“The aggregate value of AT1 (additional tier one) bonds held in a particular bank, at any point of time, shall not excess 10% of the total outstanding AT1 bonds of that particular bank,” Insurance Regulatory Development Authority of India (IRDAI) said late Wednesday.
Earlier, the cap was meant for any particular primary issuance of those bonds, popularly known as perpetual papers.
AT1 bonds have no fixed maturities and are raised to shore up the capital base. These quasi-equity securities yield much higher returns than traditional bonds as the risk is also larger.
This means, an insurer could immediately invest up to Rs 100 crore of a Rs 1,000-crore AT1 bond sale by a bank. Assuming total outstanding stock of the bank’s perpetual papers is at Rs 10,000 crore, going by the current rule, the same insurer can now subscribe to the whole primary issue of Rs 1,000 crore.
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The insurance regulator also clarified on categories of bonds issued by banks, possibly clearing the air over investments following the proposed merger of and Ltd. The home financier has a large book of outstanding bonds, classified as “infrastructure and affordable”. The merger would have culminated in breaching the sector exposure limit set for insurers that traditionally invest in those debt securities.
“Long term bonds by banks for financing of infrastructure and affordable housing shall not be part of exposure of BFSI,” IRDAI said.
Besides, an insurer can subscribe to AT1 securities if an issuing bank would have reported net profits in two preceding consecutive years without recording any divergence in asset classification and provisioning, identified by the Reserve Bank of India.
Earlier, the benchmark was only linked to two consecutive years of bonus declaration of an issuing bank. The latest addition of a profit clause widens the universe of potential investments.
“Bonus declaration is regulated by the RBI for which you cannot hold the bank responsible,” said an industry veteran, citing the pandemic during which the banking regulator barred banks from declaring dividends.
The insurance regulator sought to break the dominance of solely sponsored investment trusts as it made a compulsory limit of public shareholding in those triple-A rated hybrid instruments.
“The public holding in the InvITs/REITs shall not be less than 30% of total outstanding units of the InvIT/REIT at the time of investment,” IRDAI said.
No insurer shall invest more than 20% of the outstanding of debt instruments in a single InvIT/REIT, it said.