Sebi proposes new norms for public issue of InviTs, AT1 bonds

Heralding new avenues for raising funds, markets regulator Sebi today proposed fresh norms for retail issuance of 'core capital' instruments by banks and for the public issue of Infrastructure Investment Trusts (InviTs).
The proposed norms for retail or public issuance of Additional Tier-1 or AT1 capital instruments, which are considered to be core measure of a bank's financial strength from a regulatory viewpoint, seek to keep very small investors out of its purview by keeping the minimum amount of investment at Rs 2 lakh.
Sebi said AT1 instruments carry additional risks in relation to vanilla debt instruments such as risk of loss of coupon as well as principal, in certain circumstances.

"In view of the same, it is proposed that in order to ensure that only well informed retail investors with adequate risk tolerance level subscribe to these instruments, a minimum amount of investment, for example Rs 2 lakh, may be prescribed for such instruments," Sebi said in its draft norms.
RBI had last year allowed banks to issue AT1 instruments to retail investors, but it was felt that the retail investors may not fully appreciate the characteristics of these instruments.
In view of the same, a need was felt to look into the aspect of prescribing additional disclosure norms for retail issuance of Perpetual Non-Cumulative Preference Shares (PNCPS) and Perpetual Debt Instruments (PDIs) issued by banks.

Subsequently, Sebi's Corporate Bonds and Securitization Committee (CoBoSAC) deliberated on the additional requirements and disclosures to be made by banks for retail issuance of AT1 instruments. The proposed norms have been formulated as per the suggestions of this committee.

The final norms would be put in place after taking into account public comments, which have been invited till January 5.
The proposed norms for the public issuance of InviTs
relate to appointment of merchant bankers, disclosures in the offer documents, filing of draft papers and keeping them in the public domain for at least 21 days.
In an issue made through the book building process or otherwise, the allocation in the public issue should be maximum 75 per cent to qualified institutional buyers (QIBs) and at least 25 per cent to other investors, Sebi said.

Investment manager can allocate up to 60 per cent of the portion available for allocation to QIBs to anchor investors, subject to certain conditions.
The InviT will need to deposit, before the opening of subscription, and keep deposited with the stock exchange, an amount calculated at the rate of 0.5 per cent of the amount of units offered for subscription to the public.
The issue would need to be opened after atleast three working days from the date of filing the offer document with Sebi.
Besides, the issue would need to be kept open for at least three working days but not more than 30 days. The investment manager may issue advertisements for issue opening and closing advertisements, Sebi said.

The regulator also said that any public communication including advertisement, publicity material and research reports concerned with the issue should not contain any matter extraneous to the contents of the offer document.
Sebi also said that no InviT can make a public issue of units if it or any of its sponsors, investment manager or trustee is debarred from accessing the capital market by Sebi.
The restriction will also apply for promoter, director or person in control of any other company or a sponsor, investment manager or trustee of any other InviT, or an InviT which is debarred from market by Sebi, as also in the case of willful defaulters identified by RBI.

Besides, public issue can not be launched if the InvIT is in default of payment of distributions to the unit holders in accordance with the Sebi norms for a period of more than six months.
No person connected with the issue can offer any direct or indirect incentive "in any manner, whether in cash or kind or services or otherwise to any person for making an application for allotment of units". However, this would not apply to fees or commission for services rendered in relation to the issue.
In case of the retail or public issue of AT1 instruments, Sebi has put in place additional specific disclosure requirements, in addition to those already mandated by Sebi and RBI, "in order to enable investors to comprehend risks associated with these instruments".

Banks issuing Perpetual Non-Cumulative Preference Shares (PNCPS) and Perpetual Debt Instruments (PDIs) to the retail investors, will need to clearly disclose in the abridged prospects under the head "Disclaimer" about the risk characteristics of these instruments.
They would also need to clarify that the return on these investments may be influenced by bank's performance and the principal amount invested may be subject to losses due to loss absorbency features.
Sebi has also proposed disclosures by the banks in the
abridged prospectus that "PNCPS are not equity instruments" and they are debt instruments which carry additional risk.
The banks also need to clarify to the investors that PDIs are not like fixed deposits of banks but are akin to bonds with some additional loss bearing features in certain situations.

"The key risks involved with AT1 instruments, shall be disclosed by the issuing bank, in clear and easy to understand language, in a tabular format," Sebi said.
These would include disclosures that the instrument was perpetual and with no maturity date and whether the dividend rate was fixed or linked to certain floating rate.
Banks would also have to state the 'loss absorption features' of the instruments while stating that they had "full discretion to cancel dividend distribution in a particular year as specified in the term sheet of this instrument".
The banks would also need to mention the specific trigger points at which the instrument will absorb losses.

"Banks should also state that retail investors should carefully go through the term sheet of the instrument to fully understand the above key risk factors and other features of the instruments.
"The banks issuing such AT1 instruments and having any outstanding issues of PNCPS and/or Innovative Perpetual Debt instruments (IPDI) under Basel II framework shall also make adequate disclosures showing distinction between Basel II and Basel III perpetual instruments," Sebi said.