An RBI spokesperson, while confirming this development, said that a "rationale" for the rejection of the ICICI proposal had been given to the institution. RBI rules on capital adequacy state that preference shares have to be included only in the tier-II capital.

"You are advised to treat the Rs 350 crore preference share issue made to ITC Ltd as tier-II capital," the RBI communication to the institution said. ICICI had shown a tier-I capital adequacy ratio of 9.5 per cent for the year ended March 31, 1998, which included the 20-year preference share issue.

With the central bank declining to accept the ICICI argument, the latter's tier-I capital will stand reduced by 0.6 per cent. However, there will not be anyimpact on the overall capital adequacy ratio of the institution as its tier-II capital will rise by a similar amount, neutralising the effect.

ICICI had argued that long-term preference shares, carrying a non-cumulative nominal dividend of 0.001 per cent, should be included in its tier-I capital. The institution's decision to treat the issue as part of its tier-I regulatory capital had led to a debate in financial circles about the treatment of long-term quasi-equity.

"The preference shares concerned are of 20 years' maturity and do not carry any dividend liability. If we exclude the preference capital from the tier-I capital, the tier-I capital adequacy ratio would come down by 0.6 per cent. In December 1998, the institution's capital adequacy ratio was pegged at 13.9 per cent. Even if we take the preference issue in tier-II, there will be no change in the overall capital adequacy ratio," ICICI's senior general manager Kalpana Morparia had earlier said.

"We have met all Bank of InternationalSettlements (BIS) criteria on capital adequacy. Our auditors as well as the rating agencies have accepted this," Morparia had said. The latest BIS norms stipulate that long-term capital in the form of preference shares can qualify as tier-I capital.

According to ICICI, the decision to include the preference shares in tier-I capital was taken after discussing it with international and domestic rating agencies. "They have observed that there is nothing wrong in including the preference shares in tier-I capital. Even in countries like Japan and Germany, there are instances of even 10-year maturity preference shares included in the Tier-I capital," Morporia had said.