The country’s capital markets regulator is barring individual investors from buying a riskier type of bank bond, citing the need to protect non-professional buyers.
Starting October 12, only qualified institutional buyers can purchase banks’ Additional Tier 1 notes, the Securities and Exchange Board of India (SEBI) said in a circular late Tuesday. This type of bond was introduced by regulators after the global financial crisis to limit taxpayer bailouts of lenders by sharing the burden with investors.
The Reserve Bank of India in March permanently wrote down 87.8 billion rupees ($1.2 billion) of such debt sold by Yes Bank Ltd. in the first action of its kind by domestic authorities. The move followed the nation’s biggest-ever bank rescue involving that lender.
A smaller investor base for such debt could limit efforts by banks to boost capital buffers at time when the coronavirus pandemic is hitting many businesses and threatening to increase bad loans. Banks are already saddled with some of the world’s highest bad debt piles from before the outbreak, and need to raise billions of dollars worth of capital, according to analysts.
AT1 bonds can be written off if certain triggers are breached, and lenders can skip interest payment or call the notes early even if that results in losses for investors. Those kind of features “may not be understood in the truest form by retail individual investors,” the regulator said Tuesday.
The regulator also ordered that banks offer AT1 debt exclusively via electronic book-building platforms irrespective of the deal size. To stop individuals from buying the notes even in the secondary market, Sebi said the minimum trading lot size for such securities will be set at 10 million
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