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With reference to the Additional tier-1 (AT-1) bonds, consider the following statements:
- These are a type of perpetual bonds issued by the banks to improve their core capital base.
- These are regulated by the Securities and Exchange Board of India.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
With reference to the Additionaltier-1 (AT-1) bonds, consider the foll...
Statement 1: These are a type of perpetual bonds issued by the banks to improve their core capital base.
Additional Tier-1 (AT-1) bonds are indeed a type of perpetual bonds issued by banks to enhance their core capital base. Perpetual bonds are bonds with no maturity date, meaning they have an indefinite tenure. They are included in a bank's Tier-1 capital, which is the core capital that primarily consists of common equity and retained earnings.
AT-1 bonds provide banks with a way to raise funds from the market to meet their capital requirements. These bonds have a higher risk profile compared to other debt instruments as they can be written down or converted into equity if the bank's capital falls below a certain threshold. This makes them more attractive to investors seeking higher yields but also exposes them to greater risk.
Statement 2: These are regulated by the Securities and Exchange Board of India.
This statement is incorrect. AT-1 bonds in India are regulated by the Reserve Bank of India (RBI) and not by the Securities and Exchange Board of India (SEBI). The RBI is the central banking institution of India and is responsible for the oversight and regulation of banks and financial institutions in the country.
The RBI has set certain guidelines and regulations for the issuance and servicing of AT-1 bonds. These guidelines govern aspects such as the eligibility criteria for banks to issue AT-1 bonds, the minimum maturity period, the features and terms of the bonds, the treatment of interest payments, and the conditions for write-down or conversion of the bonds.
In conclusion, only statement 1 is correct. AT-1 bonds are perpetual bonds issued by banks to improve their core capital base, but they are regulated by the Reserve Bank of India and not by the Securities and Exchange Board of India.
Additional Tier-1 (AT-1) bonds are indeed a type of perpetual bonds issued by banks to enhance their core capital base. Perpetual bonds are bonds with no maturity date, meaning they have an indefinite tenure. They are included in a bank's Tier-1 capital, which is the core capital that primarily consists of common equity and retained earnings.
AT-1 bonds provide banks with a way to raise funds from the market to meet their capital requirements. These bonds have a higher risk profile compared to other debt instruments as they can be written down or converted into equity if the bank's capital falls below a certain threshold. This makes them more attractive to investors seeking higher yields but also exposes them to greater risk.
Statement 2: These are regulated by the Securities and Exchange Board of India.
This statement is incorrect. AT-1 bonds in India are regulated by the Reserve Bank of India (RBI) and not by the Securities and Exchange Board of India (SEBI). The RBI is the central banking institution of India and is responsible for the oversight and regulation of banks and financial institutions in the country.
The RBI has set certain guidelines and regulations for the issuance and servicing of AT-1 bonds. These guidelines govern aspects such as the eligibility criteria for banks to issue AT-1 bonds, the minimum maturity period, the features and terms of the bonds, the treatment of interest payments, and the conditions for write-down or conversion of the bonds.
In conclusion, only statement 1 is correct. AT-1 bonds are perpetual bonds issued by banks to improve their core capital base, but they are regulated by the Reserve Bank of India and not by the Securities and Exchange Board of India.
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With reference to the Additionaltier-1 (AT-1) bonds, consider the foll...
The underwhelming subscription to State Bank of India’s additional tier-1 (AT-1) bond issue has dampened market sentiment and is expected to make fund-raising harder for other PSU banks.
- These are a type of unsecured, perpetual bonds that banks issue to improve their core capital base.
- The money raised through these bonds is kept aside as a shock absorber by the bank.
- They have a call option, which can be used by the banks to buy these bonds back from investors.
- These bonds were created in the wake of the 2008 financial crisis to absorb the losses.
- These bonds are also called contingent convertible bonds or CoCos.
- These bonds are also mandatory under Basel=III norms.
- The banks must maintain capital at a minimum ratio of 11.5 per cent of their risk-weighted loans. Of this, 9.5 per cent needs to be in Tier-1 capital. AT1 bonds fall under this type of capital.
- These bonds are long-term and do not carry any maturity date. Because of a higher risk, they offer a higher yield.
- Regulation: In India AT-1 bonds are regulated by the Reserve Bank of India (RBI).
Hence only statement 1 is correct.
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