RBI Master Circular No: RBI/2013-14/79 (01-Jul-13) Master Circular - Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by FIs

DBOD.No.FID.FIC.3/01.02.00/2013-14

The CEOs of the

All-India Term Lending and Refinancing Institutions

(Exim Bank, NABARD, NHB and SIDBI)

Dear Sir,

Please refer to Master Circular DBOD.No.FID.FIC.3/01.02.00/2012-13 dated July 02, 2012 on the captioned subject. The enclosed Master Circular consolidates and updates all the instructions / guidelines on the subject up to June 30, 2013. The Master Circular has also been placed on the web-site of RBI (http://www.rbi.org.in).

2. It may be noted that the instructions contained in circulars listed in the Annex VIII have been consolidated in this master circular.

Yours faithfully,

Rajesh Verma

Chief General Manager

Master Circular - Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by FIs

Purpose

To provide a consolidated set of guidelines on Classification, Valuation and Operation of Investment Portfolio to all-India term-lending and refinancing institutions.

Previous instructions

The list of circulars containing previous instructions on the above subject is given in Annex VIII.

Application

To all the all-India Financial Institutions viz. Exim Bank, NABARD, NHB and SIDBI.

Structure

1< xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />	Introduction
2	Investment Policy
	2.1	Objectives of Investments
	2.2	Ready Forward Contracts
	2.3	Transaction / Trading in Government Securities
	2.4	Bank Receipts
	2.5	Investments in Non-Government Debt Securities
3	Internal Control System
	3.1	Guidelines for Internal Control System
	3.2	Dealing through brokers
	3.3	Audit, review and reporting of investment transactions
	3.4	Monitoring of subsidiaries / mutual funds
4	Classification of Investments
	4.1	Three Categories
	4.2	Decision of category at the time of acquisition
	4.3	Held to Maturity
	4.4	Available for Sale & Held for Trading
	4.5	Shifting among categories
5	Valuation of Investments
	5.1	Held to Maturity
	5.2	Available for < xml:namespace prefix = st1 />Sale
	5.3	Held for Trading
	5.4	General
	5.5	Market Value
	5.6	Valuation of unquoted securities
6	Conversion of Debt into Equity and Other Instruments in Case of Restructured Accounts
7	Hedging of investments with Exchange Traded Interest Rate Derivatives
8	Repo Accounting
	8.1	Coupon
	8.2	Repo Interest Income / Expenditure
	8.3	Marking to Market
	8.4	Book value on Re-purchase
	8.5	Disclosure
	8.6	Accounting Methodology
Annex - I
Annex - II
Annex - III
Annex - IV
Annex - V
Annex – VI
Annex – VII
Annex - VIII

1. Introduction

The Committee appointed by the Governor, Reserve Bank of India to enquire into the securities transactions of banks and financial institutions (Janakiraman Committee) had, in its first report, brought out several serious irregularities in these transactions. As one of the follow-up measures, the RBI had issued a detailed circular to commercial banks for suitably regulating the transactions in their investment portfolio. A copy of the Circular had also been forwarded to the FIs for implementing the specific prohibitions and general instructions/guidelines suitably, to the extent applicable. Some of these prohibitions / restrictions since stand removed/relaxed. In view of the market developments and taking into consideration the evolving international practices, Reserve Bank of India has issued guidelines on classification, valuation and operation of investment portfolio by FIs from time to time as detailed below.

2. Investment Policy

2.1 Objectives of Investments

FIs have been undertaking transactions in securities on their own Investment Account, 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. With the approval of their respective Boards, FIs should clearly lay down the broad investment objectives to be followed while undertaking transactions in securities under each category mentioned above, clearly define the authority to put through deals, procedure to be followed for obtaining the sanction of the appropriate authority, procedure to be followed while putting through deals, various prudential exposure limits, and the reporting system. While laying down such investment policy guidelines, FIs should strictly observe the following instructions.

2.2 Ready Forward Contracts

The terms and conditions subject to which ready forward contracts (including reverse ready forward contracts) may be entered into will be as enumerated below. These terms and conditions will be the relevant terms and conditions specified by the RBI under its Notification No.S.O. 131(E) dated January 22, 2003 and further notifications issued from time to time, if any, issued in exercise of powers conferred on the RBI under Section 16 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) vide Government of India Notification No.183(E) dated March 1, 2000, issued under Section 29A of the Act, ibid.

2.2.1 Eligibility

(a) Ready forward contracts should be undertaken only in:

i. dated securities and Treasury Bills issued by Government of India; and

ii. dated securities issued by the State Governments.

(b) Ready forward contracts in the above mentioned securities should be entered into by:

i. persons or entities maintaining a Subsidiary General Ledger (SGL) account with the Reserve Bank of India, Mumbai; and

ii. the following category of entities which do not maintain SGL accounts with the Reserve Bank of India but maintain gilt accounts (i.e. gilt account holders) with a bank or any other entity (i.e. the custodian) permitted by the Reserve Bank of India to maintain Constituent Subsidiary General Ledger Account (CSGL Account) with its Public Debt Office, Mumbai:

1. Any scheduled bank,

2. Any primary dealer authorised by the Reserve Bank of India,

3. Any non-banking financial company registered with the Reserve Bank of India, other than Government companies as defined in Section 617 of the Companies Act, 1956,

4. Any mutual fund registered with the Securities and Exchange Board of India,

5. Any housing finance company registered with the National Housing Bank, and

6. Any insurance company registered with the Insurance Regulatory Development Authority.

2.2.2 Restrictions

All persons or entities specified at (b) above can enter into ready forward transactions among themselves subject to the following restrictions:

i. An SGL account holder should not enter into a ready forward contract with its own constituent. That is, ready forward contracts should not be undertaken between a custodian and its gilt account holder.

ii. Any two gilt account holders maintaining their gilt accounts with the same custodian (i.e., the CSGL account holder) should not enter into ready forward contracts with each other, and

iii. Cooperative banks should not enter into ready forward contracts with the non-banking financial companies.

2.2.3 Other Requirements

(a) All ready forward contracts shall be reported on the Core Banking Solution (CBS). In respect of ready forward contracts involving gilt account holders, the custodian (i.e., the CSGL account holder) with whom the gilt accounts are maintained will be responsible for reporting the deals on the CBS on behalf of the constituents (i.e. the gilt account holders).

(b) All ready forward contracts shall be settled through the SGL Account / CSGL Account maintained with the Reserve Bank of India, Mumbai, with the Clearing Corporation of India Ltd. (CCIL) acting as the central counter party for all such Ready Forward transactions.

(c) The custodians should put in place an effective system of internal control and concurrent audit to ensure that: (i) ready forward transactions are undertaken only against the clear balance of securities in the gilt account, (ii) all such transactions are promptly reported on the CBS, and (iii) other terms and conditions referred to above have been complied with.

(d) The RBI regulated entities can undertake ready forward transactions only in securities held in excess of the prescribed Statutory Liquidity Ratio (SLR) requirements.

(e) No sale transaction shall be put through without actually holding the securities in the portfolio by a seller of securities in the first leg of a ready forward transaction.

(f) Securities purchased under the ready forward contracts shall not be sold during the period of the contract.

2.3 Transaction / Trading in Government Securities

The following instructions should be followed in conducting the trade in Government securities:

2.3.1 Transactions through SGL Account

2.3.1.1 For purchase / sale of securities through SGL A/c under the Delivery Versus Payment (DVP) System wherein the transfer of securities takes place simultaneously with the transfer of funds, it is necessary for both the selling and the buying entities to maintain current account with the RBI. As no overdraft facility in the current account would be extended, adequate balance in current account should be maintained by the FIs for effecting any purchase transaction. The following instructions should be followed by the FIs:

(i) All transactions in Govt. Securities for which SGL facility is available should be put through SGL A/cs only.

(ii) Under no circumstances, a SGL transfer form issued by a FI in favour of another entity should bounce for want of sufficient balance of securities in the SGL A/c of seller or for want of sufficient balance of funds in the current a/c of the buyer.

(iii) The SGL transfer form received by purchasing FIs should be deposited in their SGL A/cs. immediately i.e. the date of lodgement of the SGL transfer form...