’ from such date for reporting to the Authority through FORM 3A (Part A) or FORM 3B (Part A) of IRDA (Investment) Regulations, 2000 in respect of Life and Non-Life Insurers respectively and all guidelines for Classification, Income Recognition and Valuation of Assets issued by RBI shall be applicable for such Investments.
The necessary changes to incorporate the Investments made as per this circular have been given in Guidelines
INV/GLN/001/2003-04 (ver.02 – 28/04/2006) and
INV/GLN/002/2003-04 (Ver.02 – 28/04/2006)
(C R MURALIDHARAN)
Memeber