Master Circular on Investments by Primary (Urban) Co-operative Banks

RBI/2021-22/100
DOR.MRG.REC.50/21.04.141/2021-22

September 20, 2021

All Primary (Urban) Co-operative Banks

Dear Sir / Madam,

Master Circular on Investments by Primary (Urban) Co-operative Banks

Please refer to our Master Circular DCBR.BPD(PCB).MC.No.4/16.20.000/2015-16 dated July 1, 2015 on the captioned subject. The enclosed Master Circular consolidates and updates all the instructions/guidelines on the subject issued as on date.

Yours faithfully,

(Usha Janakiraman)
Chief General Manager

MASTER CIRCULAR ON INVESTMENTS BY PRIMARY (URBAN) CO-OPERATIVE BANKS

INDEX

1. RESTRICTIONS ON HOLDING SHARES IN OTHER CO-OPERATIVE SOCIETIES

1.1 Section 19 of the Banking Regulation Act, 1949 (As Applicable to Co-operative Societies) (BR Act, 1949 (AACS)) stipulates that no co- operative bank shall hold shares in any other co-operative society except to such extent and subject to such conditions as the Reserve Bank of India (Reserve Bank) may specify in that behalf. However, nothing contained in the section applies to -

1.1.1 shares acquired through funds provided by the State Government for that purpose;

1.1.2 in the case of a central co-operative bank, the holding of shares in the state co-operative bank to which it is affiliated; and

1.1.3 in the case of a primary (urban) co-operative bank (UCB), holding of shares in the central co-operative bank to which it is affiliated or in the state co-operative bank of the state in which it is registered.

1.2 In pursuance of the powers conferred by Section 19 read with Section 56 of the said Act, the Reserve Bank has specified that the extent and conditions subject to which co-operative banks may hold shares in any other co-operative society shall be as follows:

1.2.1 The total investments of a co-operative bank in the shares of co- operative institutions, other than those falling under any of the categories stated at paragraphs 1.1.1 to 1.1.3 above, shall not exceed 2 per cent of its owned funds (paid-up share capital and reserves).

1.2.2 The investment of a bank in the shares of any one co-operative institution coming under paragraph 1.2.1 above shall not exceed 5 per cent of the subscribed capital of that institution.

Note: When more than one co-operative bank contributes to the shares in a co-operative society falling under paragraph 1.2.1, the limit of 5 per cent of the subscribed capital indicated above shall apply not in respect of the investment of each of the banks but in respect of the investment of all the banks taken together. In other words, the total investment of all the co-operative banks should be limited to 5 per cent of the subscribed capital of the enterprise concerned.

A co-operative bank should offer to make its contribution to the shares of a co-operative society coming under paragraph 1.2.1 above only if the bye-laws of the recipient society provide for the retirement of share capital contributed by it.

1.2.3 The retirement of the share capital contributed by a bank to the shares of any society coming under paragraph 1.2.1 above should be completed in 10 equal annual installments commencing from the co-operative year immediately following the year in which the concern commences business or production.

1.2.4 A co-operative bank should not, except with the permission of the Reserve Bank, contribute to the share capital of a society coming under category referred to in paragraph 1.2.1 above, if it is situated outside its area of operation.

1.2.5 The above restrictions will not apply to holdings by co-operative banks of shares in non-profit making co-operative societies such as those formed for the protection of mutual interests, (e.g., co- operative banks' association) or for the promotion of co-operative education etc., (e.g., state co-operative union), or housing co- operatives for the purpose of acquiring premises on ownership basis, etc.

2 STATUTORY (SLR) INVESTMENTS

2.1 Maintenance of Statutory Liquidity Ratio (SLR) for UCBs

Banks shall refer to the Master Direction-Reserve Bank of India [Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)] Directions, 2021 on the maintenance of SLR.

3 INVESTMENT POLICY

3.1 Keeping in view the various regulatory/statutory guidelines and the bank's own internal requirements, UCBs should lay down, with the approval of their Board of Directors, the broad Investment Policy and objectives to be achieved while undertaking investment transactions. The Investment Policy should be reviewed each year. The Board/Committee/Top Management should actively oversee investment transactions. Banks should not undertake any transactions 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.

3.2 The bank’s Investment Policy should clearly indicate the authority to put through investment deals, the procedure to be followed for obtaining sanction of the appropriate authority for putting through deals, fixing various prudential exposure limits, and reporting system.

3.3 The Investment Policy of the bank should include guidelines on the quantity (ceiling) and quality of each type of security to be held on its own investment account. It should be prepared strictly observing the instructions issued by the Registrar of Co-operative Societies (Central Registrar of Co-operative Societies, where applicable) and the Reserve Bank from time to time and clearly spell out the internal control mechanism, accounting standards, audit, review and reporting system to be evolved.

3.4 All the transactions should be clearly recorded indicating full details. The Top Management should undertake a periodic review of investment transactions in a critical manner and put up details of large transactions to the Board, for information.

3.5 A copy of the internal Investment Policy guidelines framed by the bank with the approval of its Board should be forwarded to the concerned Regional Office of Department of Supervision, Reserve Bank, certifying that the policy is in accordance with the prescribed guidelines and the same has been put in place. Subsequent changes, if any, in the Investment Policy should also be advised to the Regional Office of the Reserve Bank.

3.6 For investment in non-SLR instruments, banks should review their Investment Policy and ensure that it provides for the nature and extent of investments intended to be made, the risk parameters, and cut-loss limits for holding / divesting the investments. The banks should put in place proper risk management systems for capturing and analyzing the risk in respect of non-SLR investments and taking remedial measures in time. Banks should also be guided by instructions given in paragraph 12 of this Master Circular.

4 GENERAL GUIDELINES

4.1 UCBs should not undertake any purchase/sale transactions with broking firms or other intermediaries on principal-to-principal basis.

4.2 Banks should not hold an oversold position in any security except for those banks which are eligible to undertake short sale position in Government securities as prescribed in paragraph 10 of this Master Circular. However, scheduled UCBs may sell a Government Security already contracted for purchase, provided:

4.2.1 the purchase contract is confirmed prior to the sale,

4.2.2 the purchase contract is guaranteed by Clearing Corporation of India Ltd. (CCIL) or the security is contracted for purchase from the Reserve Bank and,

4.2.3 the sale transaction will settle either in the same settlement cycle as the preceding purchase contract, or in a subsequent settlement cycle so that the delivery obligation under the sale contract is met by the securities acquired under the purchase contract (e.g. when a security is purchased on T+0 basis, it can be sold on either T+0 or T+1 basis on the day of the purchase; if however it is purchased on T+1 basis, it can be sold on T+1 basis on the day of purchase or on T+0 or T+1 basis on the next day). Sale of Government Securities allotted to successful bidders in primary issues on the day of allotment, with and between CSGL constituent account holders is permitted.

4.3 For purchase of securities from the Reserve Bank through Open Market Operations (OMO), no sale transactions should be contracted prior to receiving the confirmation of the deal/advice of allotment from the Reserve Bank.

4.4 Banks should exercise abundant caution to ensure adherence to these guidelines. The concurrent auditors should specifically verify the compliance with these instructions. The concurrent audit reports should contain specific observations on the compliance with the above instructions and should be incorporated in the monthly report to the Chairman/Managing Director/Chief Executive Officer of the bank and the half yearly review to be placed before the Board of Directors. CCIL will make available to all market participants as part of its daily reports, the time stamp of all transactions as received from NDS-OM. The mid office/back office and the auditors may use this information to supplement their checks/scrutiny of transactions for compliance with the instructions. Any violation noticed in this regard should immediately be reported to the concerned Regional Office of Department of Supervision, Reserve Bank of India. Any violation noticed in this regard would attract penalties as currently applicable to the bouncing of SGL even if the deal has been settled because of the netting benefit under DVP III, besides attracting further regulatory action as deemed necessary.

4.5 Banks successful in the auction of primary issue of Government Securities, may enter into contracts for sale of the allotted securities in accordance with the terms and conditions as indicated below:

4.5.1 The contract for sale can be entered into only once by the allottee bank, on the basis of an authenticated allotment advice issued by Reserve Bank. The selling bank should make suitable noting/stamping on the allotment advice indicating the sale contract number etc., the details of which should be intimated to the buying entity. Any sale of securities should be only on a T+0 or T+1 settlement basis.

4.5.2 The contract for sale of allotted securities can be entered into by banks only with entities maintaining SGL Account with Reserve Bank for delivery and settlement on the next working day through the DVP system.

4.5.3 The face value of securities sold should not exceed the face value of securities indicated in the allotment advice.

4.5.4 The sale deal should be entered into directly without the involvement of broker/s.

4.5.5 Separate record of such sale deals should be maintained containing details such as number and date of allotment advice, description and the face value of securities allotted, the purchase consideration, the number, date of delivery and face value of securities sold, sale consideration, the date and details of actual delivery etc. This record should be made available to Reserve Bank for verification. Banks should immediately report any cases of failure to maintain such records.

4.5.6 Such type of sale transactions of Government Securities allotted in the auctions for primary issues on the same day and based on authenticated allotment advice should be subjected to concurrent audit and the relative audit report should be placed before the Board of Directors of the bank once every month. A copy thereof should also be sent to the concerned Regional Office of Department of Supervision, RBI.

4.5.7 Banks will be solely responsible for any failure of the contracts due to the securities not being credited to their SGL account on account of non-payment etc.

4.6 While undertaking OTC transactions in Government securities, banks should seek a scheduled commercial bank, a Primary Dealer (PD), a financial institution, another UCB, insurance company, mutual fund or provident fund, as a counterparty for their transactions. Preference should be given to direct deals with such counter parties. It will be desirable to check prices from other banks or PDs with whom the UCB may be maintaining Gilt account. The prices of all trades done in Government Securities, including those traded through NDS-OM, are also available at Reserve Bank’s website (www.rbi.org.in).

4.7 Scheduled UCBs may undertake retailing of Government Securities with non-bank clients, such as provident funds, non-banking financial companies, high net worth individuals etc. subject to the following conditions:

4.7.1 Banks may freely buy and sell Government Securities on an outright basis at the prevailing market prices without any restriction on the period between sale and purchase.

4.7.2 Retailing of Government Securities should be on the basis of ongoing market rates/yield curve emerging out of secondary market transactions.

4.7.3 Immediately on sale, the corresponding amount should be deducted by the bank from its investment accounts and also from its SLR assets.

4.7.4 These transactions should be looked into by the concurrent/ statutory auditors of the bank.

4.7.5 Banks should put in place adequate internal control checks/ mechanisms as advised by the Reserve Bank from time to time.

4.8 Banks may take advantage of the non-competitive bidding facility in the auction of Government of India dated securities, provided by the Reserve Bank. Under this scheme, banks may bid upto ₹2 crore (face value) in any auction of Government of India dated securities, either directly, through a bank or through a PD. For availing this facility, no bidding skill is required, as allotment upto ₹2 crore (face value) is made at the weighted average cut-off rate which emerges in the auction. UCBs may also participate directly or through a bank or a PD in the competitive and non-competitive auctions of State Development Loans (SDLs) conducted by the Reserve Bank. Participation in non-competitive auction of SDLs will be as per guidelines prescribed in the Scheme of Non-Competitive Bidding in the Auction of SDLs issued vide circular IDMD.No.954/08.03.001/2009-10 dated August 24, 2009, as amended from time to time. An advertisement in leading newspapers is issued 4-5 days in advance of the date of auction. Half yearly auction calendar of Government of India securities is also issued by the Reserve Bank.

4.9 Gilt Accounts, if opened, should be used for holding the securities and such accounts should be maintained in the same bank with whom the cash account is maintained.

4.10 In case Gilt account is opened with any of the eligible non-banking institutions, the particulars of the designated funds account (with a bank) should be intimated to that institution.

4.11 All transactions must be monitored to see that delivery takes place on settlement day. The fund account and investment account should be reconciled on the same day before close of business.

4.12 Officials deciding about purchase and sale transactions should be separated from those responsible for settlement and accounting.

4.13 All investment transactions should be perused by the Board at least once a month.

4.14 When the bank has been specifically permitted to tender physical SGL transfer forms, it should keep a proper record of the SGL forms received / issued to facilitate counter-checking by their internal control systems/Inspecting Officers of Reserve Bank/other auditors.

4.15 All purchase/sale transactions in Government Securities by the banks should necessarily be through SGL/CSGL account (with Reserve Bank) or Gilt account (with a scheduled commercial bank/State co-operative bank/PD/SHCIL) or in a dematerialised account with depositories (NSDL/CDSL).

4.16 No transactions in Government Securities by a UCB should be undertaken in physical form with any broker.

4.17 The entities maintaining the CSGL/designated funds accounts are required to ensure availability of clear funds in the designated funds accounts for purchases and of sufficient securities in the CSGL account for sale transactions.

4.18 The security dealings of banks generally being for large values, it may be necessary to ensure, before concluding the deal, the ability of the counterparty to fulfill the contract, particularly where the counterparty is not a bank.

4.19 While buying securities for SLR purpose, the bank should ensure that the security it intends to purchase has an SLR status. The SLR status of securities issued by the Government of India and the State Governments will be indicated in the Press Release issued by the Reserve Bank at the time of issuance of the securities. An updated and current list of the SLR securities will be posted on the Reserve Bank’s website (https://dbie.rbi.org.in) under the link “Database on Indian Economy-Statistics-Financial Market-Government Securities Market.”

4.20 In order to avoid concentration of risk, the banks should have a fairly diversified investment portfolio. Smaller investment portfolios should preferably be restricted to securities with high safety and liquidity such as Government Securities.

4.21 UCBs may seek the guidance of Primary Dealers’ Association of India (PDAI)/Fixed Income and Money Market Dealers' Association (FIMMDA) on investment in Government Securities.

Negotiated Dealing System – Order Matching

4.22 All licensed UCBs fulfilling the eligibility criteria contained in circular IDMD.DOD.No.13/10.25.66/2011-12 dated November 18, 2011 as amended from time to time, are allowed direct access to Negotiated Dealing System – Order Matching platform. The eligibility criteria are as under:

1. Current account with RBI or a funds account with one of the Designated Settlement Banks (DSBs) chosen by Clearing Corporation of India Limited (CCIL) for funds settlement.

2. Subsidiary General Ledger (SGL) Account with RBI.

3. Membership of Negotiated Dealing System (NDS).

4. Indian Financial Network (INFINET) connectivity.

5. Membership of CCIL.

6. Minimum Capital to Risk Weighted Assets Ratio (CRAR) of 9 per cent.

7. Net Non-Performing Assets (NPA) of less than 5 per cent.

8. Minimum net worth of ₹25 crore.

4.23 All eligible UCBs desirous of obtaining NDS-OM membership are required to apply to concerned Regional Office of the Department of Supervision, RBI, for regulatory clearance before applying to Financial Markets Regulation Department (FMRD), RBI for NDS-OM membership.

4.24 Eligible UCBs applying for NDS-OM membership need to have the required infrastructure in place for direct access to NDS-OM and also bear the cost involved in setting up the infrastructure. After opening a SGL account with the RBI (which is one of the several requirements to be fulfilled by a UCB for obtaining NDS-OM membership), the UCB concerned cannot open / maintain a gilt account with a CSGL account holder. However, such UCBs can continue to bid for Government securities under the scheme of non-competitive bidding in Government securities.

5 TRANSACTIONS THROUGH SGL ACCOUNTS

5.1 SGL Account

5.1.1 Transfers through SGL accounts by UCBs having SGL facility can be made only if they maintain a regular current account with the Reserve Bank. All transactions in Government Securities for which SGL facility is available, should be put through SGL accounts only.

5.1.2 Banks should report / conclude their transactions on NDS / NDS-OM and clear / settle them through CCIL as central counterparty. In such cases where exceptions have been specifically permitted to tender physical SGL transfer forms, the guidelines regarding SGL transfer forms should also be followed.

5.1.3 Before issue of SGL transfer forms covering the sale transactions, banks should ensure that they have sufficient balance in the respective SGL accounts. Under no circumstances, an SGL transfer form issued by a bank in favour of another bank should bounce for want of sufficient balance in the SGL account. The purchasing bank should issue the cheques (or make payment by any other eligible mode) only after receipt of the SGL transfer forms from the selling bank.

5.1.4 In the event of bouncing of SGL transfer forms and the failure of the account holder concerned to offer satisfactory explanation for such bouncing, the UCB shall be liable to pay penalties as under:

i. Graded monetary penalties subject to a maximum penalty of ₹5 lakhs per instance:

ii. On the tenth default in a financial year, the bank will be debarred from using the SGL A/c for undertaking short sales in Government securities even to the extent permissible under circular IDMD.No/11.01.01(B)/2006-07 dated January 31, 2007 as amended from time to time, during the remaining portion of the financial year. In the next financial year, upon being satisfied that the UCB in question has made improvements in its internal control systems, RBI may grant specific approval for undertaking short sales by using the SGL A/c facility.

iii. The monetary penalty may be paid by the UCB concerned by way of a cheque or through electronic mode for the amount favouring the Reserve Bank of India, within five working days of receipt of intimation of order imposing penalty from RBI.

5.1.5 For the purpose of instructions given in paragraph 5.1.3, ‘SGL bouncing’ shall mean failure of settlement of a Government securities transaction on account of insufficiency of funds in the current account of the buyer or insufficiency of securities in the SGL / CSGL account of the seller, maintained with the Reserve Bank of India.

5.1.6 The defaulting UCB shall make appropriate disclosure, on the number of instances of default as well as the quantum of penalty paid to the Reserve Bank during the financial year, under the “Notes to Account” in its balance sheet.

5.1.7 Notwithstanding anything contained in paragraphs 5.1.3 to 5.1.5, the Reserve Bank reserves the right to take any action including temporary or permanent debarment of the SGL account holder, in accordance with the powers conferred under the Government Securities Act, 2006 as it may deem fit, for violation of the terms and conditions of the opening and maintenance of SGL/ CSGL accounts or breach of the operational guidelines issued from time to time.

5.1.8 In addition to the above, as NDS Members, UCBs should strictly abide by all other provisions of the NDS (Membership) Regulations, 2002 as amended from time to time.

5.2 SGL Forms

5.2.1 The SGL transfer forms should be in the standard format prescribed by the Reserve Bank and printed on semi-security paper of uniform size. These should be serially numbered and there should be a control system in place to account for each SGL form.

5.2.2 SGL transfer forms should be signed by two authorised officials of the bank whose signatures should be recorded with the respective PDO of Reserve Bank and other banks.

5.2.3 The SGL transfer form received by the purchasing bank should be deposited in its SGL account immediately. No sale should be affected by way of return of SGL transfer form held by the bank.

5.2.4 Any bouncing of SGL transfer forms issued by selling bank in favour of the buying bank should immediately be brought to the notice of the Reserve Bank by the buying bank.

5.3 Control, Violation and Penalty Provisions

5.3.1 Record of SGL transfer forms issued/received should be maintained. Balances as per the bank’s books in respect of SGL accounts should be reconciled with the balances in the books of PDOs. The PDO concerned will forward a monthly statement of balances of SGL/CSGL account to all account holders. UCBs having SGL/CSGL accounts with PDOs may use these statements for the purpose of monthly reconciliation of their SGL/CSGL balances as per their books and the position in this regard should be placed before the Audit Committee of the Board. This reconciliation should also be periodically checked by the internal audit department. A system for verification of the authenticity of the SGL transfer forms received from other banks and confirmation of authorised signatories should be put in place.

5.3.2 Banks should also forward a quarterly certificate to the PDO concerned, indicating that the balances held in the SGL accounts with the PDO have been reconciled and that it has been placed before the Audit Committee of the Board. A copy thereof should be sent to the concerned Regional Office concerned of the Department of Supervision, RBI.

5.3.3 Banks should put in place a system to report to the Top Management on a monthly basis the details of transactions in securities, details of SGL bouncing and review of investment transactions undertaken during the period.

5.3.4 All promissory notes, debentures, shares, bonds, etc., held in physical form, should be properly recorded and held under joint custody. A separate register may be maintained to record the particulars of securities taken out/re-lodged. These should be subjected to periodical verification, say once in a quarter or half-year, by persons unconnected with their custody.

5.3.5 Certificates should be obtained at quarterly/half-yearly intervals in respect of securities lodged with other institutions. Similarly, it is necessary to reconcile the SGL Account balance with the PDO at monthly intervals.

5.3.6 The internal inspectors and concurrent auditors should peruse the transactions to ensure that the deals have been undertaken in the best interest of the bank. The Vigilance Cell should also make surprise sample checks of large transactions.

5.3.7 The concurrent auditors should certify that investments held by the bank, as on the last reporting Friday of each quarter and as reported to Reserve Bank, are actually owned/held by it. Such a certificate should be submitted to the concerned Regional Office of Department of Supervision RBI, within 30 days from the end of the relative quarter.

6 ENGAGEMENT OF BROKERS

6.1 Dealing through Brokers

6.1.1 The 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 National Stock Exchange (NSE) / BSE wherein the transactions are transparent. In case any transactions in securities are not undertaken on NSE/BSE, the same should be undertaken by the banks directly without the use of brokers.

6.1.2 Purchase of permissible shares and PSU bonds in the secondary market (other than inter-bank transactions) should be only through recognised stock exchanges and registered stock- brokers.

6.1.3 The SBI DFHI has been permitted to operate as a broker in the inter- bank participation market. This would enable the banks to seek intermediation of SBI DFHI for borrowing/lending, if required. However, the banks shall be free to settle transaction in the inter-bank participations market directly, if so desired.

6.1.4 If a deal is put through with the help of a broker, the role of the broker should be restricted to that of bringing the two parties to the deal together. Under no circumstances banks should give power of attorney or any other authorisation to the brokers/ intermediaries to deal on their behalf in the money and securities markets.

6.1.5 Disclosure of counter party should be insisted upon on conclusion of the deal put through brokers.

6.1.6 Contract confirmation from the counter party should be insisted upon.

6.1.7 The brokers should not be involved in the settlement process at all i.e., both the fund settlement and delivery of security should be done with the counterparty directly.

6.2 Empanelment of Brokers

6.2.1 The bank should prepare a panel of brokers with the approval of their Board of Directors.

6.2.2 Brokers should be empaneled after verifying their credentials e.g.:

(a) SEBI registration

(b) Membership of BSE/NSE for debt market.

(c) Market turnover in the preceding year as certified by the Exchange/s.

(d) Market reputation etc.

6.2.3 The bank should check websites of SEBI/respective exchanges, to ensure that the broker has not been put in the banned list.

6.3 Broker Limits

6.3.1 A disproportionate part of the business should not be transacted through only one or a few brokers. Banks should fix aggregate contract limits for each of the approved brokers and ensure that these limits are not exceeded. A record of broker-wise details of deals put through and brokerage paid should be maintained.

6.3.2 A limit of 5 per cent of total transactions (both purchases and sales) entered into by the banks during a year should be treated as the aggregate upper contract limit for each of the approved brokers.

6.3.3 This limit should cover both the business initiated by the bank and the business offered/brought to the bank by a broker.

6.3.4 It should be ensured that the transactions entered through individual brokers during a year normally do not exceed the prescribed limit. However, if it becomes necessary to exceed the aggregate limit for any broker, the specific reasons, therefore, should be recorded in writing by the authority empowered to put through the deals. In such cases, post- facto approval of the Board may be obtained after explaining the circumstances under which the limit was exceeded.

Note: Clarifications on certain issues raised by the banks in this regard are furnished in Annex I.

7 SETTLEMENT OF GOVERNMENT SECURITIES TRANSACTIONS – THROUGH CLEARING CORPORATION OF INDIA LTD. (CCIL)

7.1 All Government Securities transactions (both Outright and Repo) are being settled through CCIL only.

7.2 UCBs, which are not a member of NDS-CCIL system, should undertake their transactions in Government Securities through gilt account/demat account maintained with a NDS member.

7.3 All outright secondary market transactions in Government Securities will be settled on T+1 basis. However, in case of repo transactions in Government Securities, the market participants will have the choice of settling the first leg on either T+0 basis or T+1 basis as per their requirement.

8 TRADING OF GOVERNMENT SECURITIES ON STOCK EXCHANGES

8.1 The facility of trading of Government Securities on the stock exchanges, in the dematerialized mode only, is available to banks in addition to the present NDS-OM of the Reserve Bank, which will continue to remain in place.

8.2 The UCBs have the option to undertake transactions in dated Government of India securities in dematerialised form on automated order driven system of NSE and BSE in addition to the existing mode of dealing through SGL/CSGL accounts with Reserve Bank or gilt accounts with the designated entities such as Scheduled Commercial Bank/PD/State Co-operative Bank etc.

8.3 As the trading facility on the above stock exchanges will operate parallel to the present system of trading in Government Securities, the trades concluded on the exchanges will be cleared by their respective clearing corporations/Clearing Houses. However, trading members of the stock exchanges shall not be involved in the settlement process for any regulated entity of Reserve Bank. All stock exchange trades of banks have to be settled either directly with CCIL/Clearing House (in case they are clearing members) or else through a clearing member custodian.

8.4 With a view to facilitating participation on the stock exchanges within the regulations prescribed by Reserve Bank, SEBI and the exchanges, banks are being extended the following facilities:

8.4.1 Opening demat accounts with a bank depository participant (DP) of NSDL/CDSL or with SHCIL in addition to their SGL/CSGL accounts with Reserve Bank/authorised entities.

8.4.2 Value free transfer of securities between SGL/CSGL and demat accounts is being enabled at PDO, Mumbai, subject to operational guidelines issued separately by Internal Debt Management Department to all SGL account holders.

8.5 The balances in Government Securities maintained by the banks in the depositories will be included for SLR purpose. Any shortfall in maintenance of CRR/SLR resulting from settlement failure (on either the NDS-CCIL market or the stock exchanges) will attract the usual penalties.

8.6 The Boards of UCBs may take a conscious decision in regard to using the stock exchange platform for making investments in Government Securities in addition to the existing NDS-CCIL market and the direct bidding facility. As regulations of SEBI will also apply insofar as trading of Government Securities is concerned, the Board should frame and implement a suitable policy to ensure that operations are conducted in accordance with the norms laid down by Reserve Bank/SEBI and the respective stock exchange. Prior to commencing operations, the dealing officials should also familiarize themselves with the basic operating procedures of the stock exchanges.

8.7 Operational Guidelines

8.7.1 Banks should put in place appropriate internal control systems catering to stock exchange trading and settlement before commencing operations on the exchanges. The back-office arrangement should be such that trading on the NDS-OM/OTC market and on the stock exchanges can be tracked easily for settlement, reconciliation and management reporting. Banks should, therefore, install enabling IT infrastructure and adequate risk management systems.

8.7.2 Only SEBI registered brokers who are authorized by the permitted exchanges (NSE/BSE) to undertake transactions in Government Securities can be used for placing buy/sell orders. A valid contract note indicating the time of execution must be obtained from the broker at end of day.

8.7.3 The dealing officials should independently check prices in the market or on the stock exchange screens before placing their orders with the brokers. The decision-making processes cannot be delegated to brokers by the banks.

8.7.4 The transactions done through any broker will be subjected to the current guidelines on transactions done through brokers.

8.7.5 Brokers/trading members shall not be involved in the settlement process; all trades have to be settled through clearing member custodians. Hence, it will be necessary for UCBs to enter into a bilateral clearing agreement with such service providers beforehand.

8.7.6 All transactions must be monitored with a view to ensuring timely receipt of funds and securities. Any delay or failure should be promptly taken up with the exchange/authorities concerned.

8.7.7 At the time of trade, securities must be available with the banks either in their SGL or in the demat account with depositories.

8.7.8 Any settlement failure on account of non-delivery of securities/non- availability of clear funds will be treated as SGL bouncing and the current penalties in respect of SGL bouncing will be applicable. The stock exchanges will report such failures to the respective PDOs.

8.7.9 For the limited purpose of dealing through the screen-based trading system of the stock exchanges the condition that a UCB should seek a scheduled commercial bank, a PD, a financial institution, another UCB, insurance company, mutual fund or provident fund as a counterparty, while undertaking transactions in Government Securities, will not apply.

8.7.10 Banks should report on weekly basis to their Audit Committee of the Board, giving the details of trades on aggregate basis done on the stock exchanges and details of any ‘closed-out’ transactions on the exchanges.

8.7.11 The banks should take all necessary precautions and strictly adhere to all instructions/guidelines issued by the Reserve Bank relating to transactions in Government Securities as hitherto.

9 REPO/REVERSE REPO TRANSACTIONS

9.1 UCBs may execute repo transactions subject to adherence to instructions given in Repurchase Transactions (Repo) (Reserve Bank) Directions, 2018 issued vide circular FMRD.DIRD.01/14.03.038/2018-19 dated July 24, 2018.

9.2 However, only Scheduled UCBs with strong financials and sound risk management practices are eligible to undertake repo transactions in corporate debt securities. Accordingly, scheduled UCBs, fulfilling the following conditions only would be permitted to undertake such transactions.

(a) CRAR of 10 per cent or more and gross NPA of less than 5 per cent and continuous record of profits during the previous three years.

(b) Sound risk management practices and mandatory concurrent audit of the Investment portfolio.

9.3 Further, the Repo transactions in corporate bonds shall be undertaken only with scheduled commercial banks / PDs and not with other market participants. UCBs which are lenders of funds in a repo transaction may provide for Counter-party credit risk corresponding to the risk weight for such exposure as applicable to the loan / investment exposure. UCBs may also ensure that securities acquired under repo along with other non-SLR investment already in the Balance Sheet should be within the stipulated ceiling of non-SLR investment (i.e., 10 per cent of a bank's total deposits as on March 31 of the previous year). The funds borrowed under repo should be within the limit prescribed for call money borrowing (i.e., 2 per cent of the previous year's deposits).

9.4 UCBs can undertake repo transactions only in Government securities held in excess of the prescribed SLR requirements.

9.5 Repos shall be accounted as per guidelines contained in Annex III of this Master Circular.

10. SHORT SELLING IN GOVERNMENT SECURITIES

10.1 Well managed UCBs, who are members of NDS-OM and have regular concurrent audit of their treasury operations, are permitted to undertake intra-day short selling of Government Securities. Accordingly, Urban Co-operative Banks, fulfilling the following conditions are required to seek permission from the Regional Offices concerned to undertake such transactions.

a. NDS-OM Membership.

b. Net Worth of ₹25 crore, CRAR of 9 per cent or more and net NPA of not more than 3 per cent.

c. Sound risk management practices and mandatory concurrent audit of their Treasury Operations.

10.2 UCBs are advised to adhere to the instructions/directions as prescribed in Short Sale (Reserve Bank) Directions, 2018 issued vide FMRD.DIRD.05/14.03.007/2018-19 dated July 25, 2018.

11. ‘WHEN ISSUED’ TRANSACTIONS IN GOVERNMENT SECURITIES

11.1 UCBs shall adhere to the When Issued Transactions (Reserve Bank) Directions, 2018 issued FMRD.DIRD.03/14.03.007/2018-19 dated July 24, 2018 for undertaking “When Issued” (WI) transactions.

11.2 The accounting treatment of transactions undertaken in WI securities would be as follows:

(a) The ‘WI’ security should be recorded in books as an off- balance sheet item till issue of the security.

(b) The off- balance sheet net position in ‘WI’ market should be marked to market scrip-wise on a daily basis at the day's closing price of the ‘WI’ security. In case the price of the ‘WI’ security is not available, the value of the underlying security be used instead. Depreciation, if any, should be provided for and appreciation, if any, should be ignored.

(c) The off-balance sheet (net) position in ‘WI’ securities, scrip-wise, would attract a risk weight of 2.5 per cent.

(d) On delivery, the underlying security may be classified in any of the three categories, viz; ‘Held to Maturity’, ‘Available for Sale’ or ‘Held for Trading’, depending upon the intent of holding, at the contracted price.

11.3 It is clarified that the securities bought in the ‘WI’ market would be eligible for SLR purposes, only on delivery.

12. NON - SLR INVESTMENTS

12.1 In order to contain risks arising out of the non-SLR investment portfolio of banks, the banks should adhere to the following guidelines:

12.1.1 Prudential Limit

The Non-SLR investments shall be limited to 10 per cent of a bank’s total deposits as on March 31 of the previous year.

12.1.2 Instruments

UCBs may invest in the following instruments:

(a) "A" or equivalent and higher rated Commercial Papers (CPs), debentures and bonds.

(b) Units of Debt Mutual Funds and Money Market Mutual Funds.

(c) Shares of Market Infrastructure Companies (MICs).

12.1.3 Restrictions

(a) Investment in perpetual debt instruments is not permitted.

(b) Investment in unlisted securities shall be subject to a minimum rating prescribed at 12.1.2 (a) above and shall not exceed 10 per cent of the total non-SLR investments at any time. In terms of UBD.(PCB).BPD.Cir.No.14/16.20.000/2007-08 dated September 18, 2007, where banks have already exceeded the said limit, no further investment in such securities will be permitted. Since there is a time lag between issuance and listing of securities, which are proposed to be listed but not listed at the time of subscription, banks may not be able to participate in primary issues of non-SLR securities. In view of this, investments in non-SLR debt securities (both primary and secondary market) by banks where the security is proposed to be listed in the Exchange(s) may be considered as investment in listed security at the time of making investment. However, if such security is not listed within the period specified, the same will be reckoned for the 10 per cent limit specified for unlisted non-SLR securities. In case such investments included under unlisted non-SLR securities lead to a breach of 10 per cent limit, the bank would not be allowed to make further investments in non-SLR securities (both primary and secondary market) till such time its investment in unlisted securities comes within the limit of 10 per cent.

(c) Investment in deep discount / zero coupon bonds should be subject to the minimum rating as stated above and comparable market yields for the residual duration. However, banks are not permitted to invest in Zero Coupon Bonds from February 18, 2011 as advised vide circular No.UCB(PCB)BPD.Cir.No.36/16.20.000/2010-11 dated February 18, 2011 unless the issuer builds up a sinking fund for all accrued interest and keeps it invested in liquid investments / securities (Government bonds).

(d) Investment in units of Mutual Funds, other than units of Debt Mutual Funds and Money Market Mutual Funds, are not permitted. The existing holding in units of Mutual Funds other than Debt Mutual Funds and Money Market Mutual Funds, including those in UTI should be disinvested. Till such time that they are held in the books of the bank, they will be reckoned as Non-SLR investments for the purpose of the limit at 13.1.1 above. The banks should, however, review their existing risk management policy to ensure that they do not have disproportionate exposure in any one scheme of a Mutual Fund.

(e) Non-SLR investment, other than in units of Debt Mutual Funds and Money Market Mutual Funds, and CPs, shall be in instruments with an original maturity of over one year.

(f) Investments in shares of All India Financial Institutions (AIFIs) are not permitted. In terms of UBD.(PCB).BPD.Cir.No.14/16.20.000/2007-08 dated September 18, 2007, the existing share holding in these institutions may be phased out and till such time they are held in the books of the bank, they will be reckoned as non-SLR investments for the purpose of the limit at 12.1.1 above.

(g) All fresh investments under non-SLR category should be classified under Held for Trading (HFT) / Available for Sale (AFS) categories only and marked to market as applicable to these categories of investments. However, investments in the long-term bonds issued by companies engaged in executing infrastructure projects and having a minimum residual maturity of seven years may be classified under Held to Maturity (HTM) category

(h) All non-SLR investments will be subject to the prescribed prudential single/group counter party exposure limits.

(i) All transactions for acquisition / sale of

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