In a statement, the RBI said the intent of the relaxation was to provide banks in India with additional options to raise capital to meet both their business needs and Basel II capital adequacy norms.
The statement relaxes earlier guidelines, issued by the RBI on January 25 this year, which stated that banks could issue such instruments in Indian rupees but were required to obtain RBI approval on a case-by-case basis for an issue in foreign currency.
As per last week's statement, banks are allowed to issue innovative perpetual debt instruments (IPDIs) in foreign currency up to 49% of the eligible 15% of their Tier I capital without prior RBI permission. They may also issue upper Tier II Instruments in foreign currency up to 25% of their unimpaired Tier I capital without prior approval, subject to compliance with certain specified conditions.
The capital thus raised will be over and above the existing limit for foreign currency borrowings by authorised dealers.
The RBI clarified that the amount raised through the IPDIs will not attract cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements. Investments by foreign institutional investors (FIIs) in IPDIs and upper Tier II instruments raised in Indian rupees would also be outside the limit for investment in corporate debt instruments, the central bank said.
However, investments by FIIs in upper Tier II instruments continue to be subject to a separate ceiling of $500 million.
Banks have welcomed the new guidelines as the cost of borrowing overseas is cheaper than in rupees in many cases. The State Bank of India, ICICI Bank, HDFC Bank, Bank of India, and UTI Bank are expected to be among early issuers to take advantage of the relaxation and approach overseas markets.
UTI Bank may be the first bank off the block as it already announced two weeks ago, along with its fiscal 2007 first quarter results, that it would be augmenting its Tier I capital during the course of the fiscal year.