“The aggregate value of AT1 (Extra Tier One) bonds in a particular bank at any point of time shall not exceed 10% of the total outstanding AT1 bond of that particular bank, “Insurance Regulatory Development Authority of India (IRDAI) said late Wednesday night.
Earlier, this limit was for a particular primary issue of bonds which are popularly known as perpetual papers.
AT1 bonds have no fixed maturity and are raised to increase the capital base. These quasi-equity securities offer much higher returns than traditional bonds because the risk is also greater.
This means that an insurer can invest up to Rs 100 crore immediately on sale of AT1 bonds worth Rs 1,000 crore by a bank. Assuming that the total outstanding stock of the bank’s permanent papers is Rs 10,000 crore, as per the extant rule, the same insurer can now subscribe to the entire primary issue of Rs 1,000 crore.
The insurance regulator also clarified on the categories of bonds issued by banks, possibly and cleared the air on investments following the proposed merger of Ltd. The home financier has a large book of outstanding bonds, classified as “infrastructure and affordable.” The merger would result in breaching the sector exposure limits set for insurers who traditionally invest in those debt securities.
“Long term bonds by banks for financing infrastructure and affordable housing will not be part of the exposure of BFSI,” IRDAI said.
In addition, an insurer can subscribe to AT1 securities if an issuing bank has reported net profit in the previous two years without recording any deviation in asset classification and provisioning, which is reserve Bank of India,
Earlier, the benchmark was linked to the bonus announcement of only one issuing bank for two consecutive years. The latest addition of a profit clause widens the universe of potential investments.
“The bonus announcement is regulated by the RBI, for which you cannot hold the bank responsible,” said an industry veteran, citing the pandemic.
The insurance regulator sought to break the dominance of fully sponsored investment trusts as it made mandatory limits on public stake in those triple-A rated hybrid instruments.
“The public holding in InvITs/REITs should not be less than 30 per cent of the total outstanding units of InvITs/REITs at the time of investment,” IRDAI said.
It states that no insurer shall invest more than 20 per cent of the outstanding debt instruments in any one invitation/REIT.