SEBI Tightened regulations of Additional tier-1 bonds
- Posted By
10Pointer
- Categories
Economy
- Published
11th Oct, 2020
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- Securities and Exchange Board of India has tightened its regulations of additional tier-1 bonds or AT-1 bonds to ensure that these risky instruments are less accessible to retail investors.
- Banks can issue these bonds only on electronic platform.
- Only institutional investors could subscribe to them.
- There shall be a minimum allotment size and trading lot size of ?1 crore.
- An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, pensions, and insurance companies are examples.
- Additional Tier-1 bonds: Under the Basel III framework, banks’ regulatory capital is divided into Tier 1 and Tier 2 capital. Tier 1 capital is subdivided into Common Equity (CET) and Additional Capital (AT1).
- AT1 bonds are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms.
- These have higher rates than tier II bonds.
- These bonds have no maturity date.
- The issuing bank has the option to call back the bonds or repay the principal after a specified period of time.
- The attraction for investors is higher yield than secured bonds issued by the same entity.
- Individual investors too can hold these bonds, but mostly high net worth individuals (HNIs) opt for such higher risk, higher yield investments.
- Given the higher risk, the rating for these bonds is one to four notches lower than the secured bond series of the same bank.
- Differences between Common Equity (CET) and Additional Capital (AT1):
- Equity and preference capital are classified as CET.
- Perpetual bonds are classified as AT1.
- By nature, CET is the equity capital of the bank, where returns are linked to the banks’ performance and therefore the performance of the share price.
- AT1 bonds are in the nature of debt instruments, which carry a fixed coupon payable annually from past or present profits of the bank.
