Summary of Instructions Issued by Reserve Bank of India on Repos - ಆರ್ಬಿಐ - Reserve Bank of India
Summary of Instructions Issued by Reserve Bank of India on Repos
Annexure VI
1.2 Banks were also advised that a report on the buy-back arrangements indicating, interalia, profitability of transactions, should be submitted to their Board of Directors on a quarterly basis. Further, they should place before the Board of Directors a copy of this communication for their information, under advice to the Reserve Bank. 1.3 Thereafter, in December 1987, following inquiries from banks whether they could enter into buy-back arrangements in units of Unit Trust of India (UTI) under 1964 Scheme, it was advised that the units were not approved security for buy-back arrangements in terms of the instructions of April 1987. 1.4 As there was a sharp increase in the commitments of banks under buy-back arrangements, they were cautioned in October 1987 to moderate their commitments as a sudden unwinding of these arrangements by investors could result in a serious liquidity bind. However, these commitments remained large and had a depressing effect on the growth of deposits, apart from having an adverse impact on the profitability of banks. The banks were, therefore, prohibited from entering into buy-back arrangements in Government and Other Approved Securities with non-bank clients with effect from 4th April 1988 and were advised that all such existing arrangements must be terminated on the date they expire or 1st July 1988, whichever was earlier. 1.5 Banks were further advised in April 1988 that while they were permitted to undertake outright purchases/sales, such transactions must be effected at market prices. Besides, while existing procedures for outright purchase/sale transactions could be continued, the spirit of the instruction prohibiting buy-back arrangements with non-bank investor was required to be scrupulously observed. It was to be noted that outright sale and purchase transactions with the same party and for identical or similar amounts would be construed by the Reserve Bank as tacit arrangements violating the instructions prohibiting buy-back arrangements with non-bank clients. Accordingly, the instructions conveyed in April 1987, stood modified. 1.6 It was added that banks may continue to enter into buy-back arrangements with other banks (inter-bank) in Government and Other Approved Securities subject to strict adherence to guidelines of April 1987. It was emphasised that the top executives in banks should bestow their special attention to inter-bank buy-back arrangements to ensure that the guidelines on the subject were strictly complied with in both letter and spirit, any deviation/s was/were viewed seriously and accountability fixed at all levels. 1.7 In conclusion, it was advised that a report should be submitted to the Board of Directors setting out compliance with the instructions prohibiting buy-back arrangements with non-bank investors. The position regarding the phased unwinding of buy-back commitments was to be advised to the Reserve Bank at the end of each month and a full compliance report was also to be submitted to it immediately after 1st July 1988. 1.8 In January 1991, banks were informed that it had come to Reserve Banks notice that some banks had entered into buy-back deals with certain financial institutions like National Bank for Agricultural and Rural Development. Industrial Development Bank of India and Unit Trust of India. It was clarified that buy-back arrangements in Government and Other Approved Securities were permitted between scheduled commercial banks only and for the purpose of the instructions issued in April 1988, financial institutions set up under Acts of Parliment or otherwise, both at the all-India and State levels and not undertaking banking business within the provisions of the Banking Regulations Act, 1949, were deemed as non-bank clients, and banks should not enter into any buy-back arrangements with them. 1.9 In this connection, banks were advised in January 1992 that the issue whether the prevailing repos facilities in 182 days Treasury Bills (Government Securities) by Discount & Finance House of India Ltd. (DFHI) to banks would amount to violation of the instructions of April 1988 and January 1991, was examined by the Reserve Bank. It was clarified that as the basic objective of setting up of DFHI was to facilitate the development of active money market by smoothening short-term liquidity imbalances, DFHI was expected to actively trade in money market instruments, particularly in 182 days Treasury Bills. It was, accordingly, decided to exclude DFHI from the term non-bank clients for the purpose of buy-back arrangements in Government and Other Approved Securities by commercial banks. 1.10 In June 1992, following the initial recommendations of the Janakiraman Committee, the following instructions were issued regarding Ready-Forward (buy-back) deals :
1.11 In August 1994, banks were informed that the Notification No.S.O.2561 dated 27th June 1969, issued by the Central Government in exercise of the powers conferred by sub-section (I) of Section 16 of the Securities Contracts (Regulation) Act, 1956, with respect to restriction on sale or purchase of securities, had been further amended, vide Notification No. S.O. (E) dated 1st June 1994 and a copy each of the two Notifications was forwarded to them. (These are furnished in Annexure I.) It was added that in terms of the amended Notification Ready Forward contracts may be entered into by (I) a banking company (ii) a co-operative bank and (iii) the Discount and Finance House of India Ltd. in Treasury Bills of all maturities issued by the Government of India and in such dated securities of the Government of India, as were approved by the Reserve Bank of India, in consulation with the Central Government, provided all such Ready Forward transactions were put through SGL Account with the Reserve Bank of India. 1.12 Banks were further informed that in pursuance of the aforementioned Notification dated 1st June 1994, the Reserve Bank of India, in consultation with the Government of India, had approved the following four dated securities of the Government of India for the purpose of Ready Forward contracts :
1.13 In February 1995, banks were advised that the Reserve Bank of India in consultation with the Government of India, had approved the Zero Coupon Bonds, 2000 of the Government of India for the purpose of Ready Forward contracts, in addition to the four dated securities listed in the communication dated 16th August 1994. 1.14 oon thereafter, the banks were advised that the Government of India, vide their Notification F.No. 1/9/SE/94 dated October 18, 1994, (copy furnished in Annexure II), had notified Securities Trading Corporation of India Ltd. as an eligible institution, in addition to the institutions indicated in the communication dated 16th August 1994, to undertake Ready Forward transactions in Treasury Bills and in such dated securities of the Government of India as were approved by the Reserve Bank in consultation with the Government. It would, therefore be in order for banks to enter into Ready Forward transactions in the securities specified above with Securities Trading Corporation of India Ltd. 1.15 Banks were further advised in March 1995 that it had been decided that Ready Forward deals in all the five approved securities (advised in the communications of August 1994 and February 1995) would be permitted only if the transactions were effected at Bombay and the deals were put through SGL Accounts. 1.16 Subsequently, banks were advised through different communications, that they may undertake Ready Froward transactions in the following securities subject to the condition that (a) the transactions were effected at Bombay and (b) the deals were put through SGL Accounts :
1.17 It was observed by the Reserve Bank that Ready Forward transactions were being used for as short a period as one day merely as a change in nomenclature from call money. With a view to ensuring that banks resort to Ready Forward transactions in accordance with the spirit of this facility, banks were advised on 29th September 1995, that effective from 30th September 1995, the minimum period for Ready Forward (repos) transactions will be three days. 2. Need to hold the security before sale 2.1 In July 1991, banks were advised inter alia, that it was observed that certain banks were resorting to buy-back deals in Government Securities amongst themselves without actually holding sufficient securities either in physical form or in their Subsidiary General Ledger (SGL) account (resulting in substitution of Bank Receipts (BRs)/ return of SGL forms for want of sufficient balance), at rates which had no relevance to market, with a view to window-dressing their profitability/ maintenance of SLR requirement, with the tacit understanding with the counter party banks. Some of the banks appeared to be taking outright oversold position in securities and in their desparate bid to cover the oversold position in a particular security/ies they had entered into double Ready Forward deals and other banks had obliged them in the matter. In this regard, banks were instructed as under :
2.2 Not withstanding the issue of the above instructions, irregularities on the part of banks persisted and following the initial recommendations of the Janakiraman Committee, the following comprehensive instructions on the above subject were issued in June 1992 (along with those on other issues relating to investment transactions) :
2.3 Thereafter in December 1993, banks were advised [with reference to item (iii) of para. 4.3.3 above] that it was observed that the SGL transfer forms received by the purchasing banks were not being deposited in their SGL Accounts immediately and delays (of as much as 10 days in certain cases) had been observed. It should, therefore be ensured that SGL transfer forms were lodged in the SGL Accounts with the PDO immediately, i.e. within a maximum period of two working days from the date of transaction. It was added that any delay beyond the above mentioned period would be viewed seriously. 2.4 Subsequently, in respect of item (vi) (b) of para. 4.3.3 above, banks were advised in January 1994 that if the DFHIs closing call money rate was lower than the minimum lending rate of banks, as stipulated in the Reserve Banks interest rate directive in force, the applicable penal rate to be charged would be 3 percentage point above the minimum lending rate. 3. Internal Control System in respect of investment transactions 3.1 The comprehensive instructions on Investment portfolio issued to banks in June 1992 following the initial Report of the Janakirman Committee included the following on Internal Control System of banks (which have been included in the Chapters on Frauds, Annual Accounts, etc.)
3.2 In this regard, banks were advised in August 1992 that it was the primary responsibility of the bank managements to ensure that there were adequate internal control and audit procedures for ensuring proper compliance of the instructions in regard to the conduct of the investment portfolio. Banks were instructed to undertake an immediate review of the adequacy of their internal audit departments and indicate details of their existing organisational set up and the scope of their operations to the Reserve Bank to enable it to review the adequacy of the internal machinery to oversee the implementation of the instructions given to banks. It was added that banks should also institute a regular system of monitoring compliance with the prudential and other guidelines issued by the Reserve Bank of India. Further, banks were advised to get compliance in key areas certified by their statutory auditors and to furnish such audit certificate to the Reserve Bank. 4. Engagement of brokers for Investment transactions 4.1 In July 1991, banks were advised to frame suitable investment policy. The various guidelines then furnished to them in this regard have been covered separately.) As regards engagement of brokers, they were advised as under : Transactions between one bank and another bank should not be put through the brokers accounts. The brokerage on the deal payable to the broker, if any (if the deal was put through with the help of a broker), should be clearly indicated on the notes/memorandum put up to the top management seeking approval for putting through the transaction and separate account of brokerage paid, broker-wise, should be maintained. 4.2 Thereafter, following the initial recommendations made by the Janakiraman Committee, Reserve Bank issued, in June 1992, comprehensive instructions to banks on the various aspects of conduct of their Investments Portfolio. As regards dealings through brokers, the following instructions were issued :
4.3 There after, in December 1992 banks were informed that on a scrutiny of the investment policies evolved by the banks, it was observed that a number of them had not fixed aggregate contract limits for each of the approved brokers (vide item (v) above). The matter was, therefore reviewed by the Reserve Bank and it was decided that a limit of 5% of total transactions (both purchase and sales) entered into by a bank during a year should be treated as the aggregate upper contract limit for each of the approved brokers. This limit should cover both the business initiated by a bank and the business offered/brought to the bank by a broker. Banks should ensure that the transactions entered into through individual brokers during a year normally did not exceed this limit. However, if for any reason it became necessary to exceed the aggregate limit for any broker, the specific reasons therefor should be recorded, in writing, by the authority empowered to put through the deals. Further, the Board should be informed of this, post facto. 4.4 In this regard attention of banks was drawn to the instructions on Audit, Review and Reporting contained in the communication dated 20th June 1992 and it was reiterated that the concurrent auditors who audit the treasury operations should scrutinise this aspect also and include it in their monthly report to the Chief Executive Officer of the bank. Besides, the business put through any individual broker or brokers in excess of the limit, with the reasons therefor, should be covered in the half-yearly review to the Board of Directors/Local Advisory Board. It was added that these instructions shall also apply to subsidiaries and mutual funds of the banks. 4.5 Subsequently, some of the banks sought certain clarrifications on the instructions of December 1992 and these were examined by the Reserve Bank. The clarifications sought and the replies therto, issued in July 1993, are furnished in the Annexure. 4.6 On further review of the matter, banks were advised in November 1994 that it had been decided that inter-bank securities transactions should be undertaken directly between banks and no bank should engage the services of any broker in such transactions. Banks may, however, undertake securities transactions among themselves or with non-bank clients through members of the National Stock Exchange (NSE), wherein the transactions were transparent. Transactions with non-bank clients, if such transactions were not undertaken on the NSE, should be undertaken by banks directly, without engaging brokers. 4.7 Banks were also cautioned that any violation or circumvention of Reserve Banks instructions would invite penal action against banks, which could include raising of reserve requirements, withdrawal of refinance from the Reserve Bank and denial of access to money market, as also such other penalty under the provisions of the Banking Regulation Act, 1949, as the Reserve Bank may deem fit. 4.8 After the issue of instructions of November 1994, some of the banks sought clarification on the coverage of the term securities appearing therein. Banks were advised in December 1994 that although the Securities Contracts (Regulation) Act, 1956 defines the term securities to mean corporate shares, debentures, Government Securities and rights or interest in securities, for the purpose of the communication dated 16th November 1994, the term securities would exclude corporate shares. Further, as regards the coverage of term non-bank clients appearing in the aforementioned communication, it was clarified that Provident/Pension Funds and Trusts registered under the Indian Trusts Act, 1882, would be outside the preview of the expression non-bank clients for the purpose of that communication.
CLARIFICATIONS Investment port-folio of banks-Transactions in securities- Aggregate contract limit for individual brokers- clarifications
5. Accounting standards for Investments 5.1 The comprehensive instructions issued by the Reserve Bank in April 1992 on Income Recognition, Asset Classification, Provisioning and Other Related Matters included the following on Accounting standards for Investments : The investment portfolio of a bank would normally consist of both approved securities (predominantly Government securities) and others (shares, debentures and bonds). It has been decided that the investments in approved securities should be bifurcated into permanent and current investments. Permanent investments were those which banks intended to hold till maturity and current investments were those which banks intended to deal in, i.e. buy and sell on a day-to-day basis. On this basis, banks should classify the existing investments in approved securities into the aforesaid two categories. To begin with, banks should keep not more than 70 percent of their investments in the permanent category from the accounting year 1992-93. This ratio would have to be brought down to 50 percent in due course. All subsequent purchases would also be required to be classified suitably. Reserve Bank would have no objection to banks inter-changing the investments from one category to another with the prior authorisation of the Board of Directors, in which case depreciation, if any would have to be fully provided for. 5.2 While the depreciation in respect of permanent investments was not likely to affect their realisable value and, therefore, need not be provided for, depreciation in the current investments should be fully provided for. Permanent investments could be valued at cost unless it was more than the face value, in which case the premium has to be amortised over the period remaining for maturity of the security. Banks were not expected to sell securities in the permanent category freely, but if they do so, any loss on such transactions in securities in this category has to be written off. Besides, any gain should be taken to capital reserve account. (It was subsequently advised in December 1992 that banks which experienced difficulties in adopting the above standards could discuss the matter separately with the Reserve Bank.) 5.3 The detailed instructions relating to Investment transactions issued in June 1992 following the initial Report of the Janakiraman Committee, included the following additional instructions/modifications relating to Accounting Standards :
Approved debt securities under "permanent" category
Investments under current category
(iii) Each time a security was acquired, the bank should immediately record whether it was for investment account or for trading account and accordingly account for them in the respective accounts on the basis of laid down accounting policies. Transfer of securities from one account to another (i.e. Investment Account to Trading Account or vice versa) should be done only with the prior approval of the Board of Directors of the bank and should be properly documented. (iv) Potential losses should be recognised prior to the transfer of securities from current category to permanent category where market value as on the date of transfer was less than the carrying value in the books. (v) Banks may treat equity investments in subsidiaries as permanent investment. 5.4 It was clarified in January 1994 that, in respect of Zero Coupon Bonds (issued by Government of India, vide its Notification No. F. 4(5) W & M/93 dated 7th January 1994), the value of these Zero Coupon Bonds for the purpose of determining "cost" may be reckoned after taking into account the accrued discount pro rata. After this adjustment of the "cost", banks could use the standard valuation procedures. 5.5 The clarifications/fresh guidelines issued to banks on Income Recognition, etc. in February 1994, included those relating to Valuation of Securities. Thus, banks were informed that it was observed by the Reserve Bank that the practices followed by banks and auditors differed in respect of valuation of investments in current category. It was, therefore, decided that the Indian Banks Association (IBA), in consultation with the Institute of Chartered Accountants of India (ICAI), would evolve a method for valuation of Government and other securities and banks and auditors should adopt the method so evolved while finalising the balance sheet as on 31st March 1994. 5.6 In the context of bifurcation of investments in Government securities into permanent and current category, banks were not required to make provisions for depreciation in respect of investments held under permanent category. Hence, it was not necessary to show the difference between the book value and the market value of the investments under this category as a footnote to the balance sheet and the instructions contained at Notes and instructions for compilation of balance sheet and profit and loss account, advised in February 1992, were withdrawn. However, the difference between the book value and market value could be mentioned by Statutory Auditors in the Long Form Audit Report for the information of the banks management. 5.7 In this connection, a reference was also invited to the instructions on accounting standards advised in June1992. It was clarified that while banks may, at their option, value the approved debt securities under the permanent category on a consistent basis at market value, they should refrain from doing so in respect of securities whose market price was higher than the book value (cost) on the balance sheet date. In other words, in these cases it was not permissible to carry these securities at a value higher than cost, as this would result in recognising unrealised gains in respect of such investments. 5.8 At a meeting of the Bank Audit Committee, comprising representatives of the Institute of Chartered Accountants of India (ICAI) and Chairmen of some major banks, held in March 1995, the guidelines on valuation of investments were reviewed and, in the light of the discussions held in the meeting, banks were advised as under in April 1995. :
6. Audit, review and reporting of Investment transactions For implementing the recommendation contained in the initial Report of the Janakiraman Committee, the following instructions on the captioned subject were issued (alongwith other instructions on conduct of the investment portfolio) :
7. Reconciliation of holdings of Government Securities, etc. 7.1 Following the initial report of the Janakiraman Committee, comprehensive guidelines/ instructions regarding the conduct of the Investments Portfolio were issued by the Reserve Bank in June 1992. In regard to the Subsidiary General Ledger (SGL) facility provided at the Public Debt Offices (PDOs) of the Reserve Bank, apart from detailed instructions (which have been covered separately), it was advised that records of SGL transfer forms issued/received, should be maintained by banks. Further, balances as per banks book should be reconciled at quarterly intervals with the balances in the book of PDOs. If the number of transactions so warrant, the reconciliation should be undertaken more frequently, say on a monthly basis. This reconciliation should also be periodically checked by the internal audit department. It was also advised that any bouncing of SGL transfer forms issued by selling banks in favour of the buying bank, should immediately be brought to the notice of the Central Office of the Department of Banking Operations and Development (now Department of Supervision) of the Reserve Bank by the buying bank. Similarly, a record of Bank Receipts (BRs) issued/received should be maintained. A system for verification of the authenticity of the BRs and SGL transfer forms received from other banks and confirmation of authorised signatories should be put in place. 7.2 In this connection, banks were further advised in December 1992 that during the course of scrutiny of security transactions of banks/Financial Institutions, instances of shortages in holdings of securities had come to Reserve Banks notice. Therefore, banks and their subsidiaries/Mutual Funds should reconcile the securities held by them, both on their own Investment Account, as well as Portfolio Management Scheme (PMS), as on 31st December 1992. Further, a reconciliation statement, in the prescribed proforma, should be furnished to the Reserve Bank, duly certified by the banks auditors. (The format for the Statement is at Annexure I, while the instructions for compiling it are in Annexure II.) 7.3 In this connection, it was clarified in February 1993 that there was no objection to the aforementioned verification/certification being done either by the banks own internal auditors or by external auditors. 8. Transactions in Securities Custodial Functions 8.1 In continuation of the detailed instructions in regard to management of investment portfolio of banks, particularly relating to transactions in securities, issued in June 1992, banks were advised in August 1992 that when they exercised custodial functions on behalf of their merchant banking subsidiaries, these functions should be subject to the same procedures and safeguards as would be applicable to other constituents. Accordingly, full particulars should be available with the subsidiaries of banks of the manner in which the transactions had been executed. Banks were instructed to issue suitable instructions in this regard to the department/office undertaking the custodial functions on behalf of their subsidiaries. 8.2 Banks were advised in January 1963 that under Section 6 of the Public Debt Act, 1944, no notice of any trust was receivable by Government in respect of Government securities. Consequently, the Public Debt Office of the Reserve Bank treats, and has to treat, every person, in whose name a Government security stands, as the full owner thereof, even though the said per Son may be having no personal interest in the security but may be holding it merely as a trustee of a particular trust or as an office-holder of a society or a fund, i.e., in a fiduciary or representative capacity. Holding of securities in the personal names of officials or trusts was liable to lead to considerable difficulties under certain circumstances. Since the Public Debt Office was bound to treat the "holder" as the "owner", it followed that if a trustee or office-holders, in whose personal name a security (belonging to a trust or society) was held, dies, the Public Debt Office would refuse to make any payment on the security to the trust or society unless the said trust or society obtained legal representation (i.e. Probate, Letters of Administration or Succession Certificate) in the estate of the deceased trustee/office-holder. As the obtaining of such a grant entailed considerable inconvenience and expenses, the societies or trusts concerned were, as a rule, unwilling to adopt this course and approach the Reserve Bank for relaxations, which the Public Debt Office was understandably reluctant to make, except on the condition that the claimant body executed a bond of indemnity in the Reserve Banks favour jointly with one or two sureties. Very often, it was difficult for the claimants to arrange for sureties of the requisite financial standing. It also sometimes happened that the office-holder/trustee, in whose favour a security was held, resigned and omitted or refused to transfer the security to his successor-in-office. In such cases, the Public Debt Office was unable to help the real beneficiary whose only course was to bring a suit against the ex-trustee or the ex-official in a civil court for obtaining a proper decree to enable the Public Debt Office to recognise the claimants title. It was further mentioned that a body which had a corporate status could, of course, hold Government securities in its corporate name, but this recourse was not available in the case of unincorporated bodies to which category most trusts, provident funds, etc., usually belonged. The most convenient course for such bodies was to hold securities in the form of Stock Certificates (and not in the form of Government Promissory Notes). Under Rule 8 (2)(b) of Public Debt Rules, 1946, Stock Certificates could be issued in favour of officials/trustees ex-officio without mentioning their personal names, so that in the event of death or resignation, the security could be dealt with immediately by the successor-in-office, without any formality. No question of legal representation or indemnity bond would arise if securities were so held. Besides the above advantage, holding in stock was very convenient from the point of view of a long-term investor. For example, the periodical interest on Stock Certificates was remitted by the Public Debt Office to the holder or to the holders bankers on the due date, without any cost to the holder, whereas a Government promissory note had to be physically presented for drawal of interest every time such interest was drawn. Again, if a Government Promissory note was lost, the procedure for obtaining a duplicate was a long and expensive one, whereas a lost/destroyed Stock Certificate could be replaced by the Public Debt Office on the holder merely reporting the loss and executing an affidavit. It was added that like Stock Certificates, Treasury Savings Deposit Certificates and Defence Deposit Certificates could also be issued in favour of office holders and trustees, ex-officio. Usually, all organisations like provident funds and trusts, made investments through, or on the advice of their bankers and, therefore, the expense and inconvenience caused to the beneficiaries in such cases would be obviated, if banks were to advise the above position to their customers. Banks were advised that they might, therefore, take note of these instructions and also communicate them to such of their customers as belonged to the above categories with the advice that if any securities were held by their officials/trustees in their personal names, they would be well advised to contact the nearest Public Debt Office for getting the matter regularised. In conclusion, it was indicated that in case any clarification or further information on any point was required, reference may be made to the Public Debt Office. The stipulation of minimum period of three days for ready forward transactions has been withdrawn from October 31, 1998. |