Sebi makes AT-1 bonds less accessible to retail investors2 min read . Updated: 06 Oct 2020, 09:29 PM IST
- As per latest norms, banks can issue these bonds only on electronic platform, only institutional investors could subscribe to them
- Minimum allotment for these bonds is set at ₹1 cr
Mumbai: Market regulator Securities and Exchange Board of India or Sebi on Tuesday tightened its regulations of additional tier-1 bonds or AT-1 bonds and ensured that these risky instruments are less accessible to retail investors.
This it did by ensuring that banks can issue these bonds only on electronic platform, only institutional investors could subscribe to them, and introduced a minimum allotment size and trading lot size of ₹1 crore.
AT-1 bonds are unsecured, perpetual, high-risk bonds that banks issue to shore up their core capital base to meet the Basel III norms. Banks can skip paying interest on these bonds if their capital ratios fall below certain threshold level.
This change in the regulation comes after several mutual funds and retail investors were caught on the wrong foot while investing in additional tier-1 bonds of Yes Bank.
Yes Bank wrote down its entire AT-1 bonds worth ₹8,415 crore in the March quarter, out of which over ₹2,000 crore was invested by institutional investors including Nippon Mutual Fund, Franklin Templeton India, Barclays and Kotak Mutual Fund. The Madras High Court last week upheld the legal validity of RBI circular on AT-1 bonds dismissing a plea by investors of Yes Bank against the write down of these instruments.
Yes Bank had allegedly sold these bonds to some of the investors as super fixed deposits.
"These instruments have certain unique features which, inter-alia, grant the issuer (i.e. banks, in consultation with RBI) a discretion in terms of writing down the principal / interest, to skip interest payments, to make an early recall etc. without commensurate right for investors to legal recourse, even if such actions of the issuer might result in potential loss to investors," said Sebi in the circular.
Sebi has been uncomfortable with investors getting exposed to AT1 bond, specifically retail investors.
Sebi in the circular said that only qualified institutional buyers (QIBs) can participate in issuances, the minimum allotment size and trading lot size has to be ₹1 crore. This would ensure that retail investors can be ring fenced.
"This is fantastic idea which 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 the Reserve Bank of India," said Deepak Shenoy, CEO at Capitalmind Wealth.
These regulations are applicable from 12 October and for prospective issuances. Meaning that the recent AT-1 bond issuances by public sector banks such as by State Bank of India (SBI) and Bank of Baroda (BoB)will not be impacted by these changes.
The market regulator also increased the disclosures on these bonds by saying that the issuing bank will need to disclose conditions on when call option can be exercised, risk factor and so-called 'point of non-viability clause'.
"The absolute right, given to the RBI, to direct a bank to write down the entire value of its outstanding AT1 instruments/bonds, if it thinks the bank has passed the Point of Non-Viability (PONV), or requires a public sector capital infusion to remain a going concern," said Sebi.