SEBI Raises Threshold of AT-1 Bond Investment to Prevent Retail Investment

By Angel Broking | Published on 7th October 2020 | 106

SEBI Raises Threshold of AT-1 Bond Investment to Prevent Retail Investment

The Security And Exchange Board Of India (SEBI) has issued new guidelines that will bar retail investors from investing in AT-1 bonds. In the circular the regulator mentioned,

“Issuers and Stock Exchanges shall ensure that only QIBs are allowed to participate in the issuance of AT1 instruments.”

As a result, asset management companies which were selling AT-1 bonds to retail investors will have to stop the practice. SEBI specified in its circular that only qualified institutional buyers or QIBs could only invest in tier-1 bonds.

So, what are AT-1 bonds and why these are risky for retail investors?

SEBI announcement came as an aftermath of Yes Bank fiasco, where several investors, including retail investors, have lost money on perpetual bonds investment.

AT-1 bonds are a specific type of financial instrument. Unlike regular bonds, these bonds don’t have a fixed maturity date and pay higher returns than traditional bonds. In market parlance, these bonds are called perpetual bonds. Instead of a fixed date of maturity, AT-1 bonds offer a call option as an exit route to investors.

Perpetual tier-1 bonds are risky. Before the Yes Bank incident, there was a preferential bias towards AT-1 bonds investment because these bonds pay a higher return, and there were no cases of default. But after Yes Bank investors lose nearly 8,415 crores in AT-1 bonds, the market is now trying to get a grip of the risks associated with them. SEBI, in its recent circular, prevented retail investment and possible misselling (one of the major allegations against Yes Bank AT-1 bonds) on the pretext of super FD with a higher return.

AT-1 bonds are unsecured, perpetual bonds that lure investors on the promise of a higher return, but these also come with higher risk. Banks issue AT-1 bonds to bolster their core capital base and can avoid paying interest to the bondholders if their capital ratio falls below a certain level. The recent change in AT-1 bond norms is the aftermath after several mutual funds, and retail investors found themselves in a tight spot after Yes Bank wrote down its entire AT-1 bonds capital invoking Basel regulations.

Yes Bank wrote off 8,415 crores in AT-1 bonds, of which only Rs 2,000 crores were invested by institutional investors. The Madras High Court last week upheld RBI’s circular on AT-1 bonds and dismissed the plea of the investors against Yes Bank to write off the bonds.

To protest retail investor’s from getting exposed to such risky investments, SEBI wrote down new guidelines which technically prevents retail investors from investing in perpetual bonds. As per the new guidelines,

  • Banks can only issue these bonds on an electronic platform
  • Only QIBs are allowed to invest in AT-1 type bonds
  • Minimum investment threshold is raised to minimum Rs 1 crore
  • The issuer bank will have to make candid disclosure regarding risk factor, Point Of Non-Viability (PONV) clause, and time to exercise the call option as an exit route

Conclusion

The new rules will apply from October 12, meaning the current AT-1 bonds from Bank of Baroda and SBI will not get impacted.