On Tuesday, the Securities and Exchange Board of India (SEBI) mandated the usage of electronic book mechanism for issuance of Additional Tier 1 (AT1) instruments, irrespective of the issue size.
Perpetual non-cumulative preference shares, innovative perpetual debt instruments and perpetual debt instruments, commonly referred to as AT1 instruments, are essentially non-equity regulatory instruments, forming part of a bank's capital.
Such instruments are governed by the Reserve Bank of India (RBI) guidelines and issued under SEBI's issuance and listing framework.
Issuers and stock exchanges will now have to ensure that only Qualified Institutional Buyers (QIBs) are allowed to participate in the issuance of AT1 instruments, the regulator said in a circular.
The decision has been taken based on the recommendations of the Corporate Bonds and Securitization Advisory Committee (CoBoSAC).
The instruments have certain unique features which grant the issuer (banks in consultation with RBI) a discretion in terms of writing down the principal or interest, to skip interest payments, to make an early recall, among others, without commensurate right for investors to legal recourse.
The market regulator said that retail investors may be able to fully understand the risks associated with these types of instruments.
"Given the nature and contingency impact of AT1 instruments and the fact that full import of the discretion is available to an issuer, it may not be understood in the truest form by retail individual investors," SEBI noted.
The direction will come into force with effect from 12 October.