RBI Proposes Special Share Certificates for UCBs to Boost Capital Base

Context:

To enhance capital mobilisation options for UCBs, especially Tier-4 UCBs, through innovative instruments like Special Share Certificates (SSCs) and Perpetual Non-Cumulative Preference Shares (PNCPS).

Special Share Certificates (SSCs)

A share certificate is a written document signed on behalf of a corporation that serves as legal proof of ownership of the indicated number of shares. It is also referred to as a stock certificate.

• Nature:
  • Non-voting shares (no membership rights).
  • Issued to members/others within UCB’s area of operation.
  • To be issued at book value, not face value.
• Eligibility:
  • Only Tier-4 UCBs (deposits > ₹10,000 crore) can issue SSCs initially.
• Dividend:
  • Same rate as member shares.
  • Non-cumulative in nature, as per RBI guidelines.
• Redemption:
  • Permitted after 3 years from issuance.
• Trading:
  • Tier-4 UCBs can facilitate SSC trading on their websites.
  • Open to members and persons residing within the area of operation.
• Restrictions:
  • UCBs cannot invest in SSCs of other UCBs.
  • No loans against SSCs (own or other UCBs).

Perpetual Non-Cumulative Preference Shares (PNCPS)

Perpetual Non-Cumulative Preference Shares (PNCPS) are a type of preference share issued by banks with no fixed maturity date and no accumulation of unpaid dividends. They offer a fixed dividend rate and prioritize dividend payments to equity shareholders. PNCPS are often used by banks to bolster their capital base, particularly to meet Basel III capital requirements

• Loan Facility:
  • UCBs may allow loans up to 20x the amount subscribed in PNCPS.
  • Maximum loan limit fixed at ₹5 lakh per subscriber.
• Borrower Cap:
  • PNCPS subscribers and nominal members availing credit must not exceed 20% of total borrowing members.

Rationale Behind the Proposal

• Challenges with Current Capital Options:
  • Issuing member shares is unattractive due to:
    • High dividend payouts.
    • No issuance at premium despite high book value.
• Legal & Global Context:
  • Dual-class share structures are globally common.
  • Enabled by Banking Regulation (Amendment) Act, 2020.
• Expected Impact:
  • Enhances investor interest via tradability and flexibility.
  • Provides cheaper, more accessible capital options for UCBs.
  • Addresses the problem of long tenures (e.g., 10 years) with more flexible instruments.