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SEBI Tightened regulations of Additional tier-1 bonds

  • Posted By
    10Pointer
  • Categories
    Economy
  • Published
    11th Oct, 2020
  • 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.

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