RBI has decided to revise the norms on Friday, both under the Basel-I and Basel-II Frameworks. The investments of a bank in the equity as well as non-equity capital instruments issued by a subsidiary, which are reckoned towards its regulatory capital as per norms prescribed by the respective regulator, should be deducted at 50 % each, from Tier I and Tier II capital of the parent bank, while assessing the capital adequacy of the bank on solo basis , under the Basel-I Framework .
Under the extant instructions under Basel I environment, only the equity investments of a bank only in its subsidiaries are required to be deducted, only from Tier I capital of the bank and no such deduction is required for a banks investment in associates. The investments made by a banking subsidiary in the equity or non equity regulatory-capital instruments issued by its parent bank, should be deducted from such subsidiarys regulatory capital at 50 % each from Tier I and Tier II capital, in its capital adequacy assessment on a solo basis, under Basel I and Basel II Frameworks .In addition, under the Basel II Framework, the same treatment would be applied to the investment by a banking associate also, in its parent bank. The treatment of investment by the non-banking financial subsidiaries associates in the parent banks regulatory capital would, however, be governed by the applicable regulatory capital norms of the respective regulators of such subsidiaries/associates. An associate would be defined as an entity in which the parent bank has an equity stake exceeding 30 % but less than 50 % of the paid up capital of the investee entity.