Reserve Bank of India
RBI/2022-23/05
DOR.MRG.REC.10/21.04.141/2022-23
April 01, 2022
All Primary (Urban) Co-operative Banks
Dear Sir / Madam,
Master Circular on Investments by Primary (Urban) Co-operative Banks
Please refer to our Master Circular DOR.MRG.REC.50/21.04.141/2021-22 dated September 20, 2021 on the captioned subject. The enclosed Master Circular consolidates and updates all the instructions/guidelines on the subject issued as on date.
Yours faithfully,
(Usha Janakiraman)
Chief General Manager
INDEX
| Para No. |
Subject | Page No. |
| 1 | Restrictions on Holding Shares in Other Co-operative Societies | 3 |
| 2 | Statutory (SLR) Investments | 4 |
| 3 | Investment Policy | 4 |
| 4 | General Guidelines | 5 |
| 5 | Transactions through SGL Accounts | 11 |
| 6 | Engagement of brokers | 14 |
| 7 | Settlement of Government Securities Transactions through CCIL | 16 |
| 8 | Trading of Government Securities on Stock Exchanges | 16 |
| 9 | Repo/Reverse Repo Transactions | 19 |
| 10 | Short Sale in Government Securities | 20 |
| 11 | When Issued in Government Securities | 20 |
| 12 | Non- SLR Investments | 21 |
| 13 | Internal Control and Investment Accounting | 26 |
| 14 | Recommendations of Ghosh Committee | 28 |
| 15 | Categorisation of Investments | 29 |
| 16 | Valuation of Investments | 32 |
| 17 | Investment Fluctuation Reserve (IFR) | 37 |
| Annex | ||
| I | Certain clarifications regarding brokers’ limits | 39 |
| II | Definitions of certain terms | 41 |
| III | Guidelines for accounting of Repo/Reverse Repo transactions | 42 |
| III(a) | Recommended accounting methodology for Repo/Reverse Repo Transactions | 45 |
| III(b) | Illustrative examples for accounting Repo/Reverse Repo transactions | 47 |
| Appendix | ||
| A | List of circulars consolidated in the Master Circular on Investments by primary urban co-operative banks | 54 |
| B | List of other circulars from which instructions relating to investments have been consolidated in the Master Circular | 63 |
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) (BR Act, 1949 (AACS)) 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 of India (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 (UCB), 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 cooperative institutions, other than those falling under any of the categories stated at paragraphs 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 paragraph 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 cooperative society falling under paragraph 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 cooperative society coming under paragraph 1.2.1 above only if the bye-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 paragraph 1.2.1 above should be completed in 10 equal annual installments commencing from the cooperative 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 paragraph 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 Maintenance of Statutory Liquidity Ratio (SLR) for UCBs
Banks shall refer to the Master Direction-Reserve Bank of India [Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)] Directions, 2021 on the maintenance of SLR.
3 INVESTMENT POLICY
3.1 Keeping in view the various regulatory/statutory guidelines and the bank’s own internal requirements, UCBs 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 indicate the authority to put through investment deals, the procedure to be followed for obtaining sanction of the appropriate authority for putting through deals, fixing various prudential exposure limits, and 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. It should be prepared strictly observing the instructions issued by the Registrar of Cooperative Societies (Central Registrar of Co-operative Societies, where applicable) and the Reserve Bank 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 periodic review of investment transactions in a critical manner and put up details of large transactions to the Board, for information.
3.5 A copy of the internal Investment Policy guidelines framed by the bank with the approval of its Board should be forwarded to the concerned Regional Office of Department of Supervision, Reserve Bank, 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 Reserve Bank.
3.6 For investment in non-SLR instruments, banks should review their Investment Policy and ensure that it provides for the nature and extent of investments intended to be made, the risk parameters, and cut-loss limits for holding / divesting the investments. The banks should put in place proper risk management systems for capturing and analyzing the risk in respect of non-SLR investments and taking remedial measures in time. Banks should also be guided by instructions given in paragraph 12 of this Master Circular.
4 GENERAL GUIDELINES
4.1 UCBs should not undertake any purchase/sale transactions with broking firms or other intermediaries on principal-to-principal basis.
4.2 Banks should not hold an oversold position in any security except for those banks which are eligible to undertake short sale position in Government securities as prescribed in paragraph 10 of this Master Circular. However, scheduled UCBs 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 Clearing Corporation of India Ltd. (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). Sale of Government Securities allotted to successful bidders in primary issues on the day of allotment, with and between CSGL constituent account holders is permitted.
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 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/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-OM. 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 Department of Supervision, Reserve Bank of India. Any violation noticed in this regard would attract penalties as currently applicable to the bouncing of SGL even if the deal has been settled because of the netting benefit under DVP III, besides attracting further regulatory action as deemed necessary.
4.5 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:
4.5.1 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. 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. Any sale of securities should be only on a T+0 or T+1 settlement basis.
4.5.2 The contract for sale of allotted securities can be entered into by banks only with entities maintaining SGL Account with Reserve Bank for delivery and settlement on the next working day through the DVP system.
4.5.3 The face value of securities sold should not exceed the face value of securities indicated in the allotment advice.
4.5.4 The sale deal should be entered into directly without the involvement of broker/s.
4.5.5 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 etc. This record should be made available to Reserve Bank for verification. Banks should immediately report any cases of failure to maintain such records.
4.5.6 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 concerned Regional Office of Department of Supervision, RBI.
4.5.7 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 nonpayment etc.
4.6 While undertaking OTC transactions in Government securities, banks should seek a scheduled commercial bank, a Primary Dealer (PD), a financial institution, another UCB, insurance company, mutual fund or provident fund, as a counterparty for their transactions. Preference should be given to direct deals with such counter parties. It will be desirable to check prices from other banks or PDs with whom the UCB may be maintaining Gilt account. The prices of all trades done in Government Securities, including those traded through NDS-OM, are also available at Reserve Bank’s website (www.rbi.org.in).
4.7 Scheduled UCBs 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:
4.7.1 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.
4.7.2 Retailing of Government Securities should be on the basis of ongoing market rates/yield curve emerging out of secondary market transactions.
4.7.3 Immediately on sale, the corresponding amount should be deducted by the bank from its investment accounts and also from its SLR assets.
4.7.4 These transactions should be looked into by the concurrent/ statutory auditors of the bank.
4.7.5 Banks should put in place adequate internal control checks/ mechanisms as advised by the Reserve Bank from time to time.
4.8 Banks may take advantage of the non-competitive bidding facility in the auction of Government of India dated securities, provided by the Reserve Bank. Under this scheme, banks may bid upto ₹2 crore (face value) in any auction of Government of India dated securities, either directly, through a bank or through a PD. For availing this facility, no bidding skill is required, as allotment upto ₹2 crore (face value) is made at the weighted average cut-off rate which emerges in the auction. UCBs may also participate directly or through a bank or a PD in the competitive and non-competitive auctions of State Development Loans (SDLs) conducted by the Reserve Bank.
Participation in non-competitive auction of SDLs will be as per guidelines prescribed in the Scheme of Non-Competitive Bidding in the Auction of SDLs issued vide circular IDMD.No.954/08.03.001/2009-10 dated August 24, 2009, as amended from time to time. An advertisement in leading newspapers is issued 4-5 days in advance of the date of auction. Half yearly auction calendar of Government of India securities is also issued by the Reserve Bank.
4.9 Gilt Accounts, if opened, should be used for holding the securities and such accounts should be maintained in the same bank with whom the cash account is maintained.
4.10 In case Gilt account is opened with any of the eligible non-banking institutions, the particulars of the designated funds account (with a bank) should be intimated to that institution.
4.11 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.
4.12 Officials deciding about purchase and sale transactions should be separated from those responsible for settlement and accounting.
4.13 All investment transactions should be perused by the Board at least once a month.
4.14 When the bank has been specifically permitted to tender physical SGL transfer forms, it should keep a proper record of the SGL forms received / issued to facilitate counter-checking by their internal control systems/Inspecting Officers of Reserve Bank/other auditors.
4.15 All purchase/sale transactions in Government Securities by the banks should necessarily be through SGL/CSGL account (with Reserve Bank) or Gilt account (with a scheduled commercial bank/State co-operative bank/PD/SHCIL) or in a dematerialised account with depositories (NSDL/CDSL).
4.16 No transactions in Government Securities by a UCB should be undertaken in physical form with any broker.
4.17 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 sale transactions.
4.18 The security dealings of banks generally being for large values, it may be necessary to ensure, before concluding the deal, the ability of the counterparty to fulfill the contract, particularly where the counterparty is not a bank.
4.19 While buying securities for SLR purpose, the bank should ensure that the security it intends to purchase has an SLR status. The SLR status of securities issued by the Government of India and the State Governments will be indicated in the Press Release issued by the Reserve Bank at the time of issuance of the securities. An updated and current list of the SLR securities will be posted on the Reserve Bank’s website (https://dbie.rbi.org.in) under the link “Database on Indian Economy-Statistics-Financial Market-Government Securities Market.”
4.20 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 Securities.
4.21 UCBs may seek the guidance of Primary Dealers’ Association of India (PDAI)/Fixed Income and Money Market Dealers’ Association (FIMMDA) on investment in Government Securities.
Negotiated Dealing System – Order Matching
4.22 All licensed UCBs fulfilling the eligibility criteria contained in circular IDMD.DOD.No.13/10.25.66/2011-12 dated November 18, 2011 as amended from time to time, are allowed direct access to Negotiated Dealing System – Order Matching platform. The eligibility criteria are as under:
(a) Current account with RBI or a funds account with one of the Designated Settlement Banks (DSBs) chosen by Clearing Corporation of India Limited (CCIL) for funds settlement.
(b) Subsidiary General Ledger (SGL) Account with RBI.
(c) Membership of Negotiated Dealing System (NDS).
(d) Indian Financial Network (INFINET) connectivity.
(e) Membership of CCIL.
(f) Minimum Capital to Risk Weighted Assets Ratio (CRAR) of 9 per cent.
(g) Net Non-Performing Assets (NPA) of less than 5 per cent.
(h) Minimum net worth of ₹25 crore.
4.23 All eligible UCBs desirous of obtaining NDS-OM membership are required to apply to concerned Regional Office of the Department of Supervision, RBI, for regulatory clearance before applying to Financial Markets Regulation Department (FMRD), RBI for NDS-OM membership.
4.24 Eligible UCBs applying for NDS-OM membership need to have the required infrastructure in place for direct access to NDS-OM and also bear the cost involved in setting up the infrastructure. After opening a SGL account with the RBI (which is one of the several requirements to be fulfilled by a UCB for obtaining NDS-OM membership), the UCB concerned cannot open / maintain a gilt account with a CSGL account holder. However, such UCBs can continue to bid for Government securities under the scheme of non-competitive bidding in Government securities.
