Banks in India have again began raising capital through issuance of long-term bonds compliant with Basel-III norms. The norms mandating that bondholder shall not receive the priority status in case of liquidation of the issuer of the bond and rather bondholder shall be automatically converted into equity holder and bear the losses. Such a mandate renders such unsecured long-term bonds issued by banks highly risky and uncertain with respect to principal and interest aspects for the investors. Seeking the reluctance of investors, banks shunned to raise capital through the debt route.

However, LIC's role has been cited as instrumental in the resurgence of the bank bond outlook. And in one of the media reports Jitendra Arora, Senior VP-Investments, ICICI Prudential Life Insurance Co Ltd. was quoted saying " The recent issuances have happened mostly because LIC has agreed that in case of liquidation, the value of the bond can be written down. Other investors will come on board only when credit spreads ease because it is still more lucrative to invest in the sovereign bond rather than companies".

As bondholders in the event of liquidation are provided with two options i.e. to write down the bond value or allow its conversion into equity. United Bank of India, Bank of India, Central Bank of India and Bank of Baroda raised capital through issuance of long-term bonds only recently.

Union Bank of India on Friday raised Rs. 2000 crore by issuing unsecured redeemable non-convertible tier-II bonds compliant with the global Basel-III norms. The bonds with a 10-year tenor shall carry a fixed coupon rate of 9.8% p.a. Other banks including, State Bank of India (SBI), the largest public-run bank of India, also plan to raise an additional capital of Rs. 5000 crore through the issuance of tier-II bonds till the end of the FY 2013-2014.

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