Banks Seek Hike in FII, NRI Cap in Hybrid Capital

Banks have asked the Reserve Bank of India (RBI) to review the ceiling on investment by foreign institutional investors (FIIs) and non-resident Indians (NRIs) in perpetual debt and debt capital instruments (hybrid capital)।

According to RBI guidelines, investment in these instruments by FIIs and NRIs are to be within an overall limit of 49 per cent and 24 per cent of the issue। Investment by a single FII and NRI was capped at 10 per cent and 5 per cent of the issue.

This demand was made to the RBI Governor Y V Reddy by a delegation of bankers, including K V Kamath, managing director and chief executive officer,ICICI Bank, V P Shetty, chairman and managing director (CMD), IDBI Ltd, A K Khandelwal, CMD, Bank of Baroda, P J Nayak, CMD, UTI Bank, and Sanjay Nayar, chief executive officer, Citibank, India।

In January, 2006 the RBI had permitted banks to raise capital through additional instruments popularly known as hybrid instruments। This was to let banks shore up their capital in the light of the implementation of Basel II norms. However, the RBI capped FII and NRI investments in these debt instruments.

“The investors in hybrid debt instruments are pension funds, provident funds and large institutional investors looking for fixed returns। The relevance of the ceilings prescribed may be examined considering that the hybrid debt instruments does not constitute any equity participation with ownership/voting rights implications. The ceiling fixed by the RBI has more relevance for equity participation. Since hybrid capital is not purely equity capital, there is a need to examine this aspect,’’ said the CEO of a private sector bank.

“There is a talk of moving towards full capital account convertibility. Under full capital account convertibility such restrictions have to be done away with. If the ceiling set is to ensure that such inflows do not fuel liquidity then the regulator could ask banks to keep the funds overseas rather than place restrictions on investments,’’ said a senior banker.