New pref share norms to help PSU banks

The Reserve Bank of India (RBI) today issued guidelines for commercial banks to issue various types of preference shares, including perpetual non-cumulative preference shares (PNCPSs), in rupees.

This will give one more avenue to public sector banks to raise capital without the fear of dilution of government holding.

The PNCPSs will be treated on a par with equity (part of tier-I capital). Hence, coupon payment on these instruments will be treated as dividend.

Other three types (part of tier-II capital) are perpetual cumulative preference shares, redeemable non-cumulative preference shares and redeemable cumulative preference shares.

"It's a good move as public sector banks will now have an option to raise tier-I capital. This will help public sector banks gear up for Basel-II. However, to attract investors, the banks may have to price this instrument accordingly," said MV Nair, chairman and managing director, Union Bank of India.

The RBI, in a communication, said, "The addition of these instruments is expected to significantly enhance the range of eligible instruments to meet capital adequacy purposes. Hence, it is not considered necessary to allow the banks to issue preference shares in foreign currency in overseas markets at this stage."