What changed
Previously, banks could issue capital instruments like IPDI, Upper Tier 2 debt, and preference shares with step-up options. As of January 20, 2011, RBI banned step-up options on all new Tier 1 and Tier 2 capital instruments, permitting only call options as per existing guidelines.
What it means for you
Banks can no longer use step-up features to incentivize redemption of capital instruments, which could affect investor appetite. This change ensures compliance with Basel III criteria, making instruments more resilient. Banks must adjust their capital raising strategies to rely solely on call options.
What you must do
- Stop issuing any new Tier 1 or Tier 2 capital instruments with step-up options immediately.
- Review existing capital issuance plans and replace step-up features with call options as per earlier circulars.
- Update internal policies and product documentation to reflect the ban on step-ups.
- Communicate the change to investors and treasury teams to align expectations.
Who it affects
All scheduled commercial banks (excluding RRBs), Treasury and capital management teams, Investors in bank capital instruments
Does this circular affect instruments issued before January 20, 2011?
No, the ban applies only to new issuances. Instruments issued before September 12, 2010, with step-ups will continue to be recognized under Basel III transitional arrangements.