What changed
The definition of Tier 1 capital in paragraph 9(6) of the Master Direction has been replaced to explicitly include quarterly profits, subject to limited review/audit and a formula that deducts average dividends paid over the last three years. New paragraphs 159(7) and 159(8) clarify that for exposure norms, Tier 1 capital must be based on the latest available financial statements (audited or limited review) and uses the same definition.
What it means for you
SPDs can now include quarterly profits in Tier 1 capital, but only after a limited review and after adjusting for average dividends. This gives more flexibility in capital computation but requires stricter quarterly financial oversight. For exposure norms, the applicable Tier 1 capital must be from the most recent financial statements, ensuring up-to-date capital adequacy.
What you must do
- Update internal capital computation models to include quarterly profits as per the new formula (eligible profit = net profit minus 0.25 times average dividend of last three years).
- Ensure quarterly financial statements are subjected to limited review or audit by statutory auditors before including profits in Tier 1 capital.
- Review exposure limit compliance using the latest available financial statements (audited or limited review) for Tier 1 capital calculation.
- Deduct losses, intangible assets, deferred tax assets, and investment in subsidiaries from Tier 1 capital as specified.
Who it affects
All Standalone Primary Dealers (SPDs), Statutory auditors of SPDs, RBI supervision teams monitoring SPD capital adequacy
Can SPDs include quarterly profits in Tier 1 capital immediately?
Yes, with immediate effect, but only if the quarterly financial statements are subjected to limited review or audit by statutory auditors, and the profits are reduced by 0.25 times the average dividend paid in the last three years.
What is the formula for eligible quarterly profit?
Eligible profit up to quarter 't' = Net profit up to quarter 't' minus 0.25 times the average dividend paid in the last three financial years. Losses in the current year must be fully deducted from Tier 1 capital.
How should SPDs calculate Tier 1 capital for exposure norms?
Use the latest available financial statements (audited or subject to limited review) and apply the definition of Tier 1 capital as per paragraph 9(6) of the Master Direction, which now includes quarterly profits under the specified conditions.