ATI bond case-SAT
- November 10, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
ATI bond case-SAT
The Securities Appellate Tribunal (SAT) has granted the Securities and Exchange Board of India (Sebi) three weeks to file its response in a case related to its order on mis-selling additional tier-1 (AT1) bonds.
- AT-1 bonds are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms.
- These bonds were introduced by the Basel accord after the global financial crisis to protect depositors.
- There are two routes through which these bonds can be acquired:
- Initial private placement offers of AT-1 bonds by banks seeking to raise money.
- Secondary market buys of already-traded AT-1 bonds.
- These bonds are also listed and traded on the exchanges. So, if an AT-1 bondholder needs money, he can sell it in the secondary market.
- Investors cannot return these bonds to the issuing bank and get the money. i.e there is no put option available to its holders.
- The issuing banks have the option to recall AT-1 bonds issued by them (termed call options that allow banks to redeem them after 5 or 10 years).
- Banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value.
- These bonds are perpetual in nature — they do not carry any maturity date.
- They offer higher returns to investors but compared with other vanilla debt products, these instruments carry a higher risk as well.
- These bonds are subordinate to all other debt and senior only to equity.
- Basel-III-compliant AT 1 bonds come with a built-in ‘loss absorbency’ clause which means that in case of stress, banks can write off such investments or convert them into equity.
- The principal loss absorption (through write-down or conversion into equity shares) can be triggered by pre-specified trigger of CET1 falling below 5.5 per cent before March 2019 and 6.125 per cent thereafter.
- At the instance of the RBI, bonds can also be written down upon a point of non-viability (PONV) event happening.
- The PONV trigger event is the earlier of a) decision that a conversion or write-off, without which the firm would become non-viable, is necessary, b) decision to make a public sector injection of capital, or equivalent support, without which the firm would have become non-viable.
- The norms also state that if the authorities decide to reconstitute a bank or amalgamate a bank with any other bank under Section 45 of BR Act, 1949, then such a bank will be deemed as non-viable or approaching non-viability.
- If the bank reaches the point of non-viability, AT1 bonds are the first part of debt that will be written down.
Securities Appellate Tribunal (SAT)
- It is a statutory body created under the provisions of the SEBI Act, 1992.
- The Securities Appellate Tribunal has only one bench which sits in Mumbai.
- Jurisdiction: It has jurisdiction over the whole of India.
- Composition of the SAT: It consists of a Presiding Officer and two other members.
- Appointment of the Presiding Officer: by the Central Government in consultation with the Chief Justice of India or his nominee.
- Powers: SAT has powers similar to a civil court. Appeals from its orders can be challenged in the Supreme Court.
- Key Functions:
- To hear and dispose of appeals against orders passed by the Securities and Exchange Board of India (SEBI) or by an adjudicating authority under the Act.
- To exercise jurisdiction, authority and powers conferred on the SAT by or under this Act or any other law for the time being in force.
- To hear and dispose of appeals against orders passed by the Pension Fund Regulatory and Development Authority (PFRDA).
- To hear and dispose of appeals against orders passed by the Insurance Regulatory Development Authority of India (IRDAI).