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Additional Tier I Instruments issued by Banks

Finsec Law Advisors

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SEBI on December 18, 2015, released a consultation paper on additional disclosure norms for retail/public issuance of "Additional Tier 1 (ATI) instruments issued by banks". Previously, RBI through a circular dated September 01, 2014, had allowed banks to issue AT1 instruments to retail investors. AT1 instruments are traditionally a form of capital and Indian banks, in the recent years, have been seeking to raise more capital to meet Basel-III capital requirements. However, prior to the RBI circular, AT1 instruments were issued to sophisticated institutional investors. Given the sheer magnitude of the funds that Indian banks need to raise to meet Basel-III norms, the RBI has allowed banks to tap into retail investors, as well. However, RBI is mindful of the fact that retail investors may not fully appreciate the characteristics of AT1 instruments and may not fully understand the risks involved in investing in them. Accordingly, the RBI in its Master Circular on Basel-III Capital Regulations dated July 01, 2015, specified certain additional disclosure requirements for issuance of perpetual non-cumulative preference shares and perpetual debt instruments, which form a part of the AT1 instruments. SEBI had issued the SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 to facilitate the issuance of these instruments by banks, financial institutions and certain other companies.

In view of the fact that AT1 instruments carry additional risks compared to other debt instruments, such as risk of loss of coupon and principal, SEBI has proposed that only well informed retail investors with adequate risk tolerance levels subscribe to these instruments, and it has proposed a minimum amount of investment of Rs. 2 lakh for retail investors. SEBI has also proposed certain additional disclosures in the abridged prospectus to be issued, about the risk characteristics of such instruments. It has proposed that issuers clearly specify that the return on AT1 instruments may be influenced by bank's performance and the principal amount invested may be subject to losses due to loss absorbency features, and that they are significantly different from term deposits offered by banks.

The opening up of this sector for retail investors is a commendable initiative by the RBI as it would help retail investors to invest in a new asset class and participate in the growth of Indian banks. The proposals mooted in the paper help clarify the nature of risks involved in investing in these instruments without creating too much of a burden for issuers.