Only institutional buyers can invest in AT-1 bonds: Sebi

Only institutional buyers can invest in AT-1 bonds: Sebi

Institutions can only invest in perpetual bonds, a riskier quasi-debt instrument that is not meant for retail investors, the Securities Exchange Board of India said in a circular Tuesday.

With this many wealth managers will not be able to sell them to yield-hungry retail investors amid a record low interest rate regime, a rampant practice that has raised eyebrows.

The order came in the aftermath of the Yes Bank NSE -0.38 % fiasco where investors including retail individuals lost money in those securities that yield higher returns than any normal bond.

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

“The minimum allotment of AT1 instruments shall not be less than Rs.1 crore,” it said.

Perpetual bonds, known as Additional Tier – I in market parlance do not have any fixed maturity but offer call option after a stipulated period of time, which acts as an exit route for investors.

Also, the minimum secondary market trading lot has been fixed at Rs 1 crore. In the past, those securities changed hands with transactions running into lakhs of rupees. This reflected participation of high networth individuals in such trades.

The matter was discussed in SEBI’s advisory committee on the development of the corporate bond market in India.

“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,” SEBI said in the circular.

On October 2 ET reported, the Madras High Court upheld the legal validity of Reserve Bank of India's (RBI) circular on additional Tier 1 (AT1) bonds dismissing a plea by investors of Yes Bank against the write down of these instruments.

Yes Bank's AT1 bonds worth Rs 8,415 crore were written down to zero in March as part of a government approved restructuring plan for the insolvent lender.

The write down was based on Basel III norms which allowed banks to extinguish these instruments in an emergency. However, some investors had challenged this write down in courts.