RBI/2004-05/ 367
UBD.BPD(PCB).MC.No. 16 /16.20.00/2004-05
February 18, 2005
Chief Executive Officers of
All Primary (Urban) Co-operative Banks
Dear Sir,
Master Circular on Investments
by Primary (Urban) Co-operative Banks
Please refer to our Master Circular
UBD.BPD.(PCB).MC.No.4/16.20.00/2004-05
dated December 23, 2003 on the captioned subject (available at RBI website
www.rbi.org.in). The enclosed Master Circular
consolidates and updates all the instructions/guidelines on the subject upto
June 30, 2004.
2. Please acknowledge receipt of
this Master Circular to the concerned Regional Office of this Department.
Yours faithfully,
(N.S. Vishwanathan)
Chief General Manager
Master Circular on Investments
by Primary (Urban) Co-op. Banks
Contents
1 Restrictions On Holding Shares
in Other Co-operative Societies
2 Statutory (SLR) Investments
3 Investment Policy
4 General Guidelines
5 Transactions through SGL Accounts
6 Use of Bank's Receipts
7. Engagement of brokers
8. Settlement of Government Securities Transactions through
CCIL
9 Trading of Government Securities on Stock Exchanges
10 Ready forward contracts in Govt. Securities
11 Uniform Accounting for Repo/Reverse Repo transaction
12. Non SLR Investments
13 Internal Control and Investment Accounting
14 Recommenations of Ghosh Committee
15 Categorisation of Investments
16 Valuation of Investments
17 Investment Fluctuation Reserve (IFR)
18 Reporting
Annexure
I Certain clarifications regarding
brokers’ limits
II Definitions of certain terms used for non-SLR Debt Securities
III List of All India Financial Institutions
IV Disclosure requirements for non-SLR investments
Appendix:
A: List of circulars consolidated
in the Master Circular on Investments by primary urban co-operative banks
B: List of other circulars from which instructions relating
to investments have been consolidated in the Master Circular
Master Circular on Investments
by Primary (Urban) Co-operative Banks
1 RESTRICTIONS ON
HOLDING SHARES IN OTHER CO-OPERATIVE
SOCIETIES
1.1 Section 19 of the Banking
Regulation Act, 1949 (as applicable to co-operative societies) stipulates that
no co-operative bank shall hold shares in any other co-operative society except
to such extent and subject to such conditions as the Reserve Bank may specify
in that behalf. However nothing contained in the section applies to -
1.1.1 shares acquired through
funds provided by the state government for that purpose;
1.1.2 in the case of a central
co-operative bank, the holding of shares in the state co-operative bank to which
it is affiliated; and
1.1.3 in the case of a primary
(urban) co-operative bank ( pcb), holding of shares in the central co-operative
bank to which it is affiliated or in the state co-operative bank of the state
in which it is registered.
1.2 In pursuance of the
powers conferred by section 19 read with section 56 of the said Act, the Reserve
Bank has specified that the extent and conditions subject to which co-operative
banks may hold shares in any other co-operative society shall be as follows:
1.2.1 The total investments of
a co-operative bank in the shares of co-operative institutions, other than those
falling under any of the categories stated at paras 1.1.1 to 1.1.3 above, shall
not exceed 2 per cent of its owned funds (paid-up share capital and reserves).
1.2.2 The investment of a bank
in the shares of any one co-operative institution coming under para 1.2.1 above
shall not exceed 5 per cent of the subscribed capital of that institution.
Note: When more
than one co-operative bank contributes to the shares in a co-operative society
falling under para 1.2.1, the limit of 5 per cent of the subscribed capital
indicated above shall apply not in respect of the investment of each of the
banks but in respect of the investment of all the banks taken together. In other
words, the total investment of all the co-operative banks should be limited
to 5 per cent of the subscribed capital of the enterprise concerned.
A co-operative bank should offer
to make its contribution to the shares of a co-operative society coming under
para 1.2.1 above only if the by-laws of the recipient society provide for the
retirement of share capital contributed by it.
1.2.3 The retirement of
the share capital contributed by a bank to the shares of any society coming
under para 1.2.1 above should be completed in 10 equal annual instalments commencing
from the co-operative year immediately following the year in which the concern
commences business or production.
1.2.4 A co-operative bank should
not, except with the permission of the Reserve Bank, contribute to the share
capital of a society coming under category referred to in para 1.2.1 above,
if it is situated outside its area of operation.
1.2.5 The above restrictions
will not apply to holdings by co-operative banks of shares in non-profit making
co-operative societies such as those formed for the protection of mutual interests,
(e.g. co-operative banks' association) or for the promotion of co-operative
education etc. (e.g. state co-operative union), or housing co-operatives for
the purpose of acquiring premises on ownership basis, etc.
2 STATUTORY (SLR)
INVESTMENTS
2.1 Act Provisions
2.1.1 In terms of provisions
of section 24 of the Banking Regulation Act 1949, (As applicable to co-operative
societies), every primary (urban) co-operative bank is required to maintain
liquid assets which at the close of business on any day should not be less than
25 percent of its time and demand liabilities in India (in addition to the minimum
cash reserves requirement).
2.1.2 The banks may hold such
liquid assets in the form of cash, gold or unencumbered approved securities.
2.1.3 ‘approved securities’
as defined by section 5(a) (i) & (ii) of the Banking Regulation Act, 1949
(AACS) mean -
Securities in which a trustee
may invest money under clause (a), (b), (bb), (c) or (d) of Section 20 of the
Indian Trust Act, 1882.
Such of the securities authorised
by the Central Government under clause (f) of Section 20 of the Indian Trust
Act, 1882 as may be prescribed.
2.2 Holding in Government/other
approved Securities
All primary (urban) co-operative
banks are required to achieve certain minimum level of their SLR holdings in
the form of government and other approved securities as percentage of their
Net Demand and Time Liabilities (NDTL) as indicated below :
|
Sr.No.
|
Category of bank
|
Minimum SLR holding in government
and other approved securities as percentage of Net Demand and Time Liabilities
|
|
1.
|
Scheduled banks
|
25%
|
|
2.
|
Non-Scheduled banks
a) with NDTL of Rs.25 crore
& above
b) with NDTL of less than
Rs.25 crore
|
15%
10%
|
2.3 Manner of Holding Mandatory
Investments
2.3.1 The Securities may be
held in either of the three forms viz: (a) Physical scrip form, (b) Subsidiary
General Ledger (SGL) Account. In respect of securities with SGL facility, the
SGL account can be maintained in the bank's own name directly with the Reserve
Bank of India, or in a Constituents SGL Account opened with any scheduled commercial
bank/state co-operative bank/primary dealer (PD) or Stock holding Corporation
of India Ltd. (SHCIL) (c) in a dematerialised account with depositories (NSDL/CDSL,
NSCCL).
2.3.2 Primary (urban) co-operative
banks are not permitted to open and maintain CSGL A/cs of other PCBs / other
entities like charitable institutions, trusts etc.
2.3.3 Both scheduled &
non-scheduled primary (urban) co-operative banks with NDTL of Rs.25 crores &
above are required to maintain investments in government securities only in
SGL Accounts with Reserve Bank of India or in Constituent SGL Accounts with
PDs, scheduled commercial banks, state co-operative banks, depositories and
SHCIL.
3 INVESTMENT POLICY
3.1 Keeping in view the
various regulatory/statutory and the bank's own internal requirements, primary
(urban) co-operative banks should lay down, with the approval of their Board
of Directors, the broad Investment Policy and objectives to be achieved while
undertaking investment transactions. The investment policy should be reviewed
each year. The Board/Committee/Top Management should actively oversee investment
transactions. Banks should not undertake any transactions on behalf of Portfolio
Management Scheme (PMS) clients in their fiduciary capacity, and on behalf of
other clients, either as custodians of their investments or purely as their
agents.
3.2 The bank’s investment policy
should clearly –
3.2.1 define the authority
to put through deals,
3.2.2 procedure to be followed
for obtaining sanction of the appropriate authority,
3.2.3 procedure to be followed
while putting through deals,
3.2.4 various prudential exposure
limits, and
3.2.5 reporting system.
3.3 The investment policy of
the bank should include guidelines on the quantity (ceiling) and quality of
each type of security to be held on its own investment account. Bank should
clearly indicate the authority to put through investment deals and the reporting
system to be adopted. It should be prepared strictly observing the instructions
issued by the Registrar of Co-operative Societies and the Reserve Bank of India
from time to time and clearly spell out the internal control mechanism, accounting
standards, audit, review and reporting system to be evolved.
3.4 All the transactions should
be clearly recorded indicating full details. The top management should undertake
a periodical review of investment transactions in a critical manner and put
up large transactions to the Board, for information.
3.5 A copy of the internal
investment policy guidelines framed by the banks with the approval of their
Boards should be forwarded to the concerned Regional Office of the RBI, certifying
that the policy is in accordance with the prescribed guidelines and the same
has been put in place. Subsequent changes, if any, in the Investment Policy
should also be advised to the Regional Office of the RBI.
4 GENERAL GUIDELINES
4.1 Primary (urban) co-operative
banks should not undertake any purchase/sale transactions with broking firms
or other intermediaries on principal to principal basis.
4.2 No sale transaction
should be put through by banks without actually holding the security in its
investment account i.e. under no circumstances banks should hold an oversold
position in any security. However, scheduled primary (urban) co-operative banks
may sell a government security already contracted for purchase, provided:
4.2.1 the purchase contract is
confirmed prior to the sale,
4.2.2 the purchase contract
is guaranteed by CCIL or the security is contracted for purchase from the Reserve
Bank and,
4.2.3 the sale transaction will
settle either in the same settlement cycle as the preceding purchase contract,
or in a subsequent settlement cycle so that the delivery obligation under the
sale contract is met by the securities acquired under the purchase contract
(e.g. when a security is purchased on T+0 basis, it can be sold on either T+0
or T+1 basis on the day of the purchase; if however it is purchased on T+1 basis,
it can be sold on T+1 basis on the day of purchase or on T+0 or T+1 basis on
the next day).
4.3 For purchase of securities
from the Reserve Bank through Open Market Operations (OMO), no sale transactions
should be contracted prior to receiving the confirmation of the deal/advice
of allotment from the Reserve Bank.
4.4 Only scheduled banks, not classified
as Grade III/IV, shall be permitted to become members of NDS and participate
in DVP III mode for settlement of Government Securities transactions.
4.5 Banks should exercise abundant
caution to ensure adherence to these guidelines. The concurrent auditors should
specifically verify the compliance with these instructions. The concurrent audit
reports should contain specific observations on the compliance with the above
instructions and should be incorporated in the monthly report to the Chairman
and Managing Director/Chief Executive Officer of the bank and the half yearly
review to be placed before the Board of Directors. CCIL will make available
to all market participants as part of its daily reports, the time stamp of all
transactions as received from NDS. The mid office/back office and the auditors
may use this information to supplement their checks/scrutiny of transactions
for compliance with the instructions. Any violation noticed in this regard should
immediately be reported to the concerned Regional Office of Urban Banks Department
and the Public Debt Office (PDO), Reserve Bank of India, Mumbai. Any violation
noticed in this regard would attract penalties as currently applicable to the
bouncing of Subsidiary General Ledger (SGL) forms even if the deal has been
settled because of the netting benefit under DVP III, besides attracting further
regulatory action as deemed necessary.
4.6 Banks successful in the auction
of primary issue of government securities, may enter into contracts for sale
of the allotted securities in accordance with the terms and conditions as indicated
below :
4.6.1 The contract for sale can
be entered into only once by the allottee bank on the basis of an authenticated
allotment advice issued by Reserve Bank of India. The selling bank should
make suitable noting/stamping on the allotment advice indicating the sale contract
number etc., the details of which should be intimated to the buying entity.
The buying entity should not enter into a contract to further resell the securities
until it actually holds the securities in its investment account. Any sale of
securities should be only on a T+0 or T+1 settlement basis.
4.6.2 The contract for sale of
allotted securities can be entered into by banks only with entities maintaining
SGL Account with Reserve Bank of India for delivery and settlement on the next
working day through the Delivery versus Payment (DVP) system.
4.6.3 The face value of securities
sold should not exceed the face value of securities indicated in the allotment
advice.
4.6.4 The sale deal should be
entered into directly without the involvement of broker/s.
4.6.5 Separate record of such
sale deals should be maintained containing details such as number and date of
allotment advice, description and the face value of securities allotted, the
purchase consideration, the number, date of delivery and face value of securities
sold, sale consideration, the date and details of actual delivery i.e. SGL Form
No., etc. This record should be made available to Reserve Bank of India for
verification. Banks should immediately report any cases of failure to maintain
such records.
4.6.6 Such type of sale transactions
of Government securities allotted in the auctions for primary issues on the
same day and based on authenticated allotment advice should be subjected to
concurrent audit and the relative audit report should be placed before the Board
of Directors of the Bank once every month. A copy thereof should also be sent
to the Regional Office concerned of Urban Banks Department.
4.6.7 Banks will be solely responsible
for any failure of the contracts due to the securities not being credited to
their SGL account on account of non-payment /bouncing of cheque etc.
Banks should seek a scheduled commercial
bank, a primary dealer, a financial institution, another primary (urban) co-operative
bank, insurance company, mutual funds or provident fund, as a counter-party
for their transactions. Preference should be given for direct deals with such
counter parties. It will be desirable to check prices from the other banks or
PDs with whom the primary (urban) co-operative bank may be maintaining constituent
SGL Account (CSGL). The prices of all trades done in government securities,
including those traded through Negotiated Dealing System, are also available
at RBI website (www.rbi.org.in).
4.8 Scheduled urban co-operative
banks may undertake retailing of Government Securities with non-bank clients,
such as provident funds, non banking financial companies, high net worth individuals
etc. subject to the following conditions:
4.8.1 Banks may freely buy
and sell Government securities on an outright basis at the prevailing market
prices without any restriction on the period between sale and purchase.
4.8.2 Retailing of Government
securities should be on the basis of on going market rates/yield curve emerging
out of secondary market transactions.
4.8.3 No sale of Government
securities should be effected by banks unless they hold securities in their
portfolio either in the form of physical scrips or in the SGL account maintained
with RBI.
4.8.4 Immediately on sale,
the corresponding amount should be deducted by the bank from its investment
accounts and also from its SLR assets.
4.8.5 These transactions
should be looked into by the concurrent/statutory auditors of the bank.
4.8.6 Scheduled banks should put
in place adequate internal control checks/mechanisms as advised by RBI from
time to time.
4.9 Banks may take advantage
of the non-competitive bidding facility in the auction of Government of India
dated securities, provided by RBI. Under this scheme, banks may bid upto Rs.
two crore (face value) in any auction of Government of India dated securities,
either directly, through a bank or through a primary dealer. For availing this
facility, no bidding skill is required, as allotment upto Rs. two crores (face
value) is made at the weighted average cut-off rate which emerges in the auction.
Primary (urban) co-operative banks may also participate directly or through
a bank or a primary dealer in the auctions of state development loans, where
coupon is mostly fixed in advance and notified by RBI. An advertisement in leading
newspapers is issued 4-5 days in advance of the date of auction. Half yearly
auction calender of Government of India securities is also issued by RBI.
4.10 CSGL Accounts should be
used for holding the securities and such accounts should be maintained in the
same bank with whom the cash account is maintained. For all transactions delivery
versus payment must be insisted upon by the banks.
4.11 In case CSGL account is
opened with any of the non-banking institutions indicated above, the particulars
of the designated funds account (with a bank) should be intimated to that institution.
4.12 All transactions must be monitored
to see that delivery takes place on settlement day. The fund account and investment
account should be reconciled on the same day before close of business.
4.13 Officials deciding about
purchase and sale transactions should be separate from those responsible for
settlement and accounting.
4.14 All investment transactions
should be perused by the Board at least once a month.
4.15 The banks should keep a proper
record of the SGL forms received / issued to facilitate counter-checking by
their internal control systems/RBI inspectors/other auditors.
4.16 All purchase/sale transactions
in Government securities by the banks should necessarily be through SGL account
(with RBI) or constituent SGL account (with a scheduled commercial bank/state
co-operative bank/primary dealer/Stock Holding Corporation of India) or in a
dematerialised account with depositories (NSDL/CDSL/NSCCL).
4.17 No transactions in Government
securities by a primary (urban) co-operative bank should be undertaken in physical
form with any broker.
4.18 The entities maintaining
the CSGL/designated funds accounts are required to ensure availability of clear
funds in the designated funds accounts for purchases and of sufficient securities
in the CSGL account for sales before putting through the transactions.
4.19 The security dealings of
banks generally being for large values, it may be necessary to ensure, before
concluding the deal, the ability of the counter-party to fulfil the contract,
particularly where the counter-party is not a bank.
4.20 While buying securities
for SLR purposes, the bank should ensure from the counter parties that the bonds
it intend to purchase has and would continue to have SLR status. The bank should
also verify this from independent sources in case of doubt.
4.21 In order to avoid concentration
of risk, the banks should have a fairly diversified investment portfolio. Smaller
investment portfolios should preferably be restricted to securities with high
safety and liquidity such as Government security.
4.22 The primary (urban) co-operative
banks may seek the guidance of Primary Dealer's Association of India/Fixed Income
and Money Market Dealers' Association (FIMMDA) on investment in Government Securities.
5 TRANSACTIONS THROUGH
SGL ACCOUNT
5.1 SGL Account
5.1.1 Transfers through
SGL accounts by the banks having SGL facility can be made only if they maintain
a regular current account with the Reserve Bank. All transactions in Government
securities for which SGL facility is available, should be put through SGL accounts
only.
5.1.2 Before issue of SGL
transfer forms covering the sale transactions, banks should ensure that they
have sufficient balance in the respective SGL accounts. Under no circumstances,
an SGL transfer form issued by a bank in favour of another bank should bounce
for want of sufficient balance in the SGL account. The purchasing bank should
issue the cheques only after receipt of the SGL transfer forms from the selling
bank.
5.1.3 If the SGL transfer form
bounces for want of sufficient balance in the SGL Account, the bank which has
issued the form will be liable for the following penal action:
5.1.3.1 The amount of SGL form
(cost of purchase paid by the purchaser of the bank) will be debited immediately
to the current account of the selling bank with the Reserve Bank.
5.1.3.2 In the event of an overdraft
arising in the current account following such a debit penal interest will be
charged by the Reserve Bank on the amount of the overdraft at a rate 3% points
above the Discount and Finance House of India’s call money lending rate on the
day in question.
5.1.3.3 If the bouncing of the
SGL form occurs thrice, the bank will be debarred from trading with the use
of the SGL facility for a period of 6 months from the date of occurrence of
the third bouncing. If after restoration of the facility, any SGL form of the
bank bounces again, the bank will be permanently debarred from the use of the
SGL facility in all the PDOs of the Reserve Bank.
5.2 SGL Forms
5.2.1 The SGL transfer forms
should be in the standard format prescribed by the Reserve Bank and printed
on semi-security paper of uniform size. These should be serially numbered and
there should be a control system in place to account for each SGL form.
5.2.2 SGL transfer forms should
be signed by two authorised officials of the bank whose signatures should be
recorded with the respective Public Debt Office (PDO) of Reserve Bank and other
banks.
5.2.3 The SGL transfer form received
by the purchasing bank should be deposited in its SGL account immediately. No
sale should be effected by way of return of SGL transfer form held by the bank.
5.2.4 Any bouncing of SGL transfer
forms issued by selling bank in favour of the buying bank should immediately
be brought to the notice of the Reserve Bank by the buying bank.
5.3 Control, Violation
and Penalty Provisions
5.3.1 Record of SGL transfer
forms issued/received should be maintained. Balances as per the bank’s books
in respect of SGL accounts should be reconciled with the balances in the books
of PDOs. The concerned PDO will forward a monthly statement of balances of SGL/CSGL
account to all account holders. Primary (urban) co-operative banks having SGL/CSGL
accounts with PDOs may use these statements for the purpose of monthly reconciliation
of their SGL/CSGL balances as per their books and the position in this regard
should be placed before the Audit Committee of the Board. This reconciliation
should also be periodically checked by the internal audit department. A system
for verification of the authenticity of the SGL transfer forms received from
other banks and confirmation of authorised signatories should be put in place.
5.3.2 Banks should also
forward a quarterly certificate to the concerned PDO, indicating that the balances
held in the SGL accounts with the PDO have been reconciled and that it has been
placed before the Audit Committee of the Board. A copy thereof should be sent
to the concerned Regional Office of the Urban Banks Department.
5.3.3 Banks should put in place
a system to report to the top management on a monthly basis the details of transactions
in securities, details of bouncing of SGL transfer forms issued by other banks
and review of investment transactions undertaken during the period.
5.3.4 All promissory notes,
debentures, shares, bonds, etc. should be properly recorded and held under joint
custody. A separate register may be maintained to record the particulars of
securities taken out/re-lodged. These should be subjected to periodical verification
say once in a quarter or half-year, by persons unconnected with their custody.
5.3.5 Certificates should be
obtained at quarterly/half-yearly intervals in respect of securities lodged
with other institutions. Similarly, it is necessary to reconcile the outstanding
BRs with the counter-party at monthly intervals and reconciliation of SGL Account
balance with the PDO at monthly intervals.
5.3.6 The internal inspectors
and concurrent auditors should peruse the transactions to ensure that the deals
have been undertaken in the best interest of the bank. The Vigilance Cell should
also make surprise sample checks of large transactions.
5.3.7 The concurrent auditors
should certify that investments held by the bank, as on the last reporting Friday
of each quarter and as reported to RBI, are actually owned/held by it as evidenced
by the physical securities or the out-standings statement. Such a certificate
should be submitted to the Regional Office of Urban Banks Department having
jurisdiction over the bank, within 30 days from the end of the relative quarter.
6. USE OF BANK RECEIPTS
(BRs)
6.1 When to use BRs
6.1.1 No BR should be issued
under any circumstances in respect of transactions in Government securities
for which SGL facility is available.
6.1.2 Even in the case of other
securities, BR may be issued for ready transactions only, under the following
circumstances:
6.1.2.1 The scrips are yet to be
issued by the issuer and the bank is holding the allotment advice.
6.1.2.2 The security is physically
held at a different centre and the bank is in a position to physically transfer
the security and give delivery thereof, within a short period.
6.1.2.3 The security has been
lodged for transfer/interest payment and the bank is holding necessary records
of such lodgements and will be in a position to give physical delivery of the
security within a short period.
6.1.3 No BR should be issued
on the basis of a BR( of another bank) held by the bank and no transaction should
take place on the basis of mere exchange of BRs held by the bank.
6.1.4 BRs may be issued covering
transactions relating to bank’s own Investment Accounts only, and no BR should
be issued by bank covering transactions relating to either the Accounts of Portfolio
Management Scheme Clients or Other Constituents’ Account including brokers.
6.2 BR form issue,
custody, record
6.2.1 BRs should be issued on semi-security
paper, in the standard format (prescribed by IBA), serially numbered, and signed
by two authorised officials of the bank, whose signatures are recorded with
other banks. As in the case of SGL forms, there should be control system in
place to account for each BR form.
6.2.2 There should be a proper
system for the custody of unused BR forms and their utilisation.
6.2.3 Separate registers
of BRs issued / received should be maintained, and arrangements should be put
in place to ensure that these are systematically followed-up and liquidated
within the stipulated time limit.
6.2.4 A system for verification
of the authenticity of the BRs received from other banks and confirmation of
authorised signatures should be put in place.
6.3 Settlement through BRs
6.3.1 No BR should remain outstanding
for more than 15 days.
6.3.2 A BR should be redeemed
only by actual delivery of scrips and not by cancellation of the transaction/set-off
against another transaction. If a BR is not redeemed by delivery of scrips within
the validity period of 15 days, the BR should be deemed as dishonoured and the
bank which has issued the BR should refer the case to Reserve Bank explaining
the reasons under which the scrips could not be delivered within the stipulated
period and the proposed manner of settlement of the transactions.
6.4 Control, Violation
and Penalty Provisions
6.4.1 The existence and operation
of controls at the concerned offices should be reviewed, among others, by the
statutory auditors and a certificate to this effect may be forwarded to Reserve
Bank of India, Urban Banks Department, Central Office, Mumbai 400 018 every
year.
6.4.2 The violation of the instructions
relating to the BRs would invite penal action which could include raising of
reserve requirements, withdrawal of refinance from the RBI and denial of access
to money markets. The RBI may also levy such other penalty as it may deem fit
in accordance with the provisions of the Banking Regulation Act, 1949 (AACS).
6.4.3 The reconciliation should
be periodically checked by the internal audit department.
7 ENGAGEMENT OF BROKERS
7.1 Dealing through
Brokers
7.1.1 The inter-bank securities
transactions should be undertaken directly between banks and no bank should
engage the services of any broker in such transactions. Banks may, however,
undertake securities transactions among themselves or with non-bank clients
through members of the National Stock Exchange (NSE), the Stock Exchange, Mumbai
(BSE)/OTC Exchange wherein the transactions are transparent. In case any transactions
in securities are not undertaken on NSE, OTC Exchange of India or the Stock
Exchange, Mumbai (BSE), the same should be undertaken by the banks directly
without the use of brokers.
7.1.2 Purchase of permissible shares
and PSU bonds in the secondary market (other than inter-bank transactions) should
be only through recognised stock exchanges and registered stock- brokers.
7.1.3 The Discount and Finance
House of India Ltd. (DFHI) has been permitted to operate as a broker in the
inter-bank participation market. This would enable the banks to seek intermediation
of DFHI for borrowing/lending, if required. However, the banks shall be free
to settle transactions in the inter-bank participations market directly, if
so desired.
7.1.4 It should be ensured
that the applications of the banks in respect of their own subscription to Central/State
Government loans are submitted directly to the receiving offices of the RBI/State
Bank of India and intermediaries or brokers should not be used for the purpose.
7.1.5 Similarly, where the investments
are made by the banks on account of their clients, the relative applications
bearing the bank’s own stamps should be tendered direct to the receiving offices.
7.1.6 If a deal is put through
with the help of a broker, the role of the broker should be restricted to that
of bringing the two parties to the deal together. Under no circumstances banks
should give power of attorney or any other authorisation to the brokers/ intermediaries
to deal on their behalf in the money and securities markets.
7.1.7 Disclosure of counter party
should be insisted upon on conclusion of the deal put through brokers.
7.1.8 Contract confirmation from
the counter party should be insisted upon.
7.1.9 The brokers should not be
involved in settlement process at all i.e. both the fund settlement and delivery
of security should be done with the counter party directly.
7.2 Empanelment of Brokers
7.2.1 The banks should prepare
a panel of brokers with the approval of their Board of Directors.
7.2.2 Brokers should be
empanelled after verifying their credentials e.g. :
(a) SEBI registration
(b) Membership of BSE/NSE/OTCEI for debt
market.
(c) Market turnover in the preceding year
as certified by the Exchange/s.
(d) Market reputation etc.
7.2.3 The bank should check
websites of SEBI/respective exchanges, to ensure that the broker has not been
put in the banned list.
7.3 Broker
Limits
7.3.1 A disproportionate
part of the business should not be transacted through only one or a few brokers.
Banks should consider fixing aggregate contract limits for each of the approved
brokers, and ensure that these limits are not exceeded. A record of broker-wise
details of deals put through and brokerage paid should be maintained.
7.3.2 A limit of 5% of total transactions
(both purchases and sales) entered into by the banks during a year should be
treated as the aggregate upper contract limit for each of the approved brokers.
7.3.3 This limit should cover
both the business initiated by the bank and the business offered/brought to
the bank by a broker.
7.3.4 It should be ensured that
the transactions entered through individual brokers during a year normally do
not exceed the prescribed limit. However, if it becomes necessary to exceed
the aggregate limit for any broker, the specific reasons, therefore, should
be recorded in writing by the authority empowered to put through the deals.
In such cases, post-facto approval of the Board may be obtained after explaining
the circumstances in which the limit was exceeded.
Note : Clarifications
on certain issues raised by the banks in this regards are furnished in Annexure
I.
8 SETTLEMENT
OF GOVERNMENT SECURITIES TRANSACTIONS –THROUGH CLEARING CORPORATION OF INDIA
LTD.
8.1 With effect from 1st
April, 2003, all Government Securities transactions (both outright and Repo)
are being settled compulsorily through Clearing Corporation of India
Ltd. (CCIL) only. Any transactions in Govt. Securities for settlement by the
banks outside the NDS-CCIL system are not being entertained by Reserve Bank
of India since that date.
8.2 Primary (urban) co-operative
banks which are not a member of NDS-CCIL system, should undertake their transactions
in Government securities through gilt account/de-mat account maintained with
a Negotiated Dealing System (NDS) member.
9 TRADING OF GOVERNMENT
SECURITIES ON STOCK EXCHANGES
9.1 With a view to encouraging
wider participation of all classes of investors, including retail, in government
securities, it has been decided to introduce trading in government securities
through a nation-wide anonymous, order driven, screen-based trading system of
the stock exchanges, in the same manner in which trading takes place in equities.
This facility of trading of government securities on the stock exchanges, in
the dematerialized mode only, would be available to banks in addition
to the present NDS of the Reserve Bank, which will continue to remain in place.
9.2 The primary (urban)
co-operative banks have the option to undertake transactions in dated Government
of India (GOI) securities in dematerialized form on automated order driven system
of the National Stock Exchange (NSE), The Stock Exchange, Mumbai (BSE) and Over
the Counter Exchange of India (OTCEI) in addition to the existing mode of dealing
through SGL accounts with Reserve Bank of India or Constituent SGL accounts
with the designated entities such as Scheduled Commercial Bank/Primary Dealer/State
Cooperative Bank etc.
9.3 As the trading facility
on the above stock exchanges will operate parallel to the present system of
trading in government securities, the trades concluded on the exchanges will
be cleared by their respective clearing corporations/clearing houses. However,
trading members of the stock exchanges shall not be involved in the settlement
process for any RBI regulated entity. All stock exchange trades of banks have
to be settled either directly with clearing corporation/clearing house (in case
they are clearing members) or else through a clearing member custodian.
9.4 Banks, as institutional
investors on the stock exchanges, may undertake transactions only on the basis
of giving and taking delivery of securities. In other words, short selling of
government securities, even on an intra-day basis, is not permissible.
9.5 With a view to facilitating
participation on the stock exchanges within the regulations prescribed by RBI,
SEBI and the exchanges, banks are being extended the following facilities:
9.5.1 Opening de-mat accounts
with a bank depository participant (DP) of NSDL/CDSL or with SHCIL in addition
to their SGL/CSGL accounts with RBI.
9.5.2 Value free transfer of
securities between SGL/CSGL and de-mat accounts is being enabled at Public Debt
Office (PDO), Mumbai, subject to operational guidelines issued separately by
our Department of Government and Bank Accounts (DGBA) to all SGL account holders.
9.6 The balances in government
securities maintained by the banks in the depositories will be included for
SLR purpose. Any shortfall in maintenance of CRR/SLR resulting from settlement
failure (on either the NDS-OTC market or the stock exchanges) will attract the
usual penalties.
9.7 The Boards of primary
(urban) co-operative banks may take a conscious decision in regard to using
the stock exchange platform for making investments in government securities
in addition to the existing NDS-OTC market and the direct bidding facility.
As regulations of SEBI will also apply in so far as trading of government securities
is concerned, the Board should frame and implement a suitable policy to ensure
that operations are conducted in accordance with the norms laid down by RBI/SEBI
and the respective stock exchange. Prior to commencing operations, the dealing
officials should also familiarise themselves with the basic operating procedures
of the stock exchanges.
9.8 Operational
Guidelines
9.8.1 Banks should put in
place appropriate internal control systems catering to stock exchange trading
and settlement before commencing operations on the exchanges. The back office
arrangement should be such that trading on the NDS/OTC market and on the stock
exchanges can be tracked easily for settlement, reconciliation and management
reporting. Banks should, therefore, install enabling IT infrastructure and adequate
risk management systems.
9.8.2 Only SEBI registered
brokers who are authorized by the permitted exchanges (NSE, BSE or OTCEI) to
undertake transactions in government securities can be used for placing buy/sell
orders. A valid contract note indicating the time of execution must be obtained
from the broker at end of day.
9.8.3 The dealing officials
should independently check prices in the market or on the stock exchange screens
before placing their orders with the brokers. The decision-making processes
cannot be delegated to brokers by the banks.
9.8.4 The transactions done
through any broker will be subjected to the current guidelines on transactions
done through brokers.
9.8.5 Brokers/trading members
shall not be involved in the settlement process; all trades have to be settled
through clearing member custodians. Hence, it will be necessary for primary
(urban) co-operative banks to enter into a bilateral clearing agreement with
such service providers before hand.
9.8.6 All transactions must
be monitored with a view to ensuring timely receipt of funds and securities.
Any delay or failure should be promptly taken up with the concerned exchange/authorities.
9.8.7 At the time of trade,
securities must be available with the banks either in their SGL or in the de-mat
account with depositories.
9.8.8 Any settlement failure
on account of non-delivery of securities/non-availability of clear funds will
be treated as SGL bouncing and the current penalties in respect of SGL bouncing
will be applicable. The stock exchanges will report such failures to the respective
Public Debt Offices.
9.8.9 For the limited purpose
of dealing through the screen based trading system of the stock exchanges the
condition that a primary (urban) co-operative bank should seek a scheduled commercial
bank, a primary dealer, a financial institution, another primary (urban) co-operative
bank, insurance company, mutual fund or provident fund as a counter party while
undertaking transactions in Government securities will not apply.
9.8.10 Banks should report
on weekly basis to their Audit Committee of the Board, giving the details of
trades on aggregate basis done on the stock exchanges and details of any 'closed-out'
transactions on the exchanges.
9.8.11 The banks should take
all necessary precautions and strictly adhere to all instructions/guidelines
issued by the Reserve Bank relating to transaction in Government securities
as hitherto.
10. READY FORWARD CONTRACTS
IN GOVERNMENT SECURITIES
10.1 In terms of the notification
No. S.O. 131(E) dated January 22, 2003 issued by Reserve Bank of India under
powers derived from Section 29A of the Securities Contracts (Regulation) Act
(SCRA), 1956, the primary (urban) co-operative banks may enter into ready forward
contracts (including reverse ready forward contracts), only in (i) Dated Securities
and Treasury Bills issued by Government of India and (ii) Dated Securities issued
by State Governments.
10.2 ready forward contracts
in the above - mentioned securities may be entered into by:
10.2.1 persons or entities maintaining
a Subsidiary General Ledger (SGL) account with Reserve Bank of India, Mumbai
; and
10.2.2 the following categories
of entities who do not maintain SGL accounts with the Reserve Bank of India
but maintain gilt accounts (i.e gilt account holders) with a bank or any other
entity (i.e. the custodian) permitted by the Reserve Bank of India to maintain
Constituent Subsidiary General Ledger (CSGL) account with its Public Debt Office,
Mumbai:
i. Any scheduled bank,
ii. Any primary dealer authorised by the Reserve
Bank of India,
iii. Any non-banking financial company registered
with the Reserve Bank of India, other than Government companies as defined
in Section 617 of the Companies Act, 1956,
iv. Any mutual fund registered with the Securities
Exchange Board of India
v. Any housing finance company registered with
the National Housing Bank, and
vi. Any insurance company registered with the
Insurance Regulatory and Development Authority.
10.3 All persons or entities specified
at 10.2.2 above can enter into ready forward transactions among themselves subject
to the following restrictions:
10.3.1 An SGL account holder may
not enter into a ready forward contract with its own constituent. That is, ready
forward contracts should not be undertaken between a custodian and its gilt
account holder.
10.3.2 Any two gilt account holders
maintaining their gilt accounts with the same custodian (i.e. the CSGL account
holder) may not enter into ready forward contracts with each other, and
10.3.3 Cooperative banks may not
enter into ready forward contracts with the non-banking financial companies.
10.4 All ready forward contracts
should be reported on the Negotiated Dealing System (NDS). In respect of ready
forward contracts involving gilt account holders, the custodian (i.e., the CSGL
account holder) with whom the gilt accounts are maintained will be responsible
for reporting the deals on the NDS on behalf of the constituents (i.e. the gilt
account holders).
10.5 All ready forward contracts
shall be settled through the SGL Account / CSGL Account maintained with the
Reserve Bank of India, Mumbai with the Clearing Corporation of India Ltd. (CCIL)
acting as the central counter party for all such ready forward transactions.
10.6 The custodians should
put in place an effective system of internal control and concurrent audit to
ensure that :
10.6.1 ready forward transactions
are undertaken only against the clear balance of securities in the gilt account,
10.6.2 all such transactions are promptly reported
on the NDS, and 10.6.3 other terms and conditions referred to above have been
complied with.
10.7 Primary (urban) co-operative
banks can undertake ready forward transactions only in securities held in excess
of the prescribed Statutory Liquidity Ratio (SLR) requirements.
10.8 No sale transaction should
be put through without actually holding the securities in the portfolio by a
seller of securities in the first leg of a ready forward transaction.
10.9 Securities purchased
under the ready forward contracts shall not be sold during the period of the
contract.
10.10. Prohibition against buy-back arrangements
10.10.1Banks should not undertake
double ready forward deals in Govt. securities, including treasury bills.
10.10.2 No ready forward and double
ready forward deals should be put through even among banks and even on their
investment accounts in other securities such as public sector bonds, units of
UTI, etc.
10.10.3 No ready forward and double
ready forward deals should be entered into in any securities including the Government
securities, on behalf of other constituents including brokers.
11 UNIFORM ACCOUNTING FOR REPO/REVERSEREPO
TRANSACTION
11.1 In order to ensure uniform
accounting treatment for repo/reverse repo transactions and to impart an element
of transparency, the banks should follow the uniform accounting principles detailed
below:
11.1.1 The uniform accounting
principles will be applicable from the financial year 2003-04. On implementation,
market participants may undertake repos from any of the three categories of
investments, viz. Held for Trading, Available for Sale and Held to Maturity.
11.1.2 The legal character of repo
under the current law, viz. as outright purchase and outright sale transactions
will be kept intact by ensuring that the securities sold under repo (the entity
selling referred to as "seller") are excluded from the Investment
Account of the seller of securities and the securities bought under reverse
repo (the entity buying referred to as "buyer") are included in the
Investment Account of the buyer of securities. Further, the buyer can reckon
the approved securities acquired under reverse repo transaction for the purpose
of Statutory Liquidity Ratio (SLR) during the period of the repo.
11.1.3 At present, repo transactions
are permitted in Central Government securities including Treasury Bills and
dated State Government securities. Since the buyer of the securities will not
hold it till maturity, the securities purchased under reverse repo by banks
should not be classified under Held to Maturity category. The first leg of the
repo should be contracted at prevailing market rates. Further, the accrued interest
received/paid in a repo/reverse repo transaction and the clean price (i.e. total
cash consideration less accrued interest) should be accounted for separately
and distinctly.
11.2 The other accounting
principles to be followed while accounting for repos/reverse repos will be as
under:
11.2.1 Coupon
In case the interest payment date
of the security offered under repo falls within the repo period, the coupons
received by the buyer of the security should be passed on to the seller on the
date of receipt as the cash consideration payable by the seller in the second
leg does not include any intervening cash flows. While the buyer will book the
coupon during the period of the repo, the seller will not accrue the coupon
during the period of the repo. In the case of discounted instruments like Treasury
Bills, since there is no coupon, the seller will continue to accrue the discount
at the original discount rate during the period of the repo. The buyer will
not, therefore, accrue the discount during the period of the repo.
11.2.2 Repo Interest Income/Expenditure
After the second leg of
the repo/reverse repo transaction is over,
(a) the difference in the clean price of the
security between the first leg and the second leg should be reckoned as Repo
Interest Income/Expenditure in the books of the buyer/seller respectively;
(b) the difference between the accrued interest
paid between the two legs of the transaction should be shown as Repo Interest
Income/Expenditure account, as the case may be; and
(c) the balance outstanding in the Repo Interest
Income/Expenditure account should be transferred to the Profit and Loss account
as an income or an expenditure. As regards repo/reverse repo transactions
outstanding on the balance sheet date, only the accrued income/expenditure
till the balance sheet date should be taken to the Profit and Loss account.
Any repo income/expenditure for the subsequent period in respect of the outstanding
transactions should be reckoned for the next accounting period.
11.2.3 Marking to Market
The buyer will mark to market the
securities acquired under reverse repo transactions as per the investment classification
of the security. To illustrate, for banks, in case the securities acquired under
reverse repo transactions have been classified under Available for Sale category,
then the mark to market valuation for such securities should be done at least
once a quarter. For entities who do not follow any investment classification
norms, the valuation for securities acquired under reverse repo transactions
may be in accordance with the valuation norms followed by them in respect of
securities of similar nature.
(a) In respect of the repo transactions outstanding
as on the balance sheet date:-
the buyer will mark to market the securities
on the balance sheet date and will account for the same as laid down in the
extant valuation guidelines issued by the RBI.
(b) the seller will provide for the price
difference in the Profit & Loss account and show this difference under
'Other Assets" in the balance sheet if the sale price of the security
offered under repo is lower than the book value.
(c) the seller will ignore the price difference
for the purpose of Profit & Loss account but show the difference under
"Other Liabilities" in the balance sheet if the sale price of the
security offered under repo is higher than the book value; and
(d) similarly the accrued interest paid/received
in the repo/reverse repo transactions outstanding on balance sheet dates should
be shown as "Other Assets" or "Other Liabilities" in the
balance sheet.
11.2.4 Book value on re-purchase
The seller shall debit the repo
account with the original book value (as existing in the books on the date of
the first leg) on buying back the securities in the second leg.
11.2.5 Disclosure
The following disclosures should
be made by banks in the "Notes on Accounts" to the Balance Sheet.
(Rs.
in crores)
|
Particulars
|
Minimum outstanding during
the year
|
Maximum outstanding during the year
|
Daily Average outstanding during the year
|
As on March 31
|
|
Securities sold under repos
|
|
|
|
|
|
Securities purchased under
reverse repos
|
|
|
|
|
11.3 Accounting methodology
The accounting methodology to be
followed along with illustrations are given in the Annexure I and II of our
circular UBD.BPD.PCB. Cir.44/09.80.00/2002-03 dated May 12, 2003. While market
participants, having different accounting systems, may use accounting heads
different from those used in the illustration, there should not be any deviation
from the accounting principles enunciated above. Further, to obviate disputes
arising out of repo transactions, the participants may consider entering into
bilateral Master Repo Agreement as per the documentation finalised by FIMMDA.
12. Non SLR investments
12.1 Holding Shares &
Debentures in Private Sector Companies or
Institutions other than Co-operative Sector
The primary (urban) co-operative
banks should not subscribe to the initial or subsequent issue of shares/debentures
of private sector companies or bodies or organisations other than in co-operative
sector unless specifically permitted by the Reserve Bank.
12.2 Deposits
with other institutions and other primary (urban) co-operative banks
12.2.1 Primary (urban) co-operative
banks should not park their funds as deposits with other institutions/companies/corporations
etc. Keeping of term deposits with other institutions/companies amounts to granting
of unsecured advances to such institutions, thereby, attracting the provisions
of directives on maximum limits on advances/exposure norms.
12.2.2 Scheduled primary (urban)
co-operative bank should not place deposits with any other primary (urban) co-operative
bank.
12.2.3 Non-scheduled primary
(urban) co-operative banks may place deposits with strong scheduled primary
(urban) co-operative banks, fulfilling following norms:
i. The bank is complying with the prescribed
level of CRAR.
ii. Net NPAs of the bank is less than 7%
iii. The bank has not defaulted in the maintenance
of CRR/SLR requirements for the last two years.
iv. The bank has declared net profits for the
last three consecutive years.
v. The bank is complying with prudential norms
on income recognition, asset classification and provisioning, exposure ceilings
and loans & advances to directors.
12.2.4 Acceptance of deposits
from non-scheduled banks by the schedule banks will be subject to the following
conditions:
i. The total of all such deposits accepted by
a scheduled bank should not exceed 10% of its deposit liabilities as on 31
March of the previous financial year.
ii. The rate of interest offered on such deposits
should be market related.
iii. The total amount of deposits placed by
a non-scheduled primary (urban) co-operative bank with a scheduled bank should
not exceed 20% of its capital funds so as to be in consonance with the extant
exposure norms. Capital funds for this purpose would comprise of paid up capital
and free reserves as per audited accounts. Reserves, if any, created out of
revaluation of fixed assets or those created to meet outside liabilities should
not be included in the capital funds. While free reserves may include ‘building
fund’, it shall exclude all reserves/provisions, which are created to meet
anticipated loan losses, losses on account of frauds etc., depreciation in
investments and other assets and outside liabilities. Criteria for inclusion
of a fund / reserve as free reserve is that it should have been created by
appropriation to profit and should not have been earmarked for any specific
purpose.
12.2.5 Primary (urban) co-operative
banks may, however, maintain balances in the current accounts with other banks
for meeting their clearing and remittance requirements.
12.3 Non-SLR Debt Securities
- Guidelines
In order to contain risks arising
out of the non-SLR investment portfolio of banks, the banks should adhere to
the following guidelines :
12.3.1 Coverage
i. These guidelines cover investments by urban
co-operative banks in the bonds issued by public sector undertakings, unsecured
redeemable bonds floated by nationalised banks, bonds / shares issued by All
India Financial Institutions and units of Unit Trust of India. The guidelines
will apply to investments both in the primary market as well as in the secondary
market. It may be noted that banks should not invest in Non-SLR debt securities
of original maturity of less than one-year.
ii. It is further clarified that these guidelines
apply to capital gains bonds, bonds eligible for priority sector status and
bonds issued by central or state public sector undertaking, with or without
government guarantees.
iii. Definitions of a few terms used in these
guidelines have been furnished in Annexure II with a view to ensure uniformity
in approach while implementing the guidelines.
12.3.2 Regulatory Requirements
(i) Banks should undertake usual due diligence
in respect of investments in non-SLR securities. Present RBI regulations preclude
banks from extending credit facilities for certain purposes. Banks should
ensure that such activities are not financed by way of funds raised through
the non-SLR securities.
(ii) Banks should not invest in unrated debt
securities except bonds of nationalised banks, unlisted securities, unlisted
shares of All India Financial Institutions and privately placed debt securities.
(iii) The debt securities shall carry a credit
rating of not less than investment grade from a Credit Rating Agency registered
with the SEBI. Banks should ensure that they make all fresh Non-SLR debt investments
only in listed debt securities of public sector undertakings which comply
with the requirements of the SEBI circular dated September 30, 2003.
12.3.3 Internal
Assessment
Since non-SLR securities are mostly
in the form of credit substitutes, banks should :
i. subject all their investment proposals relating
to the above securities to credit appraisal on par with their credit proposals,
irrespective of the fact that the proposed investments may be in rated securities,
ii. make their own internal credit analysis
and rating even in respect of rated issues and that they should not entirely
rely on the ratings of external agencies, and
iii. strengthen their internal rating systems
which should also include building up of a system of regular (quarterly or
half-yearly) tracking of the financial position of the issuer with a view
to ensuring continuous monitoring of the rating migration of the issuers/issues.
12.3.4 Fixing of Prudential
limits
12.3.4.1The Board of Directors
of banks should fix a prudential limit for their total investment in non-SLR
securities and sub-limits for the following debt securities:
i. bonds of public sector undertakings,
ii. bonds /equity of All India Financial Institutions
listed in Annexure – III *
iii. infrastructure bonds floated by All India
Financial Institutions,
iv. unsecured redeemable bonds floated by nationalised
banks,
v. units of UTI and
vi. certificate of deposits issued by scheduled
commercial banks and other financial institutions approved by RBI.
12.3.4.2 The total investment
in (i) to (vi) above should not exceed 10 per cent of the banks’ total deposits
as on March 31 of the previous year, with a sub-ceiling of 5 per cent of incremental
deposits of the previous year for investments covered under (v)
12.3.4.3 Banks should ensure that
exposure, to a single issuer of debt securities is within the individual exposure
ceiling prescribed by RBI for grant of advances, based on capital funds of the
bank.
12.3.4.4 Banks which have exposure
to investments in non-SLR securities in excess of the prudential limit prescribed
above as on 31st March 2003 should not make any fresh investment in such securities
till they ensure compliance with the above prudential limit.
[* Earlier the banks were permitted
to invest in the equity/ bonds of ICICI Ltd. Subsequent to its merger with ICICI
Bank Ltd., banks which have been allotted shares of ICICI Bank Ltd. in lieu
of shares of ICICI Ltd, should unwind the same latest by March 31,2004]
12.3.4.5 As a matter of prudence,
banks should stipulate entry-level minimum ratings/ quality standards and industry-wise,
maturity-wise, duration-wise, issuer-wise etc. limits to mitigate the adverse
impacts of concentration and the risk of liquidity.
12.4 Investment in
Certificates of Deposits (CDs)
Primary (urban) co-operative banks
are permitted to make investments in CDs issued by scheduled commercial banks
and other financial institutions approved by the Reserve Bank, subject to fulfilment
of the following conditions:
a. The banks should have reached
the level stipulated by the Reserve Bank for lendings to priority sector at
the time of making investment in CDs.
b. The banks should, with the
approval of their Board of Directors, evolve policy guidelines governing their
investments and obtain the approval of their Boards for placing funds in CDs.
c. The investments in CDs should
not result in resource crunch necessitating borrowings from higher financing
agencies. In other words, the banks should not resort to borrowings from higher
financing agencies while making investments in CDs, except for temporary periods
to meet exigencies. It should, however, be ensured that the borrowings are need-based
and cost-effective.
d. The banks should have achieved
the requisite level of investments in Government and other approved securities
12.5 Bonds/ Debentures received
through SC/RC
12.5.1 The bonds/ debentures received
by the banks as sale consideration towards sale of financial assets to Securitisation
/ Reconstruction Companies will be classified as non-SLR investments in the
books of the banks and accordingly the valuation, classification and other norms
applicable to non-SLR investments of banks as prescribed by RBI from time to
time would be applicable to the instruments received by the banks from the sale
consideration from SC/ RC. Primary (urban) co-operative banks are allowed to
hold these investments, over and above the limit of 10% of its deposits as on
31 March of the previous year, for non-SLR securities. Primary (urban) co-operative
banks are not permitted to make any direct investment in the security receipts,
pass-through certificates, or bonds/ debentures issued by SC/RC.
12.5.2 When a bank sells its financial
assets to SC/RC, on transfer the same would be removed from the books of the
bank.
12.5.3 If the sale to SC/RC is
at a price below the net book value (NBV) (i.e. book value less the provision
held), the shortfall should be written off/ debited to P&L A/c of that year,
subject to the provisions of co-operative societies acts/rules/administrative
guidelines in regard to write-off of debts.
12.5.4 If the sale is for a value
higher than the NBV, the excess provision will not be reversed but will be utilised
to meet the shortfall/loss on account of sale of other financial assets to SC/RC.
12.6 Role of Board of Directors
12.6.1 Banks should ensure
that their investment policies duly approved by the Board of Directors are formulated
after taking into account all the relevant issues specified in these guidelines
on non-SLR investment. Banks should put in place proper risk management systems
for capturing and analysing the risk in respect of non-SLR investment and taking
remedial measures in time.
12.6.2 The Board should devise
a system to ensure that the limits prescribed in paragraph 12.3.4 above are
scrupulously complied. The Boards should appropriately address the issue of
ensuring compliance with the prudential limits on an ongoing basis, including
breaches, if any, due to rating migration.
12.6.3 Boards of banks should
review the following aspects of non-SLR investment twice a year:
i. Total business (investment and divestment)
during the reporting period
ii. Compliance with the prudential limits prescribed
by the Board for non-SLR investment
iii. Rating migration of the issuers/ issues
held in the bank’s books and consequent diminution in the portfolio quality
iv. Extent of non-performing investments in
the non-SLR category and sufficient provision thereof.
12.7 Demat form
12.7.1 Primary (Urban) co-operative
banks should make investments in non-SLR securities in dematerialised form only.
12.7.2 In addition to one SGL/CSGL
A/c, banks may open a demat account with a bank depository participant of NSDL/CDSL
or with SHCIL for holding PSU Bonds.
12.8 Trading and
settlement in debt securities
As per the SEBI guidelines, all
trades with the exception of the spot transactions, in a listed debt security,
shall be executed only on the trading platform of a Stock Exchange. In addition
to complying with the SEBI guidelines, banks should ensure that all spot transactions
in listed securities are reported on the NDS and settled through the CCIL from
a date to be notified by RBI.
12.9 Disclosures
Presently, banks having deposits
of Rs. 100 crore and above are required to disclose certain information as ‘Notes
on Accounts’ to their balance sheet effective from the year ending March 31,
2003. In addition to these disclosures, the banks (i.e. banks having deposits
of Rs.100 crore & above) should also disclose the details of issuer composition
of non-SLR investments and the non-performing non-SLR investments in the ‘Notes
on Accounts’ of the balance sheet, as indicated in Annexure IV.
12.10 Pre-requisites
12.10.1 These non-SLR investments
may be made by the banks subject to the following conditions/safety measures:
a.A provision should exist for
such investments in respective State Co-operative Societies Act/Multi State
Co-operative Societies Act and a general or specific permission should be obtained
from the Registrar of Co-operative Societies of the concerned State.
b. Banks should comply with the
instructions regarding investment policy and the dealings in securities transactions.
c. There should be no default
by the banks in maintenance of statutory cash reserve and liquid assets requirements
as prescribed by the Reserve Bank Act, 1934/Banking Regulation Act, 1949 (AACS).
d. Banks should have achieved
the targets fixed by the Reserve Bank from time to time for lending to priority
sectors/weaker sections.
e. Overdue of banks should not
be more than 15% of their outstanding loans and advances.
f. Banks should comply with the
Reserve Bank instructions regarding income recognition, assets classification
and provisioning.
12.10.2 While investing in long
term debt instruments, the banks should thoroughly satisfy themselves about
the terms & conditions of issue, namely payment of interest and repayment
of principal, and ensure that there are no clauses permitting the issuer for
rescheduling such repayments.
13 INTERNAL CONTROL AND INVESTMENT ACCOUNTING
13.1 Internal Control
13.1.1 For every transaction entered
into, a deal slip should be prepared which should contain details relating to
name of the counter-party, whether it is direct deal or through a broker, and
if through a broker, details of security, amount, price, contract date and time.
For each deal, there must be a system of issue of confirmation to the country-party.
13.1.2 The Deal Slips should be
serially numbered and controlled separately to ensure that each deal slip has
been properly accounted for.
13.1.3 On the basis of vouchers
passed after verification of actual contract notes received from the broker/counter-party
and confirmation of the deal by the counter-party the Accounts Section should
independently write the books of accounts.
A record of broker-wise details
of deal put through and brokerage paid, should be maintained.
The Internal Audit Department should
audit the transactions in securities on an ongoing basis and monitor compliance
with the laid down management policies and prescribed procedures and report
the deficiencies directly the management of the bank.
13.2 Investment Accounting
13.2.1 Accounting Standards
n order to bring about uniform
accounting practice among banks in booking of income on units of UTI and equity
of All-India Financial Institutions, as a prudent practice, such income should
be booked on cash basis and not on accrual basis. However, in respect of income
from Government securities/bonds of public sector undertakings and All-India
Financial Institutions, where interest rates on the instruments are predetermined,
income may be booked on accrual basis, provided interest is serviced regularly
and is not in arrears.
13.2.2 Broken Period
Interest - Government and Other Approved Securities
13.2.2.1 With a view to
bringing about uniformity in the accounting treatment of broken period interest
on Government securities paid at the time of acquisition and to comply with
the Accounting Standards prescribed by the Institute of Chartered Accountants
of India, the banks should not capitalise the broken period interest
paid to seller as part of cost, but treat it as an item of expenditure under
Profit & Loss Account.
13.2.2.2 It is to be noted
that the above accounting treatment does not take into account taxation implications
and hence the bank should comply with the requirements of income tax authorities
in the manner prescribed by them.
14 RECOMMENDATIONS OF GHOSH
COMMITTEE
The following recommendations made
by the Ghosh Committee should be implemented by the banks to prevent frauds
and malpractices:
14.1 Concurrent Audit
14.1.1 In view of the possibility
of abuse, treasury functions viz. investments, funds management including inter-bank
borrowings, bills rediscounting, etc. should be subjected to concurrent audit
and the results of audit should be placed before the Chairman and Managing Director
of the bank at prescribed intervals.
14.1.2 It is the primary responsibility
of the banks to ensure that there are adequate audit procedures for ensuring
proper compliance of the instructions in regard to the conduct of investment
portfolio.
14.1.3 The concurrent audit
should cover the following aspects:
i. Ensure that in respect of purchase and sale
of securities the concerned department has acted within its delegated powers.
ii. Ensure that the securities other than those
in SGL and in demat form, as shown in the books, are physically held.
iii. Ensure that the Accounting Unit is complying
with the guidelines regarding BRs, SGL forms, delivery of scrips, documentation
and accounting.
iv. Ensure that the sale or purchase transactions
are done at rates beneficial to the bank.
v. Scrutinise conformity with broker limits
and include excesses observed in their periodical reports.
14.1.4 Banks should formulate
internal control guidelines for acquisition of permissible shares, debentures
and PSU bonds in the secondary market duly approved by their Boards.
14.2 Internal Audit
Purchase and sale of government
securities etc. should be separately subjected to audit by internal auditors
(and in the absence of internal auditors by Chartered Accountants out of the
panel maintained by the Registrar of Co-operative Societies) and the results
of their audit should be placed before the Board of Directors once in every
quarter. These audit reports should be sent to the concerned Regional Office
of the Urban Banks Department, Reserve Bank of India, at half-yearly intervals
i.e. for half-year ended 30th September and 31st March.
14.3 Review
Banks should undertake a half-yearly
review (as of 31st March and 30th September) of their investment portfolio,
which should, apart from other operational aspects of investment portfolio,
clearly indicate and certify adherence to the laid down internal investment
policy and procedures and RBI guidelines, and put up the same before the Board
within a month.
14.4 Penalties for Violation
Banks should scrupulously follow
the above instructions. Any violation of these instructions will invite penal
action against defaulting banks which could include raising of reserve requirements,
withdrawal of refinance from the Reserve Bank, denial of access to money markets,
denial of new branches/extension counters and advising the President of Clearing
House to take appropriate action including suspension of membership of the Clearing
House.
15 Categorisation of Investments
15.1 Primary (urban) co-operative
banks are required to classify their entire investment portfolio (including
SLR and non-SLR securities) under three categories viz. -
i. Held to Maturity (HTM)
ii. Available for Sale (AFS)
iii. Held for Trading (HFT)
banks should decide the category
of the investment at the time of acquisition and the decision should be recorded
on the investment proposals.
15.2 Held to Maturity
15.2.1 Securities acquired by
the banks with the intention to hold them up to maturity will be classified
under 'Held to Maturity' category.
15.2.2 The investments included
under 'Held to Maturity' category should not exceed 25 per cent of the bank's
total investments.
15.2.3 Primary (urban) co-operative
banks are not permitted to invest in bonds and debentures of private sector
companies. Their investments in bonds of PSUs and shares (as permitted by RBI)
should be classified under 'Held to Maturity' category but these will not be
counted for the purpose of ceiling of 25% specified for this category.
15.2.4 Profit on sale of investments
in this category should be first taken to the P&L Account and thereafter
be appropriated to the Investment Fluctuation Reserve/Investment Depreciation
Reserve Account Loss on sale will be recognised in the P&L A/c.
15.3 Held for Trading
15.3.1 Securities acquired by the
banks with the intention to trade by taking advantage of the short-term price/interest
rate movements will be classified under ‘Held for Trading’ category.
15.3.2 If banks are not
able to sell the security within 90 days due to exceptional circumstances such
as tight liquidity conditions, or extreme volatility, or market becoming unidirectional,
the security should be shifted to the ‘Available for Sale’ category, subject
to conditions stipulated in paragraphs 15.5.3 and 15.5.4 below.
15.4 Available for Sale
15.4.1 Securities which do not
fall within the above two categories will be classified under ‘Available for
Sale’ category.
15.4.2 Banks have the freedom
to decide on the extent of holdings under ‘Available for Sale’ category. This
may be decided by them considering various aspects such as basis of intent,
trading strategies, risk management capabilities, tax planning, manpower skills,
capital position, etc.
(Profit or loss on sale
of investments in HFT & AFS categories should be taken to P&L Account).
15.5 Shifting of investments
15.5.1 Banks may shift investments
to/from ‘Held to Maturity’ category with the approval of the Board of Directors
once in a year. Such shifting will normally be allowed at the beginning of the
accounting year. No further shifting to/from this category will be allowed during
the remaining part of that accounting year.
15.5.2 Banks may shift investments
from ‘Available for Sale’ category to ‘Held for Trading’ category with the approval
of their Board of Directors. In case of exigencies, such shifting may be done
with the approval of the Chief Executive of the Bank, but should be ratified
by the Board of Directors.
15.5.3 Shifting of investments
from ‘Held for Trading’ category to ‘Available for Sale’ category is generally
not allowed. However, it will be permitted only under exceptional circumstances
such as mentioned in paragraph 15.3.2 above, subject to depreciation, if any,
applicable on the date of transfer, with the approval of the Board of Directors/Investment
Committee.
15.5.4 Transfer of scrips from
one category to another, under all circumstances, should be done at the acquisition
cost/book value/market value on the date of transfer, whichever is the least,
and the depreciation, if any, on such transfer should be fully provided for.
15.6 Classification of Investments
in the Balance Sheet
For the purpose of Balance Sheet,
the investments should continue to be classified in the following categories:
(i) Government securities
(ii) Other approved securities
(iii) Shares
(iv) Bonds of PSUs
(v) Others
16 Valuation of investments
16.1 Valuation Standards
16.1.1 Investments classified under
'Held to Maturity' category need not be marked to market and will be carried
at acquisition cost unless it is more than the face value, in which case the
premium should be amortised over the period remaining to maturity.
16.1.2 The individual scrip in
the ‘Available for Sale’ category will be marked to market at the year-end or
at more frequent intervals. The book value of the individual securities would
not undergo any change after the revaluation.
16.1.3 The individual scrip
in the 'Held for Trading' category will be marked to market at monthly or at
more frequent intervals, the book value of individual securities in this category
would not undergo any change after marking to market
Note: Securities under
AFS and HTF categories shall be valued scrip-wise and depreciation/appreciation
shall be aggregated for each classifications as indicated at para 15.6 above.
Net depreciation, if any, shall be provided for. Net appreciation, if any, should
be ignored. Net depreciation required to be provided for in any one classification
should not be reduced on account of net appreciation in any other classification.
16.1.4 Investment Depreciation
Reserve required to be created on account of depreciation in value of investments
held under ‘AFS’ or ‘HFT’ categories in any year should be debited to the Profit
& Loss Account and an equivalent amount (net of tax benefit, if any, and
net of consequent reduction in the transfer to Statutory Reserve) or the balance
available in the Investment Fluctuation Reserve Account, whichever is less,
shall be transferred from the Investment Fluctuation Reserve Account to the
Profit & Loss Account.
16.1.5 In the event, investment
depreciation reserve created on account of depreciation in investments is found
to be in excess of the required amount in any year, the excess should be credited
to the Profit & Loss Account and an equivalent amount (net of taxes, if
any, and net of transfer to Statutory Reserves as applicable to such excess
provision) should be appropriated to the Investment Fluctuation Reserve Account
to be utilised to meet future depreciation requirement for investments. The
amounts debited to the Profit & Loss Account for depreciation provision
and the amount credited to the Profit & Loss Account for reversal of excess
provision should be debited and credited respectively under the head 'Expenditure
- Provisions & Contingencies'.The amounts appropriated from Profit &
Loss Account and the amount transferred from IFR to the Profit & Loss Account
should be shown as ‘below the line’ items after determining the profit for the
year.
General
16.1.6 In respect of securities
included in any of the three categories where interest/principal is in arrears,
the banks should not reckon income on the securities and should also make appropriate
provisions for the depreciation in the value of the investment. The banks should
not set-off the depreciation requirement in respect of these non-performing
securities against the appreciation in respect of other performing securities.
16.2 Market Value
16.2.1 Quoted Securities
The 'market value' for the purpose
of periodical valuation of investments included in the 'Available for Sale'
and the 'Held for Trading' categories would be the market price of the scrip
as available from the trades/quotes on the stock exchanges, SGL account transactions,
price list of RBI, prices declared by Primary Dealers Association of India (PDAI)
jointly with the Fixed Income Money Market and Derivatives Association of India
(FIMMDA) periodically.
16.2.2 Unquoted SLR Securities
In respect of unquoted securities,
the procedure as detailed below should be adopted.
(i) Central Government
Securities
a. The Reserve Bank of India will
not announce the YTM rates for unquoted Government securities, for the purpose
of valuation of investments by banks. The banks should value the unquoted Central
Government securities on the basis of the prices/YTM rates put out by the PDAI/FIMMDA
at periodical intervals.
b. The 6.00 per cent Capital Indexed
Bonds may be valued at 'cost' which may be reckoned by using the index ratio
calculated by taking the Wholesale Price Index (WPI) with a three months' lag.
For example, the WPI for the month of November 1997 may be used to calculate
the index ratio for month of March 1998. An illustrative example is given below:
The bonds were issued in December
1997 at par. The Wholesale Price Index (WPI) for August 1997 was taken as the
Base WPI. Similarly, the Reference WPI for payment of redemption value in December
2002, is taken as the WPI for August 2002. Thus, a clear 3 months' lag is followed
for indexation of capital. The same principle can be applied for arriving at
'Cost' for the purpose of valuation of Capital Indexed Bonds. If the valuation
of the bond is to be done in March 1998, the index ratio can be calculated by
taking the WPI for November 1997 as the Reference WPI. While thus for every
quarter ending March of a year, the numerator will take WPI of November of the
previous year, for other quarters ending in months viz. June, September and
December, every year, the index ratio will take in the numerator WPI for February,
May and August of the respective years.
Assuming that the Monthly Average
Index of Wholesale Prices (1981 - 82 = 100) for November 1997 is 329.90. The
Reference WPI is 329.90. The base WPI, i.e. the WPI for August 1997 is 326.00.
The calculation of 'Cost' of Capital Indexed Bonds is illustrated below:
|
Index Ratio for
March 1998
|
|
|
| |
WPI for November 1997
|
|
=
|
------------------------------------
|
| |
Base WPI
|
| |
|
|
=
|
329.9
-------- = 1.01196 or 1.01 (rounded to two
decimal places)
326.00
|
Cost of the bonds for valuation
as on 31 March 1998 Rs. 100 x 1.01 = Rs. 101.00.
c. It is clarified that the reckoning
of number of years for the purpose of deciding upon appropriate YTM Rate be
done by rounding off the fractional period of a year to the nearest completed
year.
d. As regards valuation of other
unquoted securities including PSU bonds, banks should uniformly follow ‘Yield
to Maturity’ method for arriving at valuation of unquoted securities.
(ii) Treasury Bills should be
valued at carrying cost.
(iii) State Government Securities
State Government securities will
be valued applying the YTM method by marking it up by 25 basis points above
the yields of the Central Government Securities of equivalent maturity put out
by PDAI/FIMMDA periodically.
(iv) Other Approved Securities
Other approved securities will
be valued applying the YTM method by marking it up by 25 basis points above
the yields of the Central Government Securities of equivalent maturity put out
by PDAI/FIMMDA periodically.
16.2.3 Unquoted non-SLR securities
(i) Debentures/Bonds
of AIFIs and PSUs
All debentures/bonds other
than debentures/ bonds which are in the nature of advance should be valued on
the YTM basis. Such debentures/bonds may be of different ratings. These will
be valued with appropriate mark-up over the YTM rates for Central Government
securities as put out by PDAI/FIMMDA periodically. The mark-up will be graded
according to the ratings assigned to the debentures/bonds by the rating agencies
subject to the following:
(a) The rate used for the YTM for
rated debentures/bonds should be at least 50 basis points above the rate applicable
to a Government of India loan of equivalent maturity,
(b) The rate used for the YTM
for un-rated debentures/ bonds should not be less than the rate applicable to
rated debentures/bonds of equivalent maturity. The mark-up for the un-rated
debentures/bonds should appropriately reflect the credit risk borne by the bank.
(c) Where interest/principal
on the debenture/bonds is in arrears, the provision should be made for the debentures
as in the case of debentures/bonds treated as advances. The depreciation/provision
requirement towards debentures where the interest is in arrears or principal
is not paid as per due date, shall not be allowed to be set-off against appreciation
against other debentures/bonds.
(ii) Where the debentures/bond
is quoted and there have been transactions within 15 days prior to the valuation
date, the value adopted should not be higher than the rate at which the transaction
is recorded on the stock exchange.
(iii) Shares of Co-operative
Institutions
If primary (urban) co-operative
banks have regularly received dividends from co-operative institutions, then
their shares should be valued at face value. In a number of cases, the co-operative
institutions in whose shares the primary (urban) co-operative banks have made
investments have either gone into liquidation or have not declared dividend
at all. In such cases, the banks should make full provision in respect of their
investments in shares of such co-operative institutions. In cases where the
financial position of co-operative institutions in whose shares banks have made
investments is not available, the shares have to be taken at Re. 1/- per co-operative
institution.
16.2.4 Shares of All India Financial
Institutions
Primary (urban) co-operative banks
are allowed to invest in the shares of all India Financial Institutions.
Where stock exchange quotations
are available, the shares should be valued accordingly. Equity shares for which
current quotations are not available or where the shares are not quoted on the
stock exchanges, should be valued at break-up value (without considering 'revaluation
reserves', if any) which is to be ascertained from the company's latest balance
sheet (which should not be more than one year prior to the date of valuation).
In case the latest balance sheet is not available, the shares are to be valued
at Re. 1 per company.
16.2.5 Units of UTI
Investments in quoted Mutual
Fund Units should be valued as per stock exchange quotations. Investments in
non-quoted Mutual Funds Units are to be valued on the basis of the latest re-purchase
price declared by the Mutual Funds in respect of each particular Scheme. In
case of funds with a lock-in period, or where repurchase price/market quote
is not available, Units could be valued at NAV. If NAV is not available, then
these could be valued at cost, till the end of the lock-in period.
16.2.6 Commercial Paper
Commercial paper should be valued
at the carrying cost
17 INVESTMENT FLUCTUATION RESERVE
(IFR)
With a view to build up adequate reserves
to guard against market risks:
17.1 Banks should build up Investment
Fluctuation Reserve (IFR) out of realised gains on sale of investments, and
subject to available net profit, of a minimum of 5 per cent of the investment
portfolio within a period of 5 years. This minimum requirement should be computed
with reference to investments in two categories, viz., ‘Held for Trading (HFT)’
and ‘Available for Sale (AFS)’. It will not be necessary to include investment
under ‘Held to Maturity’ category for the purpose. However, banks are free to
build up a higher percentage of IFR up to 10 per cent of the portfolio depending
on the size and composition of their portfolio, with the approval of their Board
of Directors.
17.2 Banks should transfer
maximum amount of the gains realised on sale of investment in securities to
the IFR. Transfer to IFR shall be as an appropriation of net profit after appropriation
to Statutory Reserve.
17.3 The IFR, consisting of
realised gains from the sale of investments from the two categories, viz., ‘Held
for Trading’ and ‘Available for Sale’, would be eligible for inclusion in Tier
II capital.
17.4 Transfer from IFR to the
Profit & Loss Account to meet depreciation requirement on investments would
be a ‘below the line’ extraordinary item.
17.5 Banks should ensure that
the unrealised gains on valuation of the investment portfolio are not taken
to the Income Account or to the IFR.
17.6 Banks may utilise the amount
held in IFR to meet, in future, the depreciation requirement on investment in
securities.
17.7 Creation of IFR as per
the above guidelines is mandatory for primary (urban) co-operative banks having
aggregate Demand and Time Liabilities of Rs. 100 crore and above, and optional
for smaller banks.
17.8 Distinction between IFR and IDR
It may be noted that Investment
Fluctuation Reserve (IFR) is the realised profit out of sale of investments
held under ‘HFT’ or ‘AFS’ category, and qualifies as Tier II capital, whereas
Investment Depreciation Reserve (IDR) is a provision created by charging diminution
in investment value to Profit & Loss Account.
18 REPORTING
Scheduled primary (urban) co-operative
banks are required to submit a statement containing information on their investments
in approved securities and money market instruments, etc. on quarterly basis.
The statement as at the end of each calendar quarter should reach RBI, Central
Office, Urban Banks Department within 10 days from the close of the quarter.
Annexure I
Master Circular on Investments
Certain clarifications on brokers’ limits
[Ref: Para 7.3]
|
Sr.No.
|
Issue raised
|
Response
|
|
1.
|
The year should be calendar
year or financial year?
|
Since banks close their accounts
at the end of March, it may be more convenient to follow the financial
year. However, the banks may follow calendar year or any other period
of 12 months provided, it is consistently followed in future.
|
|
2.
|
Whether to arrive at the
total transactions of the year, transactions entered into directly with
counter-parties, i.e. where no brokers are involved would also be taken
into account?
|
Not necessary. However, if
there are any direct deals with the brokers as purchasers or sellers the
same would have to be included in the total transactions to arrive at
the limit of transactions to be done through an individual broker.
|
|
3.
|
Whether in case of ready
forward deals both the legs of the deals i.e. purchase as well as sale
will be included to arrive at the volume of total transactions?
|
Yes
|
|
4.
|
Whether central loan/state
loan/treasury bills etc. purchased though direct subscriptions/auctions
will be included in the volume of total transactions?
|
No, as brokers are not involved
as intermediaries.
|
|
5.
|
It is possible that even
though bank considers that a particular broker has touched the prescribed
limit of 5%, he may come with an offer during the remaining period of
the year which the bank may find to its advantage as compared to offers
received from the other brokers who have not yet done business upto the
prescribed limit.
|
If the offer received is
more advantageous the limit for the broker may be exceeded and the reasons
therefore recorded and approval of the competent authority/Board obtained
post facto.
|
|
6.
|
Whether the transactions
conducted on behalf of the clients would also be included in the total
transactions of the year?
|
Yes, if they are conducted
through the brokers.
|
|
7.
|
For a bank which rarely deals
through brokers and consequently the volume of business is small maintaining
the brokewise limit of 5% may mean splitting the orders in small values
amongst different brokers and there may also arise price differential.
|
There may be no need to split
an order. If any deal causes, the particular broker's share to exceed
5% limit, our circular provides the necessary flexibility inasmuch as
Board's postfacto approval can be obtained.
|
|
8.
|
During the course of the
year, it may not be possible to reasonably predict what will be the total
quantum of transactions through brokers as a result of which there could
be deviation in complying with the norm of 5%.
|
The bank may get postfacto
approval from the Board after explaining to it, the circumstances in which
the limit was exceeded.
|
|
9.
|
Some of the small private
sector banks have mentioned that where the volume of business particularly,
the transactions done through brokers is small the observance of 5% limit
may be difficult. A suggestion has, therefore, been made that the limit
may be required to be observed if the business done through a broker,
exceeds a cut-off point of say Rs.10 crores.
|
As already observed the limit
of 5% can be exceeded subject to reporting the transactions to the competent
authority post facto. Hence, no change in instructions are considered
necessary.
|
|
10.
|
Whether the limit is to be
observed with reference to total transactions of the previous year as
the total transactions of the current year would be known only at the
end of the year?
|
The limit has to be observed
with reference to the year under review. While operating the limit, the
bank should be in view the expected turnover of the current year which
may be based on turnover of the previous year and anticipated rise or
fall in the volume of business in the current year.
|
Annexure II
Master Circular on Investments -
Certain Definitions
[ Vide para 12.3.1(iii) ]
1. With a view to imparting
clarity and to ensure that there is no divergence in the implementation of the
guidelines, some of the terms used in the guidelines are defined below.
2. A security will be treated
as rated if it is subjected to a detailed rating exercise by an external rating
agency in India which is registered with SEBI and is carrying a current or valid
rating. The rating relied upon will be deemed to be current or valid if:
i. the credit rating letter relied
upon is not more than one month old on the date of opening of the issue, and
ii. the rating rationale from
the rating agency is not more than one year old on the date of opening of the
issue, and
iii. the rating letter and the
rating rationale is a part of the offer document.
iv. In the case of secondary market
acquisition, the credit rating of the issue should be in force and confirmed
from the monthly bulletin published by the respective rating agency.
v. Securities which do not have
a current or valid rating by an external rating agency would be deemed as unrated
securities.
3. The investment grade
ratings awarded by each of the external rating agencies operating in India
would be identified by the IBA/ FIMMDA. These would also be reviewed by IBA/
FIMMDA at least once a year.
4. A ‘listed’ debt security
is a security which is listed in a stock exchange. If not so, it is an ‘unlisted’
debt security.
5. A non performing investment
(NPI), similar to a non performing advance (NPA), is one where
a. Interest/ instalment (including
maturity proceeds) is due and remains unpaid for more than 180 days. The delinquency
period has become 90 days with effect from 31st March 2004.
b. if any credit facility availed
by the issuer is NPA in the books of the bank, investment in any of the securities
issued by the same issuer would also be treated as NPI.
Annexure III
Master Circular on Investments
List of All India Financial Institutions
[Vide para 12.3.4.1 (ii)]
1. IFCI Ltd.
2. Industrial Investment Bank
of India Ltd.
3. Tourism Finance Corporation
of India Ltd.
4. Risk Capital and Technology
Finance Corporation Ltd.
5. Technology Development and
Information Company of India Ltd.
6. Power Finance Corporation Ltd.
7. National Housing Bank.
8. Small Industries Development
Bank of India
9. Rural Electrification Corporation
Ltd.
10. Indian Railways Finance Corporation
Ltd.
11. National Bank for Agriculture
and Rural Development.
12. EXIM Bank of India.
13. Infrastructure Development
Finance Co. Ltd.
Annexure IV
Master Circular on Investments
Disclosures Requirements
[ Vide para 12.9 ]
i) Issuer composition
of Non SLR investments
(Rs. in crore)
|
No.
1.
|
Issuer
2.
|
Amount
3.
|
Extent of
‘below
investment
grade’
Securities
4.
|
Extent of
‘unrated’
securities
5.
|
Extent of
‘unlisted’
securities
6.
|
|
1
|
PSUs
|
|
|
|
|
|
2
|
FIs
|
|
|
|
|
|
3
|
Nationalised Banks
|
|
|
|
|
|
4
|
Others
|
|
|
|
|
|
5
|
Provision held towards depreciation
|
|
X X X
|
X X X
|
X X X
|
| |
Total *
|
|
|
|
|
NOTE: 1.* Total under column 3 should tally
with the total of investments in Schedule 8 to the balance sheet:
2. Amounts reported under columns 4, 5, and 6
above may not be mutually exclusive.
ii) Non performing Non-SLR investments
|
Particulars
|
Amount
(Rs. Crore)
|
|
Opening balance
|
|
|
Additions during the year since 1st
April
|
|
|
Reductions during the above period
|
|
|
Closing balance
|
|
|
Total provisions held
|
|
Appendix
Master Circular on Investments
by Primary (urban) Co-op. Banks
A. List of Circulars consolidated in the Master
Circular
|
No.
|
Circular No.
|
Date
|
Subject
|
|
1.
|
UBD.BPD.SUB.CIR.5/09.80.00/2003-04
|
28-04- 2004
|
Transactions in Government
Securities (DVP III)
|
|
2.
|
UBD.BPD.PCB.Cir.45/16.20.00/2003-04
|
15-04- 2004
|
Investment in non-SLR debt
securities by UCBs
|
|
3.
|
UBD.BPD.PCB.Cir.44/09.29.00/2003-04
|
12-04- 2004
|
Sale of Govt. Securities
allocated during the auctions for primary issues on the same day.
|
|
4.
|
UBD.BPD.PCB.Cir.42/09.11.00/2003-04
|
1-04- 2004
|
Maintenance of CSGL Accounts
|
|
5.
|
UBD.BPD.PCB.Cir.35/13.05.00/2003-04
|
27-02-2004
|
Placement of deposits by
NSCBs with strong sch UCBs
|
|
6.
|
UBD.BPD.PCB.Cir.34/13.05.00/2003-04
|
11-02-2004
|
Maximum limit on advances
– limits on exposure to individual/group borrowers – Computation of capital
funds
|
|
7.
|
UBD.BPD.PCB.Cir.33/09.11.00/2003-04
|
11-02-2004
|
Maintenance of CSGL Accounts
|
|
8.
|
UBD.BPD.PCB.FIR.26/16.20.00/2003-04
|
2-12-2004
|
Investment in shares of ICICI
Bank Ltd.
|
|
9.
|
UBD.BPD.PCB.Cir.12/09.29.00/2003-04
|
04-09-2003
|
Investment Portfolio of UCBs
– Guidelines for Investment Fluctuation Reserve
|
|
10.
|
UBD.BPD.Cir.No.11/09.29.00/2003-04
|
02-09-2003
|
Investment Portfolio of UCBs
– Classification & Valuation of investments
|
|
11.
|
UBD.BPD.PCB.Cir.8/9.2900/2003-04
|
16-08-2003
|
Trading of Government Securities
in Stock Exchanges
|
|
12.
|
UBD.BPD.Cir.No.1/09.11.00/2003-04
|
08-07-2003
|
Settlement in respect of
Government Securities Transaction – Compulsory settlement through CCIL
|
|
13
|
UBD.BPD.PCB.Cir.No.2/09.80.00/2003-04
|
08-07-2003
|
Scheme for Non-Competitive
Bidding Facility in the Auction of Government of India dated securities
|
|
14.
|
UBD.PCB.56/09.29.00/2003-04
|
02-07-2003
|
Investment Portfolio of Banks
– Transactions in Securities
|
|
15.
|
UBD.BPD.PCB.Cir.No.46/16.20.00/2002-03
|
17-05-2003
|
Placement of deposits by
non-scheduled UCBs with Scheduled UCBs
|
|
16.
|
UBD.BPD.PCB.No.44/09.80.00/2002-03
|
12-05-2003
|
Guidelines for uniform accounting
for Repo/Reverse Repo transactions
|
|
17.
|
UBD.BPD.PCB.Cir.No.39/09.29.00/2002-03
|
13.03.2003
|
Trading of Government Securities
on Stock Exchange
|
|
18
|
UBD.BP.No.35/16.26.00/2002-03
|
18-02-2003
|
Prices of Government Securities
in the Secondary Market
|
|
19
|
UBD.BPD.SPCB.Cir.No.9/09.29.00/2002-03
|
27-01-2003
|
Reconciliation Procedure
for Government Loans
|
|
20
|
UBD.POT.PCB.Cir.No.06/09.29.00/2002-03
|
06-08-2002
|
Investment Portfolio of UCBs
– Transactions in Government Securities
|
|
21
|
UBD.POT.PCB.Cir.No.5/09.29.00/
2002-03
|
22-07-2002
|
Investment portfolio of banks
– transaction in securities
|
|
22
|
UBD.POT.No.49/09.80.00/2001-02
|
17-06-2002
|
Ready Forward Contracts
|
|
23
|
UBD.CO.POT.PCB.Cir.No.48/09.29.00/2001-02
|
11-06-2002
|
Certification of holding
of securities in banks’ investment portfolio
|
|
24
|
UBD.BR.No.47/16.26.00/2001-02
|
07-06-2002
|
Investments in Government
and other approved securities by Urban Co-op Banks
|
|
25
|
UBD.PCB.Cir.No.46/09.29.00/2001-02
|
06-06-2002
|
Investment Portfolio of Banks
– Transaction in Securities
|
|
26
|
UBD.Plan.SCB.Cir.No.10/09.29.00/2001-02
|
26-04-2002
|
Investment Portfolio of Urban
Banks – Transactions in Government Securities
|
|
27
|
UBD.Plan.PCB.Cir.No.41/09.29.
00/2001-02
|
20-04-2002
|
Investment Portfolio of Banks
– Transactions in Securities
|
|
28
|
UBD.BR.Cir.No.19/16.26.00/2001-02
|
22-10-2001
|
B,R.Act, 1949 (AACS) Section
24 – Investment in Government and other approved securities
|
|
29
|
UBD.No.BR.6/16.26.00/2000-01
|
09-08-2001
|
B.R. Act, 1949 (AACS) Section
24 – Investment in Government and other approved securities
|
|
30
|
UBD.No.CO.BSD.I.PCB.44/12.05.05/2000-2001
|
23-04-2001
|
Guidelines for Classification
and Valuation of Investments by Banks
|
|
31
|
UBD.No.BR.Cir/42/16.26.00/2000-01
|
19-04-2001
|
Banking Regulation Act, 1949
(As Applicable to Co-operative Societies) - Section 24 - Investment in
Government and other approved Securities by Urban Co-operative Banks (UCBS)
|
|
32
|
UBD.No.43/16.20.00/2000-01
|
19-04-2001
|
Investment of Funds by Urban
Co-operative Banks as deposits with other institutions and other Urban
Co-operative Banks
|
|
33
|
UBD.No.POT.Cir.PCB.39/09.29.00/
2000
|
18-04-2001
|
Sale of Government Securities
Allotted in the Auctions of Primary Issues
|
|
34
|
UBD.No.Plan.PCB.Cir/22/09.29.00/
2000-2001
|
30-12-2000
|
Investment Portfolio of banks
- Transactions in securities - Role of brokers
|
|
35
|
UBD.Plan.PCB.Cir/26/09.80.00/99-2000
|
28-03-2000
|
Ready Forward Contracts
|
|
36
|
UBD.Plan.18/09.80.00/1999-2000
|
30-12-1999
|
Banks' own investment in
State Government Loans -Payment of brokerage commission
|
|
37
|
UBD.No.Plan.PCB.04/09.80.00/99-2000
|
25-08-1999
|
Ready Forward Transactions
|
|
38
|
Ref. UBD No.BR. 26/18.20.00/98-99
|
07-04-1999
|
Investment of funds by primary
(urban) co-operative banks In public sector undertakings/ companies
|
|
39
|
UBD.No.Plan.PCB.DIR.3/09.80.00/98-99
|
17-08-1998
|
Reverse Ready forward transactions
|
|
40
|
UBD.No.BR.1/16.20.00/98-99
|
10-07-1998
|
Investment by urban co-op.
banks – Valuation of Investments – US – 64 units
|
|
41
|
UBD No.61/16.20.00/97-98
|
04-06-1998
|
Investment of Investment
by Urban Cooperative Banks - Valuation of Investment - US- 64 Units funds
by primary (urban) co-operative banks in public sector undertakings/companies
|
|
42
|
UBD.No.Pl.an.PCB/Cir.56/09.60.00/
97-98
|
13-05-1998
|
Investment in Certificates
of Deposit (CDs) by primary (urban) co-operative banks
|
|
43
|
UBD.No.Plan.SUB.20/09.81.00/97-98
|
19-02-1998
|
Retailing of Government Securities
|
|
44
|
UBD.No.BP.37/16.20.00/97-98
|
29-01-1998
|
Investment by Urban Co-operative
Banks - Valuation of Investments
|
|
45
|
UBD.No.BSD.I (PCB) 22/ 12.
05. 00 / 97-98
|
26-11-1997
|
Investment by Urban Co-operative
Banks Valuation of Investments
|
|
46
|
UBD.No.Plan.SUB.No.17/09.83.00/97-98
|
19-11-1997
|
Statistical data relating
to investments in Money Market Instruments/Government Securities
|
|
47
|
UBD.No.Plan.PCB/Cir.21/09.60.00/97-98
|
11-11-1997
|
Investment in certificates
of deposit (CDs) by Urban Co-operative Banks
|
|
48
|
UBD.No.Plan.PCB.Cir.19/09.29.
00/97-98
|
10-11-1997
|
Investment Portfolio of banks-Transactions
in securities-Role of brokers
|
|
49
|
UBD.No.Plan.PCB.56/09.60.00/96-97
|
06-06-1997
|
Investment in Certificates
of Deposit (CDs) by Urban Co-operative Banks
|
|
50
|
UBD.No.DS.SUB.CIR.7/13.07.00/96-97
|
07-01-1997
|
Investment of Surplus Funds
by primary co-operative Banks in Bills Rediscounting Scheme
|
|
51
|
UBD.No.Plan.PCB.34/09.29.07/96-97
|
30-12-1996
|
Investment portfolio of banks
Transactions in securities
|
|
52
|
UBD.No.Plan.PCB.No.30/09.82.00/96-97
|
27-11-1996
|
Investment by Urban Co-operative
Banks in the Units of Unit Trust of India (UTI)
|
|
53
|
UBD.No.Plan.PCB.19/09.29.00/96-97
|
11-09-1996
|
Investment portfolio of banks
- System for custody and control of unused B. R. Forms
|
|
54
|
UBD.No.Plan.PCB.7/09.60.00/96-97
|
19-07-1996
|
Investment in certificates
of deposit by Urban Co-operative Banks
|
|
55
|
UBD.No.Plan/PCB/69/09.29.00/95-96
|
21-06-1996
|
Investment portfolio of banks
- Transactions in securities
|
|
56
|
UBD.No.BR.Cir.52/16.20.00/95-96
|
16-03-1996
|
Investment of funds by Urban
Co-operative Banks in Public Sector Undertakings/Companies
|
|
57
|
UBD.No.Plan.PCB.47/09.60.00/95-96
|
29-02-1996
|
Investment in Certificates
of Deposit (CDs) by Urban Co-operative Banks
|
|
58
|
UBD.No.BR.12/16.20.00/95-96
|
06-01-1996
|
Investment of funds by urban
co-operative banks in bonds of public sector undertakings
|
|
59
|
UBD.No.BR.Cir.33/16.26.00/95-96
|
03-01-1996
|
Banking Regulation Act, 1949
(As applicable to Co-operative Societies) Section 24-Investment in Government
and other approved securities by primary co-operative banks
|
|
60
|
UBD.No.Cir.63/16.26.00/94-95
|
16-06-1995
|
Banking Regulation Act, 1949
(As applicable to Co-operative Societies) Section 24-Investment in Government
and other approved securities by primary co-operative banks
|
|
61
|
UBD.No.BR.CIR.53/16.20.00/94-95
|
24-04-1995
|
Investment of funds by Urban
Co-operative Banks in Public Sector Undertakings/Companies
|
|
62
|
UBDNo.Plan.PCB.32/09.29.00/94-95
|
24-11-1994
|
Investment Portfolio of Banks
- Transactions in Securities - Bank Receipts/Role of brokers
|
|
63
|
UBD.No.Plan.PCB.29/09.80.00/94/95
|
09-11-1994
|
Ready Forward Transactions
|
|
64
|
UBD.No.Plan.PCB.14/09.80.00/94-95
|
24-08-1994
|
Ready Forward Transactions
|
|
65
|
UBD.BR.10/PCB(CIR)/16.20.00/9495
|
01-08-1994
|
Investment of funds by primary
co-operative banks in public sector undertakings/companies
|
|
66
|
UBD.BR.CIR.72/16.20.00/93-94
|
16-05-1994
|
Investment of funds by urban
co-operative banks in public sector undertakings/companies
|
|
67
|
UBD.No.PLAN (PCB).CIR.56/09.29.00/93-94
|
11-02-1994
|
Investment portfolio of banks
- Transactions in Securities.
|
|
68
|
UBD.No.Plan.51/09.29.00/93-94
|
20-01-1994
|
Investment portfolio of banks
- Transactions in Securities - Bouncing of SGL transfer forms - Penalties
to be imposed:
|
|
69
|
UBD.No.3/09.29.00/93-94
|
02-08-1993
|
Investment port-folio of
banks - Transactions in securities - Aggregate contract limit for individuals
brokers – Clarifications
|
|
70
|
UBD.No.Plan.74/UB.81-92/93
|
17-05-1993
|
Investment portfolio or banks
- Transactions in securities
|
|
71
|
UBD.No.Plan.13/UB.81/92-93
|
15-09-1992
|
Investments portfolio of
banks Transactions in securities
|
|
72
|
UBD.No.BR.1866/A.12(19)-87/88
|
13-06-1988
|
Investments of Funds by Urban
Co-operative Banks as Deposits with Public Sector Undertakings/ Companies/Corporations/Co-operative
Institutions
|
|
73
|
UBD.No.DC.84 /R.1(B).87/88
|
13-02-1988
|
Bills Rediscounting Scheme
- Rediscounting of Bills with Banks and Financial Institutions
|
|
74
|
UBD.No.BR.1455/A12(24)-85/86
|
31-05-1986
|
Banking Regulation Act, 1949
(as applicable to co-operative societies) - Section 24 - Investment in
Units issued by the Unit Trust of India
|
|
75
|
UBD.BR.871/A.12 (24)-84/85
|
10-05-1985
|
Banking Regulation Act, 1949
(as applicable to co-operative societies) - Section 24 - Investment made
under national deposit scheme
|
|
76
|
UBD.BR.498/A.12 (24) -84/85
|
08-01-1985
|
Banking Regulation Act, 1949
(As Applicable to Co-operative Societies) Section 24 - Investment in Government
and Other Trustee Securities by primary co-operative banks
|
|
77
|
UBD.NO.DC.597/R.41-84/85
|
31-10-1984
|
7% Capital Investment Bonds
|
|
78
|
UBD.P&O.1121/UB. -63-83/84
|
01-06-1984
|
Bank's own investment in
central state government loans-payment of brokerage
|
|
79
|
ACD.ID (DC) 1799/R.36/79/80
|
10-01-1980
|
Subscription/purchase of
7 year national rural development bonds
|
|
80
|
ACD.ID. (DC) 1800/R.36-79/80
|
10-01-1980
|
Directive relating to subscription/purchase
of 7 year national rural development bonds
|
|
81
|
ACD.BR.446/A.12 (19)/72-3
|
01-11-1972
|
Banking Regulation Act, 1949
(As Applicable to Co-operative Societies) Section 19
|
|
82
|
ACD.BR.463/A.12 (19)/70-7
|
09-11-1970
|
Banking Regulation Act, 1949
(As Applicable to Co-operative Societies): Section 19
|
|
83
|
ACD.BR.1/A.12 (19)/68-9
|
01-07-1968
|
Section 19 of the Banking
Regulation act 1949 (as applicable to co-operative societies): Restriction
on holding shares in other co-operative societies
|
|
84
|
ACD.BR.3/A.12 (19)/68-9
|
01-07-1968
|
Section 19 of the Banking
Regulation Act, 1949 (as applicable to co-operative societies): Restriction
on holding shares in other co-operative societies
|
|
85
|
ACD.BR.903/A.12 (19)/67-8
|
22-12-1967
|
Banking Regulation Act, 1949
(as applicable to Co-operative Societies): Section 19: Restriction on
holding of shares in other co-operative societies
|
|
86
|
ACD.BR.388/A.11 (19) 65-6
|
01-03-1966
|
Section 19 of the Banking
Regulation Act: Restriction on holding shares in other co-operative societies
|
B. List of Other Circulars from
which instructions relating to Investments have also been consolidated in the
Master Circular
|
No.
|
Circular No.
|
Date
|
Subject
|
| |
UBD.No.POT.PCB.Cir.No.45/09.116.00/2000-01
|
25-04-2001
|
Application of Capital Adequacy Norms to
Urban (Primary) Co-operative Banks
|
| |
UBD.CO.No.BSD-I.PCB(Cir)34/ 12.05.05/99-2000
|
24-05-2000
|
Income Recognition, Asset Classification,
Provisioning and Valuation of Investments
|
| |
UBD.No.BSD.PCB./25/12.05.05/ 99-2000
|
28-02-2000
|
Income Recognition, Asset Classification,
Provisioning and other related matters
|
| |
UBD.No.I&L(PCBs)42/12.05.00/ 96-97
|
20-03-1997
|
Prudential norms - Income Recognition,
Assets Classification, Provisioning and other related matters -
|
| |
UBD.No.I&L(PCBs)68/12.05.00/ 95-96
|
10-06-1996
|
Income Recognition, assets classification,
provisioning and other related matters Clarifications
|
| |
UBD.No.I&L(PCB)61/12.05.00/94-95
|
06-06-1995
|
Income recognition, asset classification,
provisioning and other related matters Valuation of investment and others
|
| |
UBD.No.I&L86/12.05.00/93-94
|
28-06-1994
|
Income recognition, assets classification,
provisioning and other related matters
|
| |
UBD.21/12:15:00/93-94
|
21-09-1993
|
Committee to enquire into various aspects
relating to frauds and malpractices in banks primary (urban) co-operative
banks
|
| |
UBD.NO.I&L.38/J.1-92/93
|
09-02-1993
|
Income recognition, assets classification,
provisioning and other related matters
|
| |
UBD.BR.16/A.6-84/85
|
09-07-1984
|
Banking Law (Amendment) Act, 1983
|
| |
ACD.Plan.358/UB.1-78/9
|
20-04-1979
|
Report on the committee on urban co-operative
banks
|
| |
ACD.BR.184/A.12(19)-78/9
|
23-08-1978
|
The Banking Regulation Act, 1949 (as applicable
to co-operative societies) : Section 10 : Restriction on holding shares
in other co-operative societies
|
| |
ACD.BR.760/A.1/68-9
|
23-01-1969
|
The Banking Laws (Amendment) Act, 1968
|
| |
ACD.BR. 464/A. 12(24)/68-9
|
12-11-1968
|
Section 24 of the Banking Regulation Act
1949 (As Applicable to Co-operative Societies): Maintenance of Percentage
of Assets
|