AT1 bonds are a type of perpetual debt instrument that do not carry any maturity date
The government is considering relaxing valuation rules for additional tier-I, or AT-I, bonds, according to a livemint report. It will make the AT-1 bonds more attractive to investors and will make it easier for banks to raise funds from the domestic market.
The finance ministry’s Department of Financial Services has begun discussions to ease valuation norms, as there is a broad understanding in favour of aligning the valuation of the perpetual bonds with global practices, instead of treating them as having a 100-year maturity, according to the livemint report quoting two people aware of the development. It is to ensure that AT-I bonds remain a viable fundraising option.
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What Are AT-1 Bonds?
AT1 bonds are a type of perpetual debt instrument that do not carry any maturity date. Banks use them to augment their core equity base and thus comply with Basel-III norms. These bonds were introduced by the Basel accord after the global financial crisis to protect depositors.
Are AT-1 Bonds Safe for Investors?
The AT-1 bonds are seen as high-risk instruments, as these bonds can be written down by banks under the directions of the Reserve Bank of India (RBI) in the event of an institutional failure. AT1 bonds are usually the first part of a bank’s overall debt that will be written down in case of non-viability.
Last week, the Supreme Court stayed the Bombay High Court order which had set aside the writing down of Yes Bank’s AT-1 bonds of more than Rs 8,300 crore in January. The apex court also issued a notice to bondholders.
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The Bombay High Court quashed a decision taken by the Yes Bank Administrator on March 14, 2020, to write off Additional Tier 1 (AT-1) bonds noting the Administrator did not have the authority to take such a decision.
AT1 bonds worth Rs 8,414 crore were written off fully during the Yes Bank reconstruction scheme in March 2020.
