Sebi shields small investors from AT1 bonds, urges 'full discretion'

Banks issue such instruments to augment their capital base, but regulator says small investors may not understand them fully.

The Securities and Exchange Board of India (Sebi) on Tuesday took steps to restrict retail investor participation in additional tier 1 (AT1) bonds — instruments which were in the news amid troubles at private sector lender YES Bank.

In a circular, the markets regulator said issuing AT1 bonds must be done compulsorily on the electronic book provider platform. More importantly, issuers and stock exchanges have to ensure that only qualified institutional buyers are issued these bonds. Further, the minimum allotment and trading lot size shall be Rs 1 crore.

AT1 bonds are also known as perpetual non-cumulative preference shares, innovative perpetual debt instruments, and perpetual debt instruments. Typically, these are issued by banks to augment their capital base.

Sebi said retail investors might not understand the risks associated with these instruments.

“Given the nature and contingency impact of these AT1 instruments and the fact that the full import of the discretion is available to an issuer, this may not be understood in the truest form by retail individual investors,” Sebi said in a circular.

In March, several investors were caught off guard after the Reserve Bank of India (RBI) proposed writing down AT1 bonds issued by the troubled YES Bank, forcing bondholders to take a 100-per cent haircut and leading to losses of over Rs 10,000 crore.

“These instruments have certain unique features which, inter alia, grant the issuer (i.e., banks, in consultation with the RBI) discretion in terms of writing down the principal and interest, to skip interest payments, to make an early recall, etc without a commensurate right for investors to legal recourse, even if such actions of the issuer might result in potential loss to investors,” Sebi had said.

Sebi has also tightened various disclosure requirements for issuers of such bonds.