Minimum AT-1 allotment at ₹1 cr, only QIBs can buy: Sebi1 min read . Updated: 07 Oct 2020, 07:08 AM IST
- Sebi’s latest move aims to protect retail investors
- The new regulations are applicable from 12 October and only for prospective issuances
Banks can sell additional tier-1 (AT-1) bonds only to qualified institutional buyers (QIBs) from now on, the Securities and Exchange Board of India (Sebi) said on Tuesday, with the transaction mandatorily over an electronic platform and with a minimum allotment and trading lot size at ₹1 crore.
AT-1 bonds are unsecured, perpetual, high-risk bonds that banks sell to raise their core capital base. Banks can skip paying interest on these bonds if their capital ratios fall below a certain threshold level and Sebi’s latest move aims to protect retail investors. This comes after several mutual funds and retail investors were stung when Yes Bank wrote down its AT-1 bonds in Q1.
“These instruments have certain unique features which, inter-alia, grant the issuer, banks, in consultation with the Reserve Bank of India (RBI), a discretion in terms of writing down the principal/interest, to skip interest payments, to make an early recall without commensurate right for investors to legal recourse, even if such actions of the issuer might result in potential loss to investors," a Sebi circular said.
Yes Bank wrote down its entire AT-1 bonds worth ₹8,415 crore in the March quarter, of which over ₹2,000 crore was invested by institutional investors including Nippon Mutual Fund, Franklin Templeton India, Barclays, and Kotak Mutual Fund. Madras high court last week upheld the legal validity of RBI’s circular on AT-1 bonds dismissing a plea by investors of Yes Bank against the write-down of these instruments. Yes Bank sold these bonds to some of the investors as super fixed deposits, according to court filings.
“This is a fantastic idea that will protect retail investors from these toxic assets. However, Sebi can go one step forward and increase the face value of these bonds to ₹1 crore in consultation with RBI," said Deepak Shenoy, CEO at Capitalmind Wealth.
The new regulations are applicable from 12 October and only for prospective issuances.
Recent AT-1 bond issuances by public sector banks such as State Bank of India and Bank of Baroda will not be impacted by these changes. Sebi also said that the issuing bank will need to disclose conditions on when the call option can be exercised, the risk factor, and the so-called point of non-viability clause.