With investors, including retail investors, losing 100% of the Rs 8,000-crore invested in AT-1 bonds that were written down by Yes Bank after its bailout, market regulator SEBI has taken steps so that the ‘small guy’ is insulated from such shocks, at least, in the future. Announcing new norms, which kick in from October 12, the watchdog has directed that AT-1 instrument issuers and stock exchanges will have to ensure that only qualified institutions can participate in the issuance. At the same time, the minimum allotment size as well as trading lot size of AT-1 instruments has been put at a steep Rs 1 crore, putting it virtually out of retail hands.

Double-edged sword

First, let us understand the nature of AT-1 bonds.

Perpetual Non-Cumulative Preference Shares (PNCPS) and Innovative Perpetual Debt Instruments (IPDIs)/Perpetual Debt Instruments(PDIs) are commonly referred to as AT-1 instruments.

These AT-1 securities are essentially non-equity regulatory instruments, forming part of a bank’s capital, governed by the Reserve Bank of India (RBI). But the guidelines as well as issue happens under the issuance and listing framework given under Chapter VI of the SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (NCRPS Regulations). AT-1 bonds are issued by both, public and private banks with no maturity date. Technically, they can continue to pay the coupon forever. However, the bank has the option to call back the bonds /repay the bond after a specified period of time (at least 5 years from date of issue).

While AT-1 bonds can offer interest income in perpetuity, these bonds 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. This has already happened in the Yes Bank case and such actions of the issuer result in massive loss to investors.

“Given the nature and contingency impact of these AT-1 instruments and the fact that full import of the discretion is 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 the corporate bond market in India,” SEBI said, announcing new norms.

Key Changes

Issuance – SEBI has directed that the issuance of AT-1 instruments has to be done mandatorily on the Electronic Book Provider (EBP) platform irrespective of the issue size.

The usage of this EBP platform, for issuance of debt securities on private placement basis, is mandatory for the issuers with an issue size of Rs 200 crore and above. But it can be used for less than Rs 200 crore. This window has been used by SEBI for AT-1 instruments. This is a good step as it formalizes buying of AT-1 instruments. No more, hush-hush deals, brokered by ‘bank relationship managers’!

Investors – SEBI has ordered AT-1 instrument issuers (banks) and stock exchanges to ensure that only Qualified Institutional Buyers (QIBs) are allowed to participate in the issuance of AT-11 instruments. In the Yes Bank and other cases, many small investors entered the AT-1 instrument market, attracted by lucrative interest offers.

Allotment size – The minimum allotment of AT-1 instruments will be Rs 1 crore. Also, the minimum trading lot size for AT-11 instruments will be Rs 1 crore. In the Yes Bank and other cases, retail investors with Rs 10 lakh bought AT-1 bonds.

Other disclosures – Besides, AT-1 instrument issuers have to make some disclosures and share specifics such as details of all the conditions upon which the call option will be exercised by them for such instruments, in the Information / Private Placement Memorandum. Also, risk factors, to include all the inherent features of these AT-1 instruments have to be highlighted.

Disclosures also have to be made regarding the absolute right, given to the RBI, to direct a bank to write down the entire value of its outstanding AT-1 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.

You can read the SEBI circular here.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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