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Auditing Theory

Notes Investment in Securities Issued by SC/RC

All such investments to be valued at lower of cash consideration or redemption value of the
investments.

Valuation/Provisioning Norms

When banks/FIs invest in the security receipts/pass-through certificates issued by Securitization
Company (SC)/Reconstruction Company (RC) in respect of the financial assets sold by them to
the SC/RC, the sale shall be recognized in books of the banks/FIs at the lower of:
1. the redemption value of the security receipts/pass through certificates, and v the NBV of
the financial asset.
2. the cash consideration paid.
The above investment should be carried in the books of the bank/FI at the price as determined
above until its sale or realization, and on such sale or realization, the loss or gain must be dealt
with as under:

1. If the sale to SC/RC is at a price below the net book value (NBV) (i.e. Book value less
provisions held), the shortfall should be debited to the profit and loss account of that year.
2. If the sale is for a value higher than the NBV, the excess provision will not be reversed but will
be utilized to meet the shortfall/loss on account of sale of other financial assets to SC/RC.
All instruments received by banks/FIs from SC/RC as sale consideration for financial assets
sold to them and also other instruments issued by SC/RC in which banks/FIs invest will be in
the nature of non-SLR securities. Accordingly, the valuation, classification and other norms
applicable to investment in non-SLR instruments prescribed by RBI from time to time would be
applicable to bank’s/FI’s investment in debentures/bonds/security receipts/PTCs issued by
SC/RC. However, if any of the above instruments issued by SC/RC is limited to the actual
realization of the financial assets assigned to the instruments in the concerned scheme of the
bank/FI shall reckon the Net Asset Value (NAV), obtained from SC/RC from time to time, for
valuation of such investments.

10.10.2 Non-performing Investments

In respect of securities included in any of the three categories where interest/ principal is in
arrears, the banks should not reckon income on the securities and should also make appropriate
provisions for the depreciation in the value of the investment. The banks should not set-off the
depreciation requirement in respect of these non-performing securities against the appreciation
in respect of other performing securities.
A Non-performing Investment (NPI), similar to a Non-performing Advance (NPA), is one where:

1. Interest/installment (including maturity proceeds) is due and remains unpaid for more
than 90 days.
2. The above would apply mutates mutandis to preference shares where the fixed dividend
is not paid.
3. In the case of equity shares, in the event the investment in the shares of any company is
valued at ` 1 per company on account of the non availability of the latest balance sheet in
accordance with the instructions contained in paragraph 28 of the Annexure to circular
DBOD.BP.BC.32/ 21.04.048/ 2000-01 dated October 16, 2000, those equity shares would
also be reckoned as NPI.

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