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RBI brought out detailed prudential guidelines with respect to banks’ investments in venture capital funds in August 2006 6 . This serves as the master circular for such investments. Prudential exposure limits, valuation and classifications of such investments and risk weights and capital charge for market risk for exposures in VCPE funds were discussed in this notification as under: 1. All exposures to VCPE funds (both registered and unregistered) will be deemed to be on par with equity and hence will be reckoned for compliance with the capital market exposure. In the case of investment in VCPE funds set up in the form of companies, the bank will not hold more than 30% of the paid up capital of the VCPE company or 30% of its own paid up share capital and reserves, whichever is lower. In the case of investments in VCPE funds in the form of equity/units etc, the investment by the bank should not exceed 10% of the bank’s paid-up capital and reserves. The investments in all such companies, financial institutions, stock and other exchanges put together should not exceed 20% of the bank’s paid-up capital and reserves. This is in accordance to RBI’s Master Circular on Para Banking activities. 2. The quoted equity shares/ bonds/ units of venture capital funds in the bank's portfolio should be held under Available for Sale (AFS) category and marked to market on a daily basis. If not, this should be done on a weekly basis in line with valuation norms for other equity shares. Banks’ investments in unquoted shares/ bonds/ units of venture capital funds made after issuance of these guidelines should be classified under Held to Maturity (HTM) category for an initial period of three years and will be valued at cost during this period. For the investments made before issuance of these guidelines, the classification would be done as per the existing norms. The period of three years will be calculated separately for each disbursement made by the bank, as and when the committed capital is called up. After three years, the unquoted units/ shares/ bonds will need to be transferred to AFS category and valued. The circular gives separate guidelines for valuation of investments in the form of units, shares and bonds. 3. The market risk component for equities in general is 9%. However, for investments in shares/ units of venture capital funds, a risk weight of 150% should be assigned for measuring the credit risk during first three years when these are held under the HTM category. When these are held under or transferred to AFS, the capital charge for specific risk component of the market risk as required in terms of the guidelines on computation of capital charge for market risk will be fixed at 13.5% to reflect the risk weight of 150%. The same risk weights and risk capital charge apply for bonds in VCPE funds as well. The exposures to VCPE funds other than investments will also attract a risk weight of 150%. In December 2006, RBI’s circular on banks’ exposure to capital markets again stated that banks’ exposure to both registered and unregistered VCPE funds would be on par with equity and hence will be considered for compliance with capital market exposure ceilings. Accordingly, both on a solo basis as well as on a consolidated basis, the aggregate exposure of a bank to the capital markets in all forms (both fund based and non-fund based) should not exceed 40% of its net worth as on March 31 of the previous year. Within this overall ceiling, the bank’s direct investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds and all exposures to VCPE funds should not exceed 20% of its net worth 7 . In July 2008, the master circular on implementing the new capital adequacy framework specified that both fund based and non fund based exposures to VCPE funds will attract a high risk weight of 150%, as this was considered to be a high risk exposure 8 . This was reiterated in the February 2010 circular as well 9 . The latest circular by RBI dated July 2014, on Para-banking activities again refers to the August 2006 circular with respect to investments in VCPE funds. Banks should obtain prior approval of RBI while making strategic investments, to the extent of more than 10% of the equity/unit in VCPE funds 10 . The latest circular on norms for classification, valuation and operation of investment portfolio by banks (dated July 2014) also refers to the original circular dated August 2006 with respect to investments in VCPE funds 11 . Investments in venture funds by Indian Banks RBI requires banks to disclose details of their exposure to venture capital funds in the annual report. As given in Table E3.1, it is seen that although exposure to venture capital funds as a proportion to total capital market exposure is not 42
very small, when seen as a proportion of total investments and advances, it is a miniscule amount. It is interesting to note that in recent years, public sector banks have a higher proportion of exposure to VCPE funds (in relation to the total capital market exposure) compared to their private sector counterparts. The private sector banks, as seen in the case of ICICI Bank and Axis Bank, have substantially reduced their allocation to VCPE funds in the last five years. In fact, HDFC Bank, one of the leading private sector banks has an insignificant exposure. This trend could be because public sector banks have a lower proportion of investments and advances directly related to other capital market instruments. Table E3.1: Banks’ exposure to venture capital funds (both registered and unregistered) Exposures to Venture Capital Funds FY14 FY13 FY12 FY11 FY10 State Bank of India (Rs. in crores) 1,172.9 856.5 586.1 608.6 375.7 - as a % of Total Capital Market Exposure 14.6% 11.9% 16.4% 5.9% 4.8% - as a % of Total Investments and Advances 0.07% 0.06% 0.05% 0.06% 0.04% Bank of Baroda (Rs. in crores) 865.9 779.2 731.5 741.9 725.7 - as a % of Total Capital Market Exposure 28.7% 20.1% 24.9% 28.5% 28.5% - as a % of Total Investments and Advances 0.17% 0.17% 0.20% 0.25% 0.31% Punjab National Bank (Rs. in crores) 506.0 541.6 570.9 610.7 642.9 - as a % of Total Capital Market Exposure 10.8% 14.2% 14.1% 16.0% 18.0% - as a % of Total Investments and Advances 0.10% 0.12% 0.14% 0.18% 0.24% Union Bank of India (Rs. in crores) * 479.4 488.5 547.3 572.5 516.8 - as a % of Total Capital Market Exposure 25.1% 22.7% 22.9% 24.8% 24.1% - as a % of Total Investments and Advances 0.15% 0.17% 0.23% 0.27% 0.30% Canara Bank (Rs. in crores) 411.2 348.1 348.8 402.9 268.4 - as a % of Total Capital Market Exposure 14.3% 10.3% 9.2% 12.3% 15.1% - as a % of Total Investments and Advances 0.10% 0.10% 0.10% 0.14% 0.11% Andhra Bank (Rs. in crores) 226.6 197.0 176.3 126.1 112.5 - as a % of Total Capital Market Exposure 32.7% 44.8% 18.0% 13.9% 39.2% - as a % of Total Investments and Advances 0.15% 0.14% 0.16% 0.13% 0.15% ICICI Bank (Rs. in crores) 943.6 941.5 960.9 1,033.8 1,221.4 - as a % of Total Capital Market Exposure 5.5% 4.9% 4.7% 3.9% 11.0% - as a % of Total Investments and Advances 0.18% 0.20% 0.23% 0.29% 0.40% Axis Bank (Rs. in crores) 105.3 106.8 140.9 258.1 258.4 - as a % of Total Capital Market Exposure 1.3% 1.7% 3.0% 7.3% 8.6% - as a % of Total Investments and Advances 0.03% 0.03% 0.05% 0.12% 0.16% Source: Annual reports of the respective bank * Includes undrawn capital commitments Among the commercial banks, SBI, India’s largest bank, is the most active investor in VCPE funds. SBI had committed to invest in about 20 funds (as of July 2014), with a total commitment of about Rs. 3000 - 4000 crores. The total drawn down amount at the end of FY14 has been about Rs. 1,173 crores. Comparing this to its total advances portfolio of Rs. 12 lakh crores for the same year, it is seen that VCPE exposures is an insignificant amount. SBI had invested Rs. 345 crores during the year 2013-14 in different venture capital and private equity funds. To put it in perspective, this could be one tenth of the annual amount to be disbursed as advances by a mid-sized branch of the bank. SBI also has its own private equity funds in the form of two joint ventures - SBI Macquarie Infrastructure Fund and Oman India Joint Investment Fund. Reasons for low investment levels by b anks The main sources of funds for banks are public deposits and equity capital (by the Government of India, in case of public sector banks). Hence, this capital is highly regulated. Based on interactions with banks, it was understood that RBI 43
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Past Reports
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© Indian Institute of Technology M
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