SEBI Restricts Retail Investors from Investing in Fresh AT1 Bond Issues of Banks
The Securities and Exchange Board of India (SEBI) has now tightened rules for fresh issues of AT1 (additional tier-1) bonds issued by banks, to restrict retail investors from investing in them. The new rules for issuance, listing and trading of these perpetual non-cumulative preference shares (PNCPS) and innovative perpetual debt instruments (IPDIs)/ perpetual debt instruments (PDIs) (commonly referred to as AT1 bonds/instruments) will come into effect from 12 October 2020. This will protect retail investors from investing in these highly risky instruments. Last week Moneylife
reported how blatant mis-selling of these AT1 bonds
continues at the distributor and agent level.
AT1 bonds have come under a long shadow in the wake of the Yes Bank event where the entire value of the Bank’s AT1 bonds (Rs8,415 crore) was written-off when the rescue package led by ( the State Bank of India (SBI) was announced; investors in these bonds lost all their money. SBI’s AT1 bonds, which yield more than SBI’s fixed deposits, are being hawked in a similar manner. Several distributors and agents are wrongly advertising these bonds with claims that AT1 bonds are better than fixed deposits. Hundreds of retail investors have complained about the mis-selling of these instruments. The new changes in rules seem to be an effort to address this mis-selling to the average non-savvy retail investors, as exposed by Moneylife.
SEBI has also made it mandatory for banks to issue AT1 bonds on the electronic book provider (EBP) platform irrespective of issue size. "The issuance of AT1 instruments shall be done mandatorily on the EBP platform irrespective of the issue size," it said.
In the latest circular issued on 6th October, SEBI has announced the following rules:
"1. The issuance of AT1 instruments shall be done mandatorily on the electronic book provider (EBP) platform irrespective of the issue size.
2. Issuers and stock exchanges will ensure that only qualified institutional buyers (QIBs) are allowed to participate in the issuance of AT1 instruments.
3. The minimum allotment of AT1 instruments shall be Rs one crore.
4. The minimum trading lot for AT1 instruments shall be Rs one crore."
The market regulator has also specified in the circular that issuers will need to comply with enhanced disclosure requirements. This includes details of the conditions under which the call option included in these bonds may be exercised. The issuer also needs to clearly state the inherent features of AT-1 bonds in the risk factors.
In addition, the ‘point of non viability clause’, which gives the Reserve Bank of India (RBI) absolute right 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.
AT1 bonds have certain unique features which 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.
The regulator seems to acknowledge the backlash after the Yes Bank episode and admitted that the “the nature and contingency impact of these AT1 instruments and the fact that full import of the discretion available to an issuer, may not be understood in the truest form by retail individual investors." The matter was discussed in SEBI’s advisory committee on the development of corporate bond market in India, viz., corporate bonds and securitisation advisory committee (CoBoSAC) and based on the recommendations of the CoBoSAC, the new framework was designed.
The changed rules effectively restrict AT1 bond buying by non-QIBs (qualified institutional buyers) only to secondary markets and someone buying more than Rs1 crore worth of these bonds would be implicitly assumed to be an informed buyer. This, however, means that large corporates would be deprived of the opportunity and will not be able to buy these bonds in the primary market since they are not QIBs.
The other possible mid-term to long-term effect is that when the call option in the already issued AT1 bonds is triggered over the next few years, a lack of market appetite for fresh issues of these bonds might lead to a problem and could upset the banking sector.
However, a lot of retail investors might continue to have an exposure to AT1 bonds through mutual fund fixed-income schemes, which are allowed to invest in them. Public sector banks, like SBI and Bank of Baroda, have issued large volumes of AT1 bonds in the past few weeks.