RBI circular relaxing the overall exposure of bank to a group of connected counter parties from 25% to 30% of the bank’s available eligible capital base. Hitherto it was restricted to 25% of the bank’s eligible capital base. But now considering the covid pandemic and the strain on corporates to raise funding from the capital markets, it has been decided for banks to come to the rescue of corporates.
What is a connected counter party. This definition is given in the RBI circular given below
6. Definition of connected counterparties
6.1 In some cases, a bank may have exposures to a group of counterparties with specific relationships or dependencies such that, were one of the counterparties to fail, all of the counterparties would very likely fail. A group of this sort, referred to in this framework as a group of connected counterparties, must be treated as a single counterparty. In this case, the sum of the bank’s exposures to all the individual entities included within a group of connected counterparties is subject to the large exposure limit and to the regulatory reporting requirements as specified above.
6.2 Two or more natural or legal persons shall be deemed to be a group of connected counterparties if the control criteria is satisfied i.e., one of the counterparties, directly or indirectly, has control over the other(s).
6.3 Banks must assess the relationship amongst counterparties with reference to the above criteria in order to establish the existence of a group of connected counterparties. In assessing whether there is a control relationship between counterparties, banks must automatically consider that the control relationship criterion (paragraph 6.2 above) is satisfied if one entity owns more than 50 percent of the voting rights of the other entity. In addition, banks must assess connectedness between counterparties based on control using the following evidences:
a. Voting agreements (e.g., control of a majority of voting rights pursuant to an agreement with other shareholders);
b. Significant influence on the appointment or dismissal of an entity’s administrative, management or supervisory body, such as the right to appoint or remove a majority of members in those bodies, or the fact that a majority of members have been appointed solely as a result of the exercise of an individual entity’s voting rights;
c. Significant influence on senior management, e.g., an entity has the power, pursuant to a contract or otherwise, to exercise a controlling influence over the management or policies of another entity (e.g., through consent rights over key decisions).
6.4 Banks are also expected to refer to criteria specified in the extant accounting standards for further qualitative guidance when determining control.
6.5 Where control has been established based on any of the above criteria, a bank may still demonstrate to the RBI in exceptional cases, e.g., existence of control between counterparties due to specific circumstances and corporate governance safeguards, that such control does not necessarily result in the entities concerned constituting a group of connected counterparties.