The Reserve bank of India (RBI) released a new set of guidelines for the issuance and regulation of equity and securities for primary cooperative banks in March 2022.

By Trisha Shreyashi

Primary Cooperative Banks, popularly known as Urban Cooperative Banks (UCBs) are cooperative societies registered under the terms of the respective State Cooperatives Act or Multi-State Cooperatives Act, 2002. UCBs are ​​under the supervision of the Registrar of Cooperatives. However, the authority to issue banking licenses and regulate, monitor and develop banking functions of UCBs rests with the RBI under the Banking Regulation (BR) Act, 1949.

In light of the BR Amendment Act of 2020, the new fundraising standard was proposed and public comment on the draft was requested by RBI in 2021 last year. The 2020 amendment replaced Article 12 to provide for the issuance and regulation of securities by cooperative banks.

The 2022 notice specifies that UCBs can raise capital through three broad methods, namely: – issuance of common shares, preference shares and debt instruments.

Firstly, UCBs can raise funds by issuing shares to subscribed members within the scope or by issuing additional shares to existing members.

Second, UCBs may increase Tier I and Tier II capital by issuing perpetual cumulative and non-cumulative preference shares and redeemable cumulative and non-cumulative preference shares.

Third, UCBs may issue perpetual debt instruments (PDIs) for Tier-I capital and subordinated long-term bonds as Tier-II capital. It may also be issued to institutional investors, with the consent of the depositors.

It may be relevant to understand that Tier – I Capital is the bank’s primary source of funding. It includes shareholders’ equity and retained earnings that are disclosed in their financial statements. On the other hand, Tier II capital or additional capital includes undisclosed funds, revaluation reserves, hybrid capital instruments, subordinated debt securities, general loss on loans, uncollected reserves, etc.

The notice specifies that such fundraising capital instruments may be issued by the UCBs with the prior approval of RBI. UCBs must request authorization through an application to RBI’s regional office. The application shall be accompanied by an offer memorandum, prospectus, information memorandum, certificate of compliance from a chartered accountant and relevant disclosures.

The notice also establishes the terms of issue specifying eligibility, limits, amount, term, options, dividend/coupons, classification on the balance sheet, payment of dividend/coupons, seniority of the claim, voting rights, discount, disclosures, due diligence, interest rate, investment, advances for purchase of certain instruments and lock-in clause.

Furthermore, UCBs issuing the above regulatory capital instruments are subject to certain conditions. Banks should therefore not use their fixed deposit rate as a benchmark for floating rate debt instruments or floating rate instruments. Secondly, the investors declare in the common application form for the proposed issuance that they have understood the characteristics and risks involved. Third, UCBs must provide a disclaimer that these capital instruments are different from a fixed deposit and are not covered by deposit insurance. Furthermore, it is mandatory to specify the procedure for the transfer to legal heirs in the event of the death of a subscriber.

Investors should note that UCB will not cancel or reduce its share capital unless approved by RBI. In such a scenario, the UCB will reimburse the share capital to their members, nominees or heirs upon request. Finally, UCB’s loans are linked on a collateral basis to the shareholdings of borrowing members. These above conditions must be met in order to better inform investors about the risk characteristics of regulatory capital requirements.

It is imperative to mention the two main issues that were excluded in the draft 2021 notice: (i) Reasonableness of threshold criteria for stocks linked to lending standards (ii) Whether or not the issuance of PDIs is restricted to institutional investors. It can be deduced from the aforementioned explanation that these matters were discussed in the final notification of 2022.

(The author is a lawyer and columnist. Opinions are personal and not necessarily those of

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