A Matter of Bond
SEBI has recently announced that AT1 bonds will be available for a minimum investment of Rs 1 crore..not lesser.. What is the logic of this move ? Let us understand this better ... Banks have been hitherto allowed to raise Additional Tier 1 funds ( quasi equity) as perpetual bonds with a fixed coupon. This was done to help bolster additional capital requirements of the banks without necessarily diluting their equity capital. What this meant was the Banks were free to raise the funds as per their needs and with an option to call in the investments at a time of their choosing i.e., is repay the investors the principal amount when it suited them. Since these are perpetual in nature, considered quasi equity and were taxable, they commanded a higher interest rate than what was prevailing in the market. Over a period of time this led to a thriving secondary market for such bonds..over the past decade a lot of retirees have used these bonds to secure their retiral cash flows in the scenario of dropping interest rates. These bonds have been available at a retail size of Rs 10.00 lakhs face value. The AT1 Bonds industry is a fairly large one with the size estimates in excess of Rs 100,000 Crores. The trouble rose in the case of Yes Bank, as the bank due to its financial troubles started going to liquidation, the management of the bank wrote down the value of payables on this bonds amounting to almost Rs 10,000 crores to Zero. This was as per the terms of the bond and was tenable , as per the terms and conditions of the bond offering. Therefore all the holders of YES bank AT1 bonds were left holding paper, quite worthless. An appeal to the Supreme court further confirmed the worst fears of these bond holders.
SEBI’s recent actions of raising the bar on the minimum investments for AT1 Bonds to Rs 1 Crore is to keep these instruments , which are high risk bonds out of the reach of retail investors. This will prevent any further blood letting of retail investor money as it happened in YES BANK.
One cannot but feel a touch of irony for the AT1 Bonds holders of YES BANK, who would have looked at these as an FD alternative, as they came from a reputed bank. While the action in cancelling these bonds was within the purview of the terms of these bonds, the spirit of these actions do not augur well for the banking industry. The banking industry which was hitherto known as the protector of retail depositors, is now looked at with suspicion of someone who can destroy retail investors' trust. This in the long run will not be a healthy precedent.
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