The State Bank of Pakistan has issued new instructions on reciprocal crossholdings of banks/development finance institutions (DFIs). The State Bank had issued instructions (Section 1.1) on Minimum Capital Requirement (MCR) vide its BSD Circular No 8 of June 27, 2006 which requires deduction of such artificially designed reciprocal crossholdings of banks/DFIs that inflate the capital position.
According to a Circular (BSD Circular Letter No 6) issued on Thursday, the following instructions shall be applicable with effect from 30th April, 2010 on banks/DFIs'' investment in mutual funds of Asset Management Company (AMC) in which a bank/DFI has significant influence or control ie bank/DFI owns 20 percent or more equity interests in the AMC:-
a) Investment in Closed Ended Funds: Where a bank/DFI owns less than 20 percent of the closed ended mutual funds being managed by above referred AMC and these mutual funds in turn also hold the Capital (Tier-1 & Tier-2) instruments issued by the bank/DFI; the lower of the following two will be deducted from the bank/DFIs Tier-1 capital for capital adequacy purpose.
i. Bank/DFIs investment in such mutual funds, or;
ii. The mutual funds'' investment in bank/DFIs capital instruments.
b) Investment in Open Ended Funds: Where a bank/DFI owns open ended mutual funds being managed by above referred AMC and these mutual funds in turn also hold the Capital (Tier-1 & Tier-2) instruments issued by the bank/DFI; the lower of the following two will be deducted from the bank/DFIs Tier-1 capital for capital adequacy purpose.
i. Bank/DFIs investment in such mutual funds, or;
ii. The mutual funds'' investment in bank/DFIs capital instruments.