Stock Market Regulator – SEBI Restrict Individual from Purchasing the Riskier Kind of Bank Bond

By Swati Mishra

The country’s capital market regulator, Security and Exchange Board of India (SEBI) is barring individual investors from buying a riskier type of bank bond, citing the need to protect non-professional and immature buyers.

As per the SEBI statement in circular late Tuesday, from October 12, only qualified institutional buyers can procure the bank’s Additional Tier 1 (AT1) note. It is SEBI’s responsibility to protect buyers who have not professional in the business of selling and buying stock. This step will help them to understand the nuances of risk which used to occur in the stock market.

Usually, in the phase of global crisis or recession, this type of bond is presented by the regulators to capture the market and looking for the buyers so that they can 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 that mean 1.2 billion dollars of such debt sold by the Yes Bank Ltd. in the first action of its kind of domestic authorities. The move followed the nation’s biggest-ever bank rescue involving that lender.

Banks are facing severe financial debt due to the pandemic. It can not be said that the condition of banks was good before the period of the pandemic outbreak. Banks are already saddled with some of the world’s highest bad-debt piles and need to raise billions of dollars so that they could boost the capital buffers. In this perspective, they search for small investors or buyers to reduce their debt burden. Not only banks but businesses are also hit by the coronavirus pandemic and the whole inverse situations are threatening them to increase bad loans.

AT1 bonds can be written off if certain triggers are breached, and lenders can skip interest payment or call the notes early if that result in losses for investors. Those kinds of features “may not be understood in the honest form by a retail individual investor,” the regulator added Tuesday.

In order to secure the new buyer from the unnecessary and intentional burden, the regulator also instructed that banks offer AT1 debt exclusively via electronic book-building platform disregarding 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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