Prudential Guidelines on Bank's/FI’s Investment in Venture Capital Funds (VCF)
1. Prudential Exposure Limits
1.1 All exposures to VCFs (both registered and unregistered) will be deemed to be on par with equity and hence will be reckoned for compliance with the capital market exposure ceilings (ceiling for direct investment in equity and equity linked instruments as well as ceiling for overall capital market exposure).
1.2 The investment in VCFs set up in the form of companies will be subject to compliance with the provisions of Section 19(2) of Banking Regulation Act 1949 i.e the bank will not hold more than 30% of the paid up capital of the investee company or 30% of its own paid up share capital and reserves, whichever is lower.
1.3 Besides, investments in VCFs in the form of equity / units etc. will also be subjected to the limits stipulated vide para 3 of Master circular on Para Banking Activities DBOD.FSD.No.10/24.01.001/2005-06 dated July 1, 2005 in terms of which the investment by a bank in a subsidiary company, financial services company, financial institution, stock and other exchanges should not exceed 10 per cent of the bank's paid-up capital and reserves and the investments in all such companies, financial institutions, stock and other exchanges put together should not exceed 20 per cent of the bank's paid-up capital and reserves.
2. Valuation and classification of FIs' investment in VCFs
2.1 The quoted equity shares / bonds / units of VCFs in the bank's/FI’s portfolio should be held under Available for Sale (AFS) category and marked to market preferably on a daily basis, but at least on a weekly basis in line with valuation norms for other equity shares as per existing instructions.
2.2 FIs' investments in unquoted shares / bonds / units of VCFs made after issuance of these guidelines will be classified under Held to Maturity (HTM) category for initial period of three years and will be valued at cost during this period. For the investments made before issuance of these guidelines, the classification would be done as per the existing norms.
2.3 For this purpose, the period of three years will be reckoned separately for each disbursement made by the bank/FI to VCF as and when the committed capital is called up. However, to ensure conformity with the existing norms for transferring securities from HTM category, transfer of all securities which have completed three years as mentioned above will be effected at the beginning of the next accounting year in one lot to coincide with the annual transfer of investments from HTM category.
2.4. After three years, the unquoted units / shares / bonds should be transferred to AFS category and valued as under :
(i) Units
In the case of investments in the form of units, the valuation will be done at the Net Asset Value (NAV) shown by the VCF in its financial statements. Depreciation, if any, on the units based on NAV has to be provided at the time of shifting the investments to AFS category from HTM category as also on subsequent valuations which should be done at quarterly or more frequent intervals based on the financial statements received from the VCF. At least once in a year, the units should be valued based on the audited results. However, if the audited balance sheet / financial statements showing NAV figures are not available continuously for more than 18 months as on the date of valuation, the investments are to be valued at Rupee 1.00 per VCF.
(ii) Equity
In the case of investments in the form of shares, the valuation can be done at the required frequency based on the break-up value (without considering 'revaluation reserves', if any) which is to be ascertained from the company's (VCF's) latest balance sheet (which should not be more than 18 months prior to the date of valuation). Depreciation, if any on the shares has to be provided at the time of shifting the investments to AFS category as also on subsequent valuations which should be done at quarterly or more frequent intervals. If the latest balance sheet available is more than 18 months old, the shares are to be valued at Rupee.1.00 per company.
(iii) Bonds
The investment in the bonds of VCFs, if any, should be valued as per prudential norms for classification, valuation and operation of investment port-folio by FIs issued by RBI from time to time.
3. Risk Weight and capital charge for market risk for exposures in VCFs
3.1 Shares and units of VCFs
Investments in shares / units of VCFs may be assigned 150% risk weight for measuring the credit risk during first three years when these are held under HTM category. When these are held under or transferred to AFS, the capital charge for specific risk component of the market risk as required in terms of the present guidelines on computation of capital charge for market risk, may be fixed at 13.5% to reflect the risk weight of 150%. The charge for general market risk component would be at 9% as in the case of other equities.
3.2 Bonds of VCFs
Investments in bonds of VCFs will attract risk weight of 150% for measuring the credit risk during first three years when these are held under HTM category. When the bonds are held under or transferred to AFS category, these would attract specific risk capital charge of 13.5%. The charge for general market risk may be computed as in the case of investment in any other kind of bonds as per existing guidelines
3.3 Exposures to VCFs other than investments
The exposures to VCFs other than investments may also be assigned a risk weight of 150%.
4. Exemption under guidelines relating to non-SLR Securities
As per extant guidelines relating to non-SLR securities, a bank's investment in unlisted non-SLR securities should not exceed 10 per cent of its total investment in non-SLR securities as on March 31, of the previous year. Further, FIs must not invest in unrated non-SLR securities. The investments in unlisted and unrated bonds of VCFs will be exempted from these guidelines.
5. RBI approval for Strategic Investments in VCFs by Banks/FIs
FIs should obtain prior approval of RBI for making strategic investment in VCFs i.e. investments equivalent to more than 10% of the equity / unit capital of a VCF. However, in case of SIDBI the following guidelines will be applicable :
(i) SIDBI's investment limit to VCF without our prior approval is increased from existing 15% to 20% subject to the proviso that they will maintain a capital charge of 175%. For specific risk where SIDBI's CME is between 20% and 30%, the capital charge will be at 200% and for CME above 30% and upto 40% the capital charge on specific risk will be 225%.
(ii) SIDBI’s investment in any venture fund may be reckoned as MSME dedicated, as long as the Fund invests at least twice the contribution made by SIDBI or 50% of its funds, whichever is more to MSMEs.
Prudential Norms for Off-balance Sheet Exposures of FIs
Please refer to our circular DBOD.No.BP.BC.57/21.04.157/2008-09 dated October 13, 2008, in terms of which, any change in any of the parameters of a derivative contract is treated as restructuring and the mark-to-market (MTM) value of the contract on the date of restructuring should be cash settled.
2. There may be situations where the clients of FIs may like to reduce the notional exposure of the hedging derivative contract. In such cases, FIs may partially or fully terminate the contract before maturity, at their discretion, thereby reducing the notional exposure of the contract. This reduction in notional exposure would not be treated as re-structuring of the derivative contract provided all other parameters of the original contract remain unchanged.
3. In such cases, if the MTM value of the derivative contract is not cash settled, FIs may permit payment in instalments of the crystallized MTM of such derivative contracts (including Forex Forward Contracts), subject to the following conditions :
(i) FIs should have a Board approved policy in this regard.
(ii) FIs should permit repayment in instalments only if there is a reasonable certainty of repayment by the client.
(iii) The repayment period should not extend beyond the maturity date of the contract.
(iv) The repayment instalments for the crystallized MTM should be uniformly received over the remaining maturity of the contract and its periodicity should be at least once in a quarter.
(v) If the client is permitted to pay the crystallized MTM in instalments and
a. if the amount becomes overdue for 90 days from the date of partial / full termination of the derivative contract, the receivable should be classified as NPA.
b. if the amount becomes overdue for 90 days from the due date of payment of subsequent instalments, the receivable should be classified as NPA.
(vi) FIs should reverse the entire MTM which has been taken to Profit and Loss account on accrual basis in case of (v) (a) and (v) (b) above. For the accounting of reversed MTM in these cases, FIs should follow an approach similar to the one stipulated in circulars DBOD.No.BP.BC.57/21.04.157/2008-09 dated October 13, 2008 and DBOD.No.BP.BC.28/21.04.157/2011-12 dated August 11, 2011 on 'Prudential Norms for Off-balance Sheet Exposures of FIs'. Accordingly, the crystallized MTM of these derivative contracts should be reversed from Profit and Loss account and credited to another suspense account styled as 'Suspense Account - Crystallised Receivables'.
4. If the client is not granted the facility of paying the crystallised MTM value in instalments and the amount becomes overdue for 90 days from the date of partial / full termination of the derivative contract, the entire receivable should be classified as NPA and FIs should follow the instructions stipulated in our circulars dated October 13. 2008 and August 11, 2011, referred to above.
5. There may be cases, where the derivative contract has been terminated, either partially or fully, and crystallized MTM has been permitted to be repaid in instalments but the client subsequently decides to hedge the same underlying exposure again by entering into new contract with same or other bank (provided such re-booking is permissible as per extant RBI guidelines). In such cases, FIs may offer derivative contracts to the client provided the client has fully repaid the entire outstanding instalments corresponding to the derivative contract that was used to hedge the underlying exposure previously.
List of sub-sectors for 'Infrastructure Lending'
A credit facility extended by lenders (i.e. banks and select All India Term-Lending and Refinancing Institutions) to a borrower for exposure in the following infrastructure sub-sectors will qualify as 'infrastructure lending' with effect from November 25, 2013:
Category
|
Infrastructure sub-sectors
| |
| Transport |
i
| Roads and bridges |
ii
| Ports1 | |
iii
| Inland Waterways | |
iv
| Airport | |
v
| Railway Track, tunnels, viaducts, bridges2 | |
vi
| Urban Public Transport (except rolling stock in case of urban road transport) | |
| Energy |
i
| Electricity Generation |
ii
| Electricity Transmission | |
iii
| Electricity Distribution | |
iv
| Oil pipelines | |
v
| Oil / Gas / Liquefied Natural Gas (LNG) storage facility3 | |
vi
| Gas pipelines4 | |
| Water & Sanitation |
i
| Solid Waste Management |
ii
| Water supply pipelines | |
iii
| Water treatment plants | |
iv
| Sewage collection, treatment and disposal system | |
v
| Irrigation (dams, channels, embankments etc) | |
vi
| Storm Water Drainage System | |
vii
| Slurry Pipelines | |
| Communication |
i
| Telecommunication (Fixed network)5 |
ii
| Telecommunication towers | |
iii
| Telecommunication & Telecom Services | |
| Social and Commercial Infrastructure |
i
| Education Institutions (capital stock) |
ii
| Hospitals (capital stock)6 | |
iii
| Three-star or higher category classified hotels located outside cities with population of more than 1 million | |
iv
| Common infrastructure for industrial parks, SEZ, tourism facilities and agriculture markets | |
v
| Fertilizer (Capital investment) | |
vi
| Post harvest storage infrastructure for agriculture and horticultural produce including cold storage | |
vii
| Terminal markets | |
viii
| Soil-testing laboratories | |
ix
| Cold Chain7 | |
x
| Hotels with project cost8 of more than Rs.200 crores each in any place in India and of any star rating; | |
xi
| Convention Centres with project cost8 of more than Rs.300 crore each. | |
1. Includes Capital Dredging
2. Includes supporting terminal infrastructure such as loading / unloading terminals, stations and buildings 3. Includes strategic storage of crude oil 4. Includes city gas distribution network 5. Includes optic fibre / cable networks which provide broadband / internet 6. Includes Medical Colleges, Para Medical Training Institutes and Diagnostics Centres 7. Includes cold room facility for farm level pre-cooling, for preservation or storage of agriculture and allied produce, marine products and meat. 8. Applicable with prospective effect from the date of this circular and available for eligible projects for a period of three years; Eligible costs exclude cost of land and lease charges but include interest during construction. | ||
