Govt exempts banks from nod to raise tier-II capital

The government has exempted banks from taking its permission for raising tier-II capital from the market.

According to a recent notification, banks can raise tier-II capital from the market in the form of subordinated bonds after the proposal is vetted and approved by the Reserve Bank of India (RBI), without having to seek further approval from the ministry.

According to banking sources, the permission has been given considering the fact that tier II of a bank's capital does not comprise equity and it is a borrowing in the balance sheet. They added that this will expedite the process of raising capital by the banks.

In fact, many banks have lined up for raising tier-II capital. These include UCO Bank, Union Bank of India, Central Bank of India, said an investment banker.

He added that some banks that were proposing public issues of equity for raising funds might consider the bond route now.

Earlier, banks had to put up the proposal for tier-II resources to the RBI which in turn would submit it to the government for approval.

Investment bankers added that banks will have to list their bonds and also come out with offer documents for the bonds as per the new guidelines issued jointly by the Securities and Exchange Board of India (Sebi) and the RBI.

However, some banks have requested the RBI to exempt them from complying with the corporate governance norms for private placement specified under clause 49 of the listing agreement.

This is because the board is set up by the government and individual banks have no say in its composition. The proposal, bankers said, is under the consideration of the RBI.

Tier-II bonds comprise liabilities in the balance sheet of banks and form part of the borrowings.