Explained About At1 Bonds

Additional Tier 1 is a perpetual bond. Perpetual bonds are bonds without any maturity date. Thus, it can be treated and viewed as equity and not as debt. These are exceptional bonds where investors do not get the principal amount back, and interest payments never cease hypothetically. Perpetual bonds are known as fixed-income securities. Additional Tier 1 bonds involve high risks. Banks write such bonds under the Reserve Bank of India (RBI) directions. If the bank institution fails, these bonds are at risk. Banks raise money by issuing Additional Tier 1 bonds at certain intervals. 

Everything Explained About At1 Bonds

Various features make these perpetual bonds different from other basic bonds. They do not have any maturity date. Banks have the facility and authority to call and redeem the amount every five or ten years. Banks can also choose only to pay interest on AT1 bonds for an infinite duration. It is the choice of banks to skip giving interest for a specific year or to decrease the face value of the bond without any sort of difficulty with the investors. There are various situations in which the Reserve Bank of India gives guidelines to the banks regarding AT1 bonds. If RBI finds after proper analysis that the bank is in an unstable condition, under pressure, and in a condition where it requires a rescue, it asks the banks to withdraw their outstanding Additional Tier 1 bond without seeking permission from investors. AT1 bonds are quite complex and hybrid. They are ideal for smart and experienced investors who can easily decode their terms using their knowledge and properly analyse whether the higher rates compensate for higher risks. These perpetual bonds are sold to numerous retail investors in India as NCD substitutes or as fixed deposits. Additional Tier 1 bonds possess a ₹ 10 Lakh face value on every bond. The AT1 bonds are lower than all the other debts, but they are at a senior position than common equity. According to a few new and crucial guidelines and rules in India, a bank must maintain the capital of at least an 11.5 per cent ratio of their loans. Of these, 9.5 percent is required to be Tier 1 capital, and 2 percent is required to be Tier 2 capital. 

YES Bank and SBI bank perpetual bonds

Additional Tier 1 bonds of YES bank were recorded in written form as zero in March 2020. The regulators in the market had accused that serious misrepresentation of data had taken place. They also accused the fraud in YES bank bonds as the investors were not informed well about the risk factors while giving the facility of Additional Tier 1 bond sale in the secondary market. The Securities Appellate Tribunal (SAT) has directed the Securities and Exchange Board of India (SEBI) to submit a reply maximum within four weeks. After this, YES bank needs to submit a rejoinder in the next three weeks. As per the SAT website, the case of YES bank bonds was posted for final disposal on July 31, 2021. State Bank of India, in the year 2021, raised ₹4,000 crores by selling SBI perpetual bonds AT1. This sale by SBI, which is the largest lender in the nation, impacted the market positively and even provided liquidity. The SBI, perpetual bonds event, prompted other lenders to go for the local market rather than going global. 

Conclusion: 

Generally, investors in the market get attracted to higher returns through Additional Tier 1 bonds. The returns via traditional fixed deposits are not that high. Banks keep raising money by generating such bonds after certain intervals. Lenders even pitch for these perpetual bonds to investors and convince them to invest as it has multiple benefits. Before the YES bank bonds episode, investors were investing significantly via such schemes in India. Now, expert investors view these bonds with caution.