Money & Banking

SEBI move on AT-1 bonds: Marginal impact expected on banks’ fund-raising plans

Surabhi Mumbai | Updated on October 07, 2020

Retail investors will be safeguarded, but the fund-raising plans of some PSBscould be marginally impacted by the decision of the Securities and Exchange Board of India (SEBI) to tighten the regulations for additional Tier-1 or AT-1 bonds. Retail investors do not invest significantly in these bonds.

Experts said that at least ₹90,000 crore of such AT-1 bonds are outstanding as on date, and private sector banks are unlikely to tap this source, given the developments at YES Bank, where it wrote back such bonds worth ₹8,415 crore, makingretail investors more cautious. However, the quantum of bonds already invested in by retail investors is difficult to assess.

In recent months, State Bank of India and Bank of Baroda raised capital through AT-1 bonds amounting to ₹4,000 crore and ₹764 crore, respectively.

“Investment by retail investors in these bonds has not been very significant, and we don’t envisage issuance volumes to be further materially impacted for the larger and better-rated banks. That said, sentiment around AT1 bonds had already been impacted post the principal write-down seen earlier this year in the AT1 bonds issued by YES Bank, and this had affected mid- and small-sized banks more,” said Krishnan Sitaraman, Senior Director, Crisil Ratings, adding that going forward, there may be some increase in the spreads on AT1 bonds as investors try to more effectively price in the risks on these bonds.

International practices

Alok Singh, Chief Investment Officer, BOI AXA Mutual Fund, said that the SEBI move is in line with international practices, as these bonds are considered risky and so only institutional investors are allowed to participate.

“The way the YES Bank bond was treated, it increases the risk and is seen more as equity than bond and, hence, the pricing has to be in line with equity expectations,” he said.

“This is a welcome move and will help safeguard small investors. However, it may not impact fund-raising by banks too much as AT-1 bonds are only a small part of it and subscription by retail investors even lower,” said Jaikishan Parmar, Senior Equity Research Analyst, Angel Broking.

He further noted that most private banks depend on institutional investors for fund raising through AT-1 bonds, and only a few private sector lenders and public sector banks seek retail investors for raising funds through these bonds.

A report by ICRA in March this year had said a total of ₹93,669 crore of AT-I bonds will be outstanding as on date (₹84,574 core, excluding YES Bank), of which, ₹39,315 crore will be that of private banks (₹30,620 crore, excluding YES Bank). “Most of these bonds were issued during 2016-17 and 2017-18 with first call option after the fifth year from issuance and, hence, large bonds are due for call in 2021-22 and 2022-23.

Anil Gupta, Vice-President, Financial Sector Ratings, ICRA, said that private banks are unlikely to go for issuances of AT-1 bonds this fiscal, but public sector banks are expected to issue these bonds, given the limited capital infusion budgeted for 2020-21.

“The revised SEBI guidelines will possibly have an impact on the investor demand, given that some of the primary investors were subscribing to the AT-1 bonds with the intention of downselling them to HNIs and retail investors. With the increase in ticket size and trading lot, there could be a possibility that some HNIs and retail investors may not have that kind of investment appetite, which could reduce the demand for such bonds,” he noted.


Sources also highlighted the issue of downselling, wherein a SEBI-regulated entity can sell AT-1 bonds to retail investors. “It may have been more prudent if these entities had been barred from selling them to retail investors and such investors were defined,” noted an expert.

Published on October 07, 2020

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