The Reserve Bank of India (RBI) has released a Discussion Paper on Capital Raising Avenues for Primary (Urban) Co-operative Banks. The Banking Regulation (Amendment) Act, 2020 has enabled certain capital related provisions such as issuance of special shares, issuance of shares at a premium, etc., which are new to the co-operative banking sector. The Report of the Expert Committee on Primary (Urban) Co-operative Banks (the Expert Committee), chaired by N.S. Vishwanathan, former Deputy Governor, RBI, had provided broad guiding principles on these provisions through its recommendations. Thereafter, a Working Group was constituted in RBI to inter alia operationalise the recommendations of the Expert Committee on these newly enabled capital related provisions.

RBI noted that as a part of the Statement on Developmental and Regulatory Policies released on Oct 09, 2024, RBI had proposed to issue a Discussion Paper (DP) on Capital Raising Avenues for Primary (Urban) Co-operative Banks based on the recommendations of the Working Group. Accordingly, RBI released the DP which proposes capital raising avenues for UCBs.

The research paper outlines the recommendations of the Committee are as under:

• Amendments to the BR Act for enabling RBI to notify through a Gazette Notification the classes of instruments as securities for the purpose of SCRA and SEBI Acts, to enable their listing and trading on stock exchanges.
• Till such amendment comes into force, banks may be allowed to have a system on their websites facilitating buyers and sellers of member shares to indicate their interests to buy / sell securities at book value, subject to the bank ensuring that the prospective buyer is eligible to be admitted as a member.
• RBI may provide the broad mechanism for guidance of the banks to determine the valuation (book value) based on their last audited financial statement.
• The statutory auditor of the bank may be required to certify the book value of the member shares as per RBI’s directions.
• Eligible banks may be required to publish their financial statements more frequently (say, quarterly / half-yearly) for transparency. The banks may also be required to carry out valuation of their member shares with certification by the auditors at quarterly / half yearly intervals. The valuation of the member shares should be disclosed by banks on their websites.
• The banks should disclose the price / volume and other important data with respect to all buy / sell transactions on their website for the guidance of other prospective investors.
• Banks should not be allowed to issue fresh member shares at less than the book value certified by the Statutory Auditors. However, the transactions between members may happen at the price negotiated by the buyers / sellers.
• Redemption of the member shares with the bank may only be as per the provisions of the concerned Co-operative Societies laws. Where legislations permit redemption at higher than face value, redemption value may not be more than the price paid at the time of the primary issuance of the share and in any case not higher than the book value at the time of redemption.
• UCBs should be required to disclose other important information like divergences identified by the RBI, penalties imposed by the regulators, etc. on their websites for the benefit of the investors.