The Presidents/Chief Executives,

All Banks/DFIs

Dear Sirs/Madam,

PRUDENTIAL REGULATIONS FOR CORPORATE /COMMERCIAL BANKING
AND SMALL AND MEDIUM ENTERPRISES FINANCING

Please refer to the Prudential Regulations issued vide BPD circular No 35 dated 28th October 2003.

2. The following two amendments have been made in respect of the captioned regulations:

A) Modification in the features of Preference Shares: The Paragraph at serial No.9 & 8 of Definition Part of the PRs for Corporate and Commercial Banking and PRs for SMEs respectively, “Equity of the Borrower” has been substituted as under:

“Equity of the Borrower includes paid-up capital, general reserves, balance in share premium account, reserve for issue of bonus shares and retained earnings / accumulated losses, revaluation reserves on account of fixed assets and subordinated loans.

The Preference Shares, only with the following features, will now also be included in the equity of the borrower:

• There should not be any provision for redemption or the redemption should be at the option of the issuer. In case the issuer is given an option to redeem the preference shares, as per agreed terms and conditions, the issuer will redeem the shares only through a sinking fund created out of the profits of the company. Further, the sinking fund created for this purpose would not be calculated towards the equity of the issuer.
• The terms and conditions should not give rise to a contractual obligation on the part of the issuer to deliver another financial asset or exchange another financial instrument under conditions that are or can be potentially unfavourable to the issuer. However, an option to convert preference shares into common shares may be included in the features of the preference shares.
• The terms and conditions of the preference shares should not be such as to compel the issuer economically, financially or otherwise to redeem the shares.
• Payment and distribution of dividend to the holders of preferred shares, whether cumulative or non-cumulative should be at the discretion of the issuer.”

B) De-classification of restructured/rescheduled accounts ( Para 3 of R-8 of PRs for Corporate and Commercial Banking, and Para 3 of R-11 of PRs for SMEs): It may be noted that “The condition of one year retention period, prescribed for restructured/rescheduled loan account to remain in the classified category, will not apply in case the borrower has repaid or adjusted in cash at least 50% of the total restructured loan amount (principal + mark-up), either at the time of restructuring agreement or later-on during the grace period if any. “

3. All other instructions on the subject will, however, remain unchanged.

4. Please acknowledge receipt.