19 D HYBRID FINANCE
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What is hybrid finance in the context of corporate finance?
Hybrid finance refers to financial instruments that combine characteristics of both debt and equity, such as convertible debentures, preference shares, and perpetual bonds, blurring the line between the two traditional categories.
What is the primary purpose of hybrid finance in capital structure management?
To combine debt and equity features for flexible capital raising.
Which RBI guidelines govern the issuance of hybrid capital instruments by Indian banks?
RBI's Master Circular on Basel III Capital Regulations governs hybrid capital instruments, specifying eligibility criteria under Additional Tier 1 (AT1) and Tier 2 capital buckets for Indian banks.
What is the Basel III minimum Common Equity Tier 1 (CET1) ratio required for Indian banks?
Minimum CET1 ratio is 5.5% under RBI Basel III norms.
What are Additional Tier 1 (AT1) instruments under Basel III?
AT1 instruments are perpetual, deeply subordinated hybrid securities that absorb losses through principal write-down or conversion to equity when the bank's Common Equity Tier 1 ratio falls below a pre-specified trigger, typically 5.5% in India.
What distinguishes Tier 1 capital from Tier 2 capital in bank regulation?
Tier 1 is going-concern capital; Tier 2 is gone-concern capital.
Why are preference shares classified as hybrid instruments?
Preference shares carry a fixed dividend like debt but rank above equity shareholders in liquidation while below creditors, and may be converted to equity, giving them characteristics of both debt and equity.
What is the maximum permissible AT1 instruments as a percentage of risk-weighted assets under RBI norms?
AT1 instruments can be up to 1.5% of risk-weighted assets.
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