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Sovereign backing prevents misselling of perpetual debt by PSU banks

The Sebi on 12 April had imposed a fine of  ₹25 crore on Yes Bank in the AT1 bonds misselling case.mintPremium
The Sebi on 12 April had imposed a fine of 25 crore on Yes Bank in the AT1 bonds misselling case.mint

  • The Sebi on 12 April imposed a fine of 25 crore on Yes Bank in the AT1 bonds misselling case
  • It also fined former head of the bank’s private wealth management team Vivek Kanwar 1 crore and two other former executives, Ashish Nasa and Jasjit Singh Banga, 50 lakh each

India’s state-owned lenders are seemingly insulated from charges of misselling additional tier I (AT1) bonds or perpetual bonds, recently made against a private lender, as investments in such instruments are easier to come by for these banks, said experts.

The Securities and Exchange Board of India (Sebi) on 12 April imposed a fine of 25 crore on Yes Bank in the AT1 bonds misselling case. It also fined former head of the bank’s private wealth management team Vivek Kanwar 1 crore and two other former executives, Ashish Nasa and Jasjit Singh Banga, 50 lakh each.

Backed by the sovereign, it is much easier for public sector banks to find investors for AT1 bonds as the chance of a sudden drop in regulatory capital and a resultant writedown is highly unlikely, industry experts said. AT1 bonds have a clause that allows the issuer to stop paying the investor whn capital falls below a certain level. This clause was used in the case of Yes Bank last year to write down bonds of 8,415 crore.

“What we saw in the Yes Bank case is that executives were pushed by the top management to missell these bonds to smaller investors, luring them with the promise of high returns," said a banking analyst, one of the experts mentioned above, on condition of anonymity.

The total stock of AT1 bonds outstanding is 1.03 trillion as on 28 February, of which 70% is issued by state-owned banks, rating agency ICRA estimated. Among private banks that have used this route are Axis Bank, HDFC Bank, ICICI Bank, and IndusInd Bank. State-owned banks have been large issuers of AT1 bonds with issuances of 95,975 crore during FY15-21, while the issuances for private banks stood at 39,315 crore in the same period, as per ICRA. SBI alone has issued such bonds of 33,932 crore in the same period.

Sebi also found that Yes Bank had misrepresented the product as a ‘Super FD’ and ‘as safe as an FD’. The term sheet was not shared with many investors and no confirmation was taken from customers on their understanding of the product’s features and the risks associated with the bond.

“Only some private lenders with good capital position are able to issue AT1 bonds. It is easier for public sector banks to do it as the market knows that the Centre will keep infusing capital one way or the other," said the fixed income head of an institution, the second expert quoted above.

Perpetual bonds, though riskier, pay higher interest than bank deposits. SBI issued AT1 bonds in September last year at 7.74%, while the bank paid 5.4% to depositors under the five-to-10-year tenor. However, according to Sebi regulations, banks can sell these bonds only to qualified institutional buyers (QIB) with a minimum lot size of 1 crore.

Meanwhile, HDFC Bank plans to raise up to 50,000 crore through debt instruments, including perpetual bonds. It had last issued AT1 bonds in FY18, raising 8,000 crore. The bonds have a call option after five years, in FY23, and the new fundraise could be used to replace existing perpetual bonds, said the second expert mentioned above.

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