On October 6, 2020, the Securities and Exchange Board of India (“SEBI”) issued a circular with respect to 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 Additional Tier 1 (AT 1) Instruments) (“Circular”).

The Circular is issued in exercise of powers under Section 11(1) of Securities and Exchange Board of India Act, 1992 read with Regulations 23(5) and 26 of the SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013 (“NCRPS Regulations”), and is based on recommendations of the Corporate Bonds and Securitization Advisory Committee set up by SEBI. The Circular shall be applicable with effect from October 12, 2020.

Background:

AT 1 Instruments are non-equity regulatory capital instruments, issued by banks to meet their long-term capital requirements. The instruments are governed by Reserve Bank of India (“RBI”) and issued under the issuance and listing framework provided under Chapter VI of NCRPS Regulations.

AT1 Instruments have various unique characteristics, including inter alia, at the discretion of the issuing bank, in consultation with RBI, to write-down the principal / interest towards the instruments, to skip interest payments, to make an early recall, without commensurate right for investors to legal recourse, even if such actions of the bank might result in potential loss to investors.

Key Points:

1. Issuance through electronic book building platform: SEBI vide circular No. SEBI/HO/DDHS/CIR/P/2018/05 dated January 05, 2018 and SEBI/HO/DDHS/CIR/P/2018/122 dated August 16, 2018, mandated usage of an Electronic Book Provider (“EBP”) platform for issuance of debt securities on private placement basis. EBP means a recognized stock exchange or a recognised depository, which pursuant to obtaining approval from SEBI, provides an electronic platform for private placement of securities. SEBI has now mandated that:

a) issuance of AT1 Instruments shall be done through EBP platform irrespective of the issue size; and

b) the term ‘Securities’ defined under the circulars shall be restricted to AT1 Instruments, for the purpose of the Circular.

2. Investors: Only qualified institutional buyers shall be allowed to participate in the issuance of AT1 Instruments.

3. Allotment size and Trading lot size: Minimum allotment and minimum trading lot size of AT1 Instruments shall not be less than Rs.1 crore.

4. Disclosure requirements: Banks shall be required to make the following disclosures, including those specified in Schedule I of NCPRS Regulations:

a) as specified in Annex I to the Circular.

b) details of all the conditions upon which the call option will be exercised by them for AT1 Instruments, in the information/private placement memorandum.

c) risk factors, which include all the inherent features of AT1 Instruments.

d) Point of Non Viability (“PONV”) clause: The absolute right, given to the RBI, to direct a bank to write down the entire value of its outstanding AT1 Instruments, if it thinks the bank has passed the PONV, or requires a public sector capital infusion to remain a going concern.              

Additionally, banks shall also comply with the provisions of circulars as specified in Annex II to the Circular.

Please find a copy of the Circular here.

This update has been contributed by Suchita Ambadipudi (Partner) and Mitali Jain (Associate).