What changed
RBI issued a master circular consolidating all previous instructions on capital adequacy and risk management for standalone Primary Dealers, effective July 1, 2011. It updates earlier guidelines from December 2000 and January 2004, incorporating developments like exchange-traded derivatives. The circular also lists all consolidated circulars in Annex G.
What it means for you
Standalone PDs now have a single reference document for capital funds composition (Tier-I, II, III) and risk management, simplifying compliance. The circular clarifies deductions from Tier-I capital (e.g., intangible assets, deferred tax assets) and limits on Tier-II instruments like subordinated debt (max 50% of Tier-I). Banks with PD departments must continue following bank-specific capital adequacy rules, not this circular.
What you must do
- Review and update internal capital adequacy policies to align with the master circular's definitions of Tier-I, II, and III capital.
- Ensure subordinated debt instruments meet maturity and discount rate requirements for Tier-II capital inclusion.
- Verify that deductions from Tier-I capital (e.g., intangible assets, deferred tax assets) are correctly applied.
- For banks with PD departments, confirm adherence to separate bank-level capital adequacy guidelines.
- Maintain records of all consolidated circulars listed in Annex G for audit and compliance reference.
Who it affects
Standalone Primary Dealers (PDs) in government securities market, Banks undertaking PD activities departmentally (indirectly, via separate guidelines), RBI's Financial Markets Regulation Department
What is the maximum limit for subordinated debt as Tier-II capital?
Subordinated debt eligible as Tier-II capital is limited to 50% of Tier-I capital. Instruments with initial maturity less than 5 years or remaining maturity of one year or less are excluded.
Are banks with PD departments covered by this master circular?
No. Banks undertaking PD activities departmentally must follow the extant guidelines applicable to banks for capital adequacy and risk management, not this circular.
What deductions are required from Tier-I capital?
Deductions include investment in subsidiaries, intangible assets, current period losses, deferred tax assets, and losses brought forward. Also, loans to group companies not related to business must be deducted.