Bankers have sought clarity from the finance ministry on treatment of additional tier-I bonds under Basel-III guidelines that prescribe how much capital banks should hold. The government has been pushing banks to raise capital through this instrument, popularly known as AT1 bonds, to meet fund requirements. 

Under the Basel-III norms, AT1 bonds come with loss absorbency features. 

This means that in case of stress, banks, on guidance of the central bank, can write off such investments or convert them into common equity, providing banks with capital when they need it the most. Tier I capital , or core capital, includes equity capital and disclosed reserves, while AT1 is a relatively new type of instrument. 

So far, only two banks - Bank of India and IDBI Bank - have raised money by issuing bonds under the AT1 structure. 

"Investors want to know whether these instruments will be treated as bonds or equity for taxation purposes. 

Also, some suggestions were made on opportunity of premature exit from such investment," said a senior banker. 

Last week, the finance ministry held a meeting on these issues. It was attended by bankers and representatives from the insurance and pension regulators. 

Investors also want that they should have the option to exit such an investment after a few years, a facility now available only to banks, said the bank official, who is part of deliberations. 

The ministry has asked state-run banks to utilise the instrument for their capital-raising plans. There are, however, not many willing investors, given the banks may write off these bonds during time of stress. "We want insurers to participate actively in these bonds, but Insurance Regulatory & Development Authority (IRDA) is reluctant," said a government official, also present at the meeting. 

The pension regulator has also raised issues on the taxation structure of these bonds. "If these bonds are considered as part of equity, then income flow will be treated as dividend which will be taxable," said the government official, adding that the ministry has now promised to provide clarity. 

According to a research report by ratings firm ICRABSE -0.96 %, AT1 requirement for this fiscal year through March 2015 would be around Rs 20,000 crore. In subsequent years, annual requirement could be as high as Rs 40,000-50,000 crore. As per Reserve Bank of India estimates, public and private sector banks will together need an additional capital of Rs 5 lakh crore to comply with the Basel III regulations. 

Of this, equity capital requirement will be Rs 1.75 trillion and non-equity capitalRs 3.25 trillion. (Economic Times)