SEBI Curbs Retail Investors From Investing In Fresh AT-1 Bond Issues
The Securities and Exchange Board of India has tightened rules for fresh issues of additional tier-1 securities issued by banks, restricting retail investors from investing in such instruments.
The restrictions follow the Yes Bank Ltd. episode where AT-1 securities were written-off at the time a scheme of reconstruction was approved for the lender, catching a large number of retail investors off-guard.
In a circular dated Oct.6, the capital market regulator detailed the following rules:
- The issuance of AT-1 instruments shall be done mandatorily on the electronic book provider platform irrespective of the issue size.
- Issuers and stock exchanges will ensure that only qualified institutional buyers are allowed to participate in the issuance of AT-1 instruments.
- The minimum allotment of AT-1 instruments shall not be less than Rs 1 crore.
- The minimum trading lot for AT-1 instruments shall be Rs 1 crore.
Issuers will also 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 would also need 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 RBI absolute right to direct a bank to write down AT-1 bonds should be detailed, the capital markets regulator said.
The circular shall come into effect from Oct. 12.
SEBI is trying to address the concerns around miss-selling that came up during the Yes Bank crisis where AT-1 bonds issued by the bank had to be written-off and retail investors too were hit, said Shameek Ray, head of debt capital markets, ICICI Securities Primary Dealership.
Having a minimum Rs 1 crore lot and issuance on EBP [Electronic Book Provider] platform is a fair solution since it restricts AT-1 bond purchases by non-QIBs only to secondary markets, where someone buying more than Rs 1crore may be assumed to be an informed buyer. This would, however, prevent large corporate treasuries from buying in the primary markets as these are not QIBs.Shameek Ray, Head Of Debt Capital Markets, ICICI Securities PD
A senior debt market banker said that since the minimum allotment size is set at Rs 1 crore, only large QIBs will be able to buy AT-1 bonds in the primary markets, while other investors who buy in lots of Rs 5-10 lakhs will be deprived of the opportunity.
Also, by restricting corporates from primary market AT-1 bond issuance, the regulator has created a dilemma since a QIB with a net-worth of less than Rs 100 crore can buy such bonds, whereas a corporate with net-worth with Rs 1,000 crore may not be able to participate, the person quoted above said on condition of anonymity. This move may reduce the market appetite for AT-1 bonds, he said.
Amol Joshi, financial planner and founder of PlanRupee Investment Services said this is a measure to protect retail investors from a high-risk product.
Not too long back, because the AT-1 bonds of State Bank of India are yielding markedly higher than its fixed deposits, the bonds were being marketed as an alternative to retail investors. However, because AT-1 bonds are, by nature, quasi-equity, the implied risk is much higher.Amol Joshi, Founder, PlanRupee Investment Services
He added that some retail investors will continue to have an exposure to AT-1 bonds through mutual fund fixed income schemes, which can continue to invest in these instruments.
Only a handful of banks, including State Bank of India and Bank of Baroda, have issued AT-1 bonds since the Yes Bank incident. Private banks have stayed away from the market as they have raised equity capital to meet their requirements.
Karthik Srinivasan, head of financial sector ratings at ICRA, said that the immediate impact of the announcements may be limited since few banks are issuing these instruments. However, over the next few years as the call option in a number of already issued AT-1 bonds kicks in, a lack of appetite for fresh issues of perpetual bonds may hurt the sector, he said.