-Megha Mittal (mittal@vinodkothari.com) As per Regulation 39 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”), a liquidator shall endeavour to maximize recovery and realisation from all assets of and dues to the corporate debtor. Realisation from assets of the corporate debtor shall be done by way of sale as […]
Our other write-ups on Factoring:
https://vinodkothari.com/wp-content/uploads/2017/03/FAQs_on_factoring_by_RBI-1.pdf
https://vinodkothari.com/wp-content/uploads/2017/03/Export_Factoring.pdf
-Kanakprabha Jethani (kanak@vinodkothari.com)
On October 9, 2020, the RBI released its Statement of Developmental and Regulatory Policies[1] which lays down the next steps of the RBI in the direction of coping up with the impact of the pandemic. The intended moves of the RBI seem to ensure preparing the financial sector to support the economy get in track with the new normal. Below are a few highlights proposed by the RBI with respect to the financial sector.
Banks and NBFCs are required to maintain certain capital ratios prescribed by the RBI. As for banks, they are required to maintain a Capital to Risk-weighted Assets Ratio (CRAR) of 9%. For the calculation of risk-weighted assets, the RBI prescribes the weights to be assigned to each on and off the balance sheet assets of the banks.
The RBI has prescribed 75% risk weight for the ‘regulatory retail portfolio’ of banks. For an exposure to qualify into the regulatory retail portfolio[2], the following conditions are required to be met:
The above limit of Rs. 5 crores has now been increased to Rs. 7.5 crores for fresh facilities and incremental qualifying exposures. This has been done with an intent to reduce the cost of credit and to harmonisation the regulations with the Basel guidelines[3]. This measure is expected to increase the much-needed credit flow to the small business segment.
The risk weights for housing loans to individuals have also been changed. The table below shows the change in risk weighting requirements:
Earlier Risk weighting requirements[4]
| Outstanding Loan | LTV ratio (%) | Risk Weight (%) |
| Upto Rs. 30 lakhs | <=80 | 35 |
| >80 and <=90 | 50 | |
| Above Rs. 30 lakhs and upto Rs. 75 lakhs | <=80 | 35 |
| Above Rs. 75 lakhs | <=75 | 50 |
Revised requirement:
| LTV ratio (%) | Risk Weight (%) |
| <=80 | 35 |
| >80 and <=90 | 50 |
Under the existing regulations, differential risk weights are assigned to individual housing loans, based on the size of the loan as well as the loan-to-value ratio (LTV). In order to rationalise the risk weights, the regulator has linked them to LTV ratios only for all new housing loans sanctioned up to March 31, 2022. This measure is expected to give a fillip to the real estate sector. However, the determination of LTV is still linked to the size of the loan[5]. Hence, there is only a minimal change with this revision of limits, which is not likely to have much impact on housing loans extended by banks.
Loans co-originated by banks and NBFC-SIs were allowed to qualify for priority sector lending targets[6]. The RBI has now allowed loans co-originated by banks with NBFC-NSIs and HFCs as well for qualifying as priority sector loans. The detailed guidelines in this regard are awaited.
There already exist co-lending arrangements between banks and smaller NBFC and HFCs, however, they are not regulated by any specific guidelines. Though in spirit most of these arrangements are structured in accordance with the existing guidelines for NBFC-SI, however, some of the norms may be a challenge to implement- one of them being the minimum risk sharing of 20% by way of direct exposure by the NBFC.
These steps introduced by the RBI are not exactly a major move taken by the regulator, however, several such changes may have an impact in the long run. Further, the inclusion of NBFC-NSIs and HFCs in the scope of co-origination guidelines is a welcome move and is expected to work in the benefit of smaller NBFCs and HFCs.
[1] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50480
[2] Refer: https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=4353
[3] Refer: https://www.bis.org/publ/bcbs128b.pdf
[4] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10995&Mode=0
[5] Refer: https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9851
[6] Refer: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11376&Mode=0
Qasim Saif | Executive
Perpetual Non-Cumulative Preference Shares (PNCPS’) and Innovative Perpetual Debt Instruments (IPDIs) / Perpetual Debt Instruments (PDIs) (commonly referred to as AT1 instruments) are a kind of perpetual bonds without any redemption date that banks issue to meet their long term capital as well as their Additional Tier-I capital requirements. These instruments are treated as quasi-equity instruments, providing a unique blend of characteristics, that is, coupling the perpetual availability of funds with fixed periodic payments.
Despite having unique characteristics, the AT1 bonds are seen with distrust by investors because such instruments are more likely to default and in some circumstances carry more risk of non-repayment than equity. The return on such bonds is higher than tier 2 bonds however is significantly lower than the return on equity.
Recently, the AT1 bonds were all over the news when the Reserve Bank of India wrote down the liability towards the AT1 bonds issued by Yes Bank, without affecting the equity shareholders, resulting in a large number of people, including senior citizens, losing their savings who were lured to invest in AT1 bonds instead of fixed deposits, with a promise to pay higher returns. Our detailed write-up on this topic can be viewed here.
This write-up, however, deals with the recent changes brought in by SEBI for the listing of AT1 bonds.
Though the AT1 Bonds are regulated by RBI guidelines issued in consonance with Basel III norms, however public issues and listing of these bonds are regulated by SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013.
SEBI on October 6, 2020,[1] issued a circular containing additional guidelines in regards to the issuance, listing and trading of AT1 Instruments. The additional guidelines are based on recommendations of the Corporate Bonds and Securitization Advisory Committee set up by SEBI. The Circular shall come into force with effect from October 12, 2020.
The additional guidelines prescribed and its analysis is as follows-
SEBI vide circular dated January 05, 2020,[2] mandated issuance of debt securities exceeding rupees two hundred crores to be undertaken through the electronic book building platform (“EBPF”). Now, SEBI has mandated that the issuance of AT1 instruments shall be compulsorily done through EBPF irrespective of the issue size.
Further, the January 2020 Circular did not include AT1 bonds, however, the October Circular has specifically included AT1 bonds within its ambit.
EBPF is deployed in large size issue because of the novelty of the system and higher cost as compared to other alternatives. However, the latest amendment on the use of EBPF irrespective of the issue size will increase smaller issuances costly, therefore, making them unviable.
The most important change is that now only QIBs shall be allowed to participate in the issuance of AT1 bond; retail and other non-QIB investors have been excluded from the list of eligible investors to AT1 bonds. The amendement is made with an intent to safeguard the retail investors from the risk possed by such instruments, as these complex instruments carry certain risk that are not generally not understood by the common people
The QIBs are better equipped for analyzing potential risk and whether or not such issuance is worth investing compared to other classes of the investor, this would hence form the first line of defense to protect the other investors, who would be benefited with skills and resources of QIBs.
This change however directly conflicts with the RBI Guidelines on this issue, which allows banks to issue AT1 bonds to retail investors with permission of its board via amendments to implementation of Basel III Capital Regulations in Indian on date September 1, 2014[3]
In any event, if the AT1 bonds are taken for listing, the conditions under SEBI Circular will have to be fulfilled and therefore, the issuances shall have to be restricted to QIBs only.
It shall be noted that the restriction is only on the issuance of securities and non-QIB investors can still purchase the securities from the open market.
However, there might be still concerns that such QIBs might engage in selling securities by misleading investors as it was alleged in the case of Yes Bank.
SEBI has further specified the minimum allotment of AT1 instruments shall not be less than rupees one crore and further the minimum trading lot is also fixed at rupees one crore.
As mentioned above that though retail investors may not be able to participate in issuances, they might purchase the bonds from stock markets, to further deter retail investment in such instruments the trading lot has also been fixed at rupee one crore.
The fixing of minimum allotment size may not be of major importance as the issuance would only be to QIBs who, usually invest larger sums of money, however, minimum allotment size is generally kept in parity with trading lot size to create a uniform lot of securities and avoid forming of odd lots, hence fixing of minimum allotment size is mainly to bring it with parity with trading lot size.
Issuers of AT1 bonds are required to make disclosures as prescribed under Schedule I of SEBI (NCPRS) Regulations, in addition to that the issuer shall now have to make disclosures that are prescribed under Annex I and provisions of circulars mentioned in Annex II of the October Circular.
Along with that specific disclosures about the following shall have to be made in the offer document:
These additional disclosures will give the investors a better understanding of the instrument and what they are signing up for.
The majority of additional guidelines are in respect of securities that would be now be issued hence would have no impact on bonds already issued/listed on securities market. However, the conditions with respect the trading lot could impact the holders of AT1 bonds as they might have investments, not in multiple of one crore, which might result in the creation of odd lots.
Generally, special windows are provided by stock exchanges where investors can sell their odd lots to the market maker, intermediaries, or other concerns hence a special window, in this case, might be provided to deal with odd lots that might be created due to additional guidelines.
Given the tone of the changes made by the SEBI, it is very clear that the changes are highly inspired by the events that led to retail investors burning their hands in the case of Yes Bank. Most of the changes seem to carry the intent of deterring the retail investors from investing in these securities. The following paragraph from the circular makes the situation clear:
“Given the nature and contingency impact of these AT1 instruments and the fact that full import of the discretion is available to an issuer, may not be understood in the truest form by retail individual investors.”
Additional guidelines would without doubt restrict retail investment in AT1 bonds however, the added conditions in likelihood would jeopardize whatever little interest investors had on this product. Though the protection of investors is a goal of SEBI, so is the promotion of capital markets in India; hence, the regulation might be welcomed on the investor protection front but there are serious doubts on how good it will do for the development of the AT1 bonds market in India.
Links to related articles –
https://vinodkothari.com/2020/03/at1-bonds-blessed-with-perpetuity-or-cursed-with-mortality/
[1] https://www.sebi.gov.in/legal/circulars/oct-2020/issuance-listing-and-trading-of-perpetual-non-cumulative-preference-shares-pncps-and-innovative-perpetual-debt-instruments-ipdis-perpetual-debt-instruments-pdis-commonly-referred-to-as-additi-_47805.html
[2] https://www.bseindia.com/downloads1/SEBI_EBP_Circular_Jan_5_2018.pdf
[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9202&Mode=0
Watch our YouTube video on AGM extension – https://www.youtube.com/watch?v=5DNOJDB9o0k
Watch our YouTube video on AGM extension – https://www.youtube.com/watch?v=5DNOJDB9o0k
