Additional Tier-1 (AT1) bonds

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    • Recently, the Bombay High Court Friday quashed the write-off of Additional Tier-1 (AT1) bonds issued by Yes Bank Ltd.

    More about the news

    • SEBI investigation:
      • A Sebi probe found that the bank facilitated the selling of AT1 bonds from institutional investors to individual investors. 
      • It found that during the process of selling the AT1 bonds, individual investors were not informed about all the risks involved in the subscription of these bonds
    • Super FD’ and ‘as safe as FD’:
      • The Sebi investigation also found that Yes Bank represented these bonds as a ‘Super FD’ and ‘as safe as FD’ to the investors.
    • Reckless selling of the bonds:
      • SEBI also found that the push from the managing director of Yes Bank to down-sell the AT1 bonds led its private wealth management team to recklessly sell the bonds to individual investors.

    More about the Additional Tier-1 AT1 bonds

    • AT1 bonds are unsecured bonds that have perpetual tenor. 
      • In other words, these bonds, issued by banks, have no maturity date. 
      • They have a call option, which can be used by the banks to buy these bonds back from investors. 
    • These bonds are typically used by banks to bolster their core or tier-1 capital.
    • AT1 bonds are subordinate to all other debt and only senior to common equity. 
    • Mutual funds (MFs) were among the largest investors in perpetual debt instruments.

    More about the Bonds

    • Meaning:
      • A bond is simply a loan taken out by a company. 
      • Instead of going to a bank, the company gets the money from investors who buy its bonds. 
      • Interest coupon:
        • In exchange for the capital, the company pays an interest coupon, which is the annual interest rate paid on a bond expressed as a percentage of the face value. 
      • Interest:
        • The company pays the interest at predetermined intervals (usually annually or semiannually) and returns the principal on the maturity date, ending the loan.
    • Significance:
      • The bond market can help investors diversify beyond stocks.
      • Some of the characteristics of bonds include their maturity, their coupon (interest) rate, their tax status, and their callability.
    • Stock vs. Bonds:
      • Safer:
        • When bonds and stocks are compared, bonds are considered to be a safer investment. 
          • It is important to note that bonds are not completely risk-free and only receive preference in case of bankruptcy.
      • Less volatility:
        • Owning a stock offers more potential for returns, but bonds come with much less downside volatility. 
        • Bond investments play a key role in balancing and reducing the short-term volatility associated with stocks.
      • Larger market:
        • The bond market is actually much larger than the stock market, in terms of aggregate market value.
    • Risks:
      • Several types of risks associated with bonds include interest rate risk, credit/default risk, and prepayment risk.
    • Bond Ratings:
      • Most bonds come with a rating that outlines their quality of credit. 
      • That is, how strong the bond is and its ability to pay its principal and interest. Ratings are published and are used by investors and professionals to judge their worthiness.
      • Rating agencies:
        • The most commonly cited bond rating agencies are Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings. 
        • They rate a company’s ability to repay its obligations. 
      • Ratings range:
        • Ratings range from AAA to Aaa for high-grade issues very likely to be repaid to D for issues that are currently in default.
    • Types of Bonds:
      • Central Government Bonds:
        • As they are issued by the government, central government bonds carry the sovereign guarantee. 
        • This makes them one of the safest types of bonds. However, these bonds are exposed to inflation rate risk due to the long maturity period. 
      • State Government Bonds:
        • State Government bonds are also known as state development loans (SDLs). 
        • They are issued by state governments to fund infrastructural developments in the state or during liquidity crunch etc.
      • Public Sector Bonds:
        • These bonds are mostly issued by top public sector companies or institutions to fund their growth and expansion needs. 
        • They are relatively less risky than corporate bonds.
      • Corporate Bonds:
        • Corporate bonds are issued by private companies. They represent a large portion of the bond market in India. 
        • By issuing corporate bonds, companies can raise capital at a low cost.

    Securities and Exchange Board of India (SEBI)

    • About:
      • SEBI is a statutory body established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
        • Before SEBI came into existence, Controller of Capital Issues was the regulatory authority; it derived authority from the Capital Issues (Control) Act, 1947.
    • Aim: 
      • To protect the interests of investors in securities and to promote the development of, and regulate the securities market.
      • It is the regulator of the securities and commodity market in India owned by the Government of India.
    • Statute:
      • Initially SEBI was a non statutory body without any statutory power.
      • It became autonomous and given statutory powers by SEBI Act 1992.

    Source: TH