Regulatory and Development Authority of India (IRDAI) has allowed insurance
companies to invest
in Additional Tier 1 (Basel III compliant) perpetual bonds. Earlier, there was no clarity on insurers
investing in these instruments and they perceived it risky.
In a circular issued to insurance
companies today, IRDAI
said that the rating of the AT1 bonds should not be less than 'AA'. Further, it said that the aggregate value of the AT1 bonds held in any particular bank cannot exceed 10 per cent of the total outstanding AT1 bonds at any time. These bonds will be a part of "equity" under investment regulations.
have been told that they cannot invest
more than 10 per cent in AT1 bonds offered through IPO. Also, the regulator said insurers
can only invest
in AT1 bonds of those banks that have declared dividends for preceding two years.
in AT1 bonds of their promoter group bank or where the bank is their corporate agent.
A perpetual bond
is a financial instrument with no maturity date. These bonds are not redeemable but pay a steady stream of interest forever. Here, the price of a perpetual bond
is, therefore, the fixed interest payment, coupon amount, divided by a constant discount rate, which represents the speed at which money loses value over time (partly because of inflation).
The regulator also said that the Common Equity
Tier 1 Capital (CET) including Capital Conservation Buffer of the issuer bank will have to be more than 1 per cent of the CET
prescribed by Reserve Bank of India
at time of investment in these bonds.
were awaiting clarity on whether this instrument would count as a debt
or an equity
instrument from the sector regulator. It is anticipated that large investors like Life Insurance
Corporation of India will be able to take advantage of these norms to invest
in such bonds as also issuing banks which were earlier finding it difficult to attract insurers
in perpetual bonds.