What are Additional Tier 1 (AT1) or perpetual bonds


Additional Tier 1 (AT1) or perpetual bonds are now hogging the limelight as large banks including HDFC Bank, Axis Bank are tapping offshore markets for the first time via such instruments. The local market has dried up completely as mutual funds, traditional investors in those papers have shied away.

What is AT1?

It is a kind of bond billed as a quasi-equity instrument. While such securities offer greater returns, the risk is also higher. These add to a bank’s capital strength aiding any bank to maintain regulatory thresholds for capital adequacy, a gauge for accounting compliance in proportion to expanding credit business.

For a corporate, these securities are popularly termed as perpetual bonds, instead of AT1. They do not form part of capital formation unlike banks.

When Bharti Airtel raises perpetual bonds, it is different from that of HDFC Bank raising AT1. Usage is the key differentiator here.

Key features of AT1:

These papers do not have any fixed maturity but generally have a five-year call option, an exit route for investors when issuers call such bonds back after the stipulated period. These papers are always rated three-four notches below the same issuer’s general corporate rating.

What’s the risk element?

These are riskier instruments as repayment obligations come lower in the waterfall mechanism. Those liabilities are not top priority for any borrower/issuer at time of any crisis. The principal or any accrued interest can be written down partly or fully. If a borrower’s common equity tier 1 (CET1) ratio, an international standard for capital, falls to or below 6.125 percent from October onwards this year.

History of investor loss:

On the domestic turf, investors used to presume it as a five-year paper. Borrowers and investors used to agree on an informal agreement that the issuer would call it back after five years.

None thought AT1 would falter. No investment is risk-free in this world as the popular saying goes.

Private sector lender Yes Bank reminded investors of the age-old adage. Under new management it decided to write off the AT1 obligation. Some of those securities were allegedly mis-sold to wealthy investors.

Did Yes Bank trigger panic?

Yes, it did. This prompted regulators like the Securities Exchange Board of India (SEBI) coming out with stricter regulations for AT1 investments. The regulator was concerned over the valuation process by mutual funds that hold a lot of retail investments.

What SEBI did?

The capital market regulator directed mutual funds to cap ownership of bonds with special features at 10% of the assets in a scheme and value them as 100-year instruments from April, potentially triggering a redemption wave. The order came on March 10, 2021.

Later, the capital markets regulator eased valuation rules but with some riders after the finance ministry had asked Sebi to withdraw its order to mutual funds.

Why did the local market dry up?

The appetite for AT1 bonds has lost as fund houses now appear not so keen to buy papers sold by banks/institutions/companies in the local market.

MFs are now often seen highlighting hurdles in valuing those securities following new guidelines by the SEBI.

Between FY18 and FY21, perpetual bonds sales by banks have nearly halved to Rs 18,772 crore from Rs 34,860 crore three years ago, show reported data. Beginning this financial year, the bond street did not have any single issuance on the AT1 lane.

So offshore sales way forward?

Banks barring the State Bank of India never tapped the overseas market for AT1 sales. There was reportedly one issuance by the SBI way back in 2016 for about $300 million.

HDFC Bank set a precedence recently raising the largest AT1 sale offshore for $1 billion. Many more like Axis Bank, Union Bank of India and State Bank of India are in the process of building such issuances, media reports suggest.

What evinced interest for international investors?

Internationally interest rates are at record lows. US Treasury benchmark is still yielding about 190 basis points lower than its near-term high of 3.08 percent in October, 2018. Global central banks have resorted to easy monetary policies, which are unlikely to taper before this year-end at least.

Yield hungry investors are scouting for higher rates of returns especially when equity valuations are seen overshooting.

Will the local market revive for those quasi-debt papers?

Unlikely unless wrinkles are ironed out. Still some large banks will try convincing fund houses, who may bet only after easing of valuation regulation that is unlikely.

The deployable money by fund houses could well find alternatives like investment trusts.

Any scope for secondary market trade?

Like primary sales, the secondary market has also dried up with securities changing hands occasionally. This makes the market more illiquid.

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Nippon India MF’s Bhan suggests shifting focus to large caps


Investors looking to bet on mid- and small-cap Indian stocks should be cautious, and should reallocate a part of their portfolio to bellwether large caps, says Sailesh Raj Bhan, deputy chief investment officer for equity investments at Nippon India Mutual Fund.

Bhan, a 25-year veteran in the banking and financial services industry, thinks that large caps offer a better risk-reward opportunity to an investorgiven their relative underperformance versus mid- and small-cap stocks.

Moreover, if post-lockdown recovery expectations are not met, mid- and small-cap shares could see their valuations come under pressure, he said in an interview with Moneycontrol.

Most promising sectors

Bhan thinks that manufacturing and capital goods, large banks, insurance and credit sub-sectors, power utilities and consumer discretionary sectors appear to be the most promising. 
Yet another sector, which has seen headwinds even as the Sensex has zoomed past the 56,000-mark, is auto, which could see some disruption, especially in the electric vehicle segment, Bhan thinks. 

Near-term correction

Bhan says that while earnings are becoming broad-based and are being supported by a global growth, “near-term corrections on account of global factors or the occurrence of further disruption will test the resilience”.   

“Also, market euphoria is visible in the mid- and small-cap space which can see a material impact in case rising expectations are not met,” he adds. 

Focus on large caps

Bhan thinks that large-cap companies have the ability to deliver market share gains in difficult operating circumstances, and that is precisely what seems to be playing out in the market right now. These companies are also doing most of the heavylifting and supporting earnings recovery. 

He says that the top 50 stocks, which make up the Nifty 50, have seen “material consolidation with top players gaining significant market shares like in telecom, banks, steel sector, etc.”
“Sectors which were suffering in the last few years like metals, pharmaceuticals, IT services, etc. have seen a material uptick in the earnings growth in the last 12 months and have contributed to market rerating,” he adds. 

Bhan says that given the sharp underperformance of large cap indices vs mid and small-cap space over the last 12 months, the case of large caps investing is favourable.
“Recent market shifts where largecaps have started outperforming lately over mid and small caps do reflect the shift in sentiment and focus on investors in reducing overall portfolio risk and choosing the large cap space,” he adds. 

Undervalued sectors

Bhan says that his fund benefited from focussing on undervalued sectors including engineering, large metals and pharmaceuticals in the last one year. 

“A differentiated portfolio created out of high conviction investing has been a key factor of our Nippon Large Cap Strategy. The fund focused on areas where growth was strong, while valuations were relatively attractive,” he says.

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All you want to know about RBI’s sovereign gold bond series VI


The Reserve Bank of India (RBI) has come up with the sixth tranche of the popular sovereign gold bonds (SGBs) scheme that allows retail investors to invest in gold at discounted rates and to earn tax-free capital gains on their money.

When does the scheme open? When will I get the bonds?

The new scheme, for the current financial year, opens Monday. It will remain open for subscription for the next five days. The bond certificates will be issued by September 7. 

Does the SGB scheme allow me to own actual gold?

Not really, but you get to invest in an instrument whose price is pegged to the price of gold. Simply put, the value of your investment will go up or down with the prevailing market price of the yellow metal.  
But why are these bonds better than holding physical gold?

They are better in that you do not have to worry about safe keeping or theft. You do not need a locker as you do for physical gold. On top of that your investment earns you a nominal 2.5% interest every year, irrespective of whether the price of gold goes up or down. 

Finally, there is no question of a metal of lower purity, as often arises when it comes to unmarked physical gold. Also, there are no making charges, like in the case of jewellery. 

How are SGBs different from owning digital gold?

For one, digital gold can be converted into physical gold after a certain lock-in period or whenever you want it, prematurely. Second, each time you buy digital gold you have to pay the Goods and Services Tax (GST), which shaves a portion off your final return, as it adds to your cost. When it comes to SGBs you do not have to pay any GST. 

But do I have to pay capital gains tax on SGBs?

No. If you hold your bonds till maturity, you don’t have to pay any capital gains tax. 
Moreover, even if you exit before maturity, your capital gains are indexed, so it is beneficial for you. This is where SGBs score over digital or physical gold. 

What is the issue price of these SGBs?

The central bank has kept Rs 4,732 per gram as the issue price for the sixth tranche. Those applying online and paying digitally will get a discount of Rs 50 per gram. 

Are there any investment limits?

There is a minimum investment requirement of one gram. Individuals and Hindu Undivided Families can buy a maximum of 4kg worth of bonds. Trusts can invest in SGBs up to 20kg. 

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FDI inflows into India rocket in the first quarter but there is a catch


India recorded a sharp spike in inflows of long-term patient capital with total foreign direct investment (FDI) almost doubling in the first quarter of the current fiscal year thanks to a low base of last year at the onset of the coronavirus pandemic, even as foreign portfolio investors (FPIs) turned cautious.

India attracted total FDI inflow of $22.53 billion during the first three months of 2021-22, up 90% from $11.84 billion during April-June 2020, as per data released by the Ministry of Commerce and Industry.

This was powered by even sharper growth in total FDI equity inflows, which jumped 168% in the first three months to $17.57 billion from $6.56 billion in Q1 2020-21.

Total FDI inflows include not just fresh equity inflows but also reinvested earnings and other capital. In particular, reinvested earnings represent the Indian arms of multinational companies with operations in the country which redeploy their earnings and surplus back into the business.

The automobile industry was the top sector during the first three months of 2021-22 with a 27% share of total FDI equity inflows. It was followed by computer software and hardware (17%) and services sector (11%), respectively.

Karnataka accounted for nearly half of the total foreign equity inflows, ahead of Maharashtra (23%) and Delhi (11%).

The flip side

On the flip side, the real reason for the year-on-year jump in inflows is the low base of Q1 of 2020-21 when the hard countrywide lockdown had put business activity on hold and investors turned cautious. While there were some lockdowns in the country this year too, these were not as strictly imposed as last year.

Indeed, the total FDI inflow as well as equity FDI in Q1 this year have been just marginally up compared to the numbers in April-June 2019. Total FDI inflow was $21.3 billion in Q1 2019-20 while equity FDI was $16.3 billion. This means, total FDI has risen just 6% and equity inflow has grown by an equally modest 7.8% over a two-year period.

Foreign portfolio investors

Meanwhile, the spike in FDI inflow is in contrast to the behaviour of offshore portfolio investors, who tend to make decisions based on short-term triggers.

The fast spread and the devastating impact of the second wave of the pandemic had led hot money to flee the Indian capital markets. Net FPI inflow in the country dived to just Rs 2,180 crore in the first quarter of 2021-22, all thanks to a rebound in June after hot money flow receded from the Indian market in the previous two months.

Earlier this year, FPIs had been super bullish on India having pumped in over Rs 55,000 crore in net terms in January-March 2021. While the flight of foreign capital thereafter has been counterbalanced by the rise in domestic capital moving into the markets that has helped the benchmark indices to scale new heights, the faith shown by long-term offshore investors lends credence to the underlying fundamentals of the economy.

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Bharti Airtel to raise Rs 21,000 cr via Rights Issue


Bharti Airtel Ltd has decided to raise Rs 21,000 crore ($2.87 billion) through a rights issue to its shareholders, as the telecom operator seeks to create a capital cushion and take on deep-pocketed rival Reliance Jio Infocomm Ltd.

Bharti Airtel will allot the shares in the rights issue at Rs 535 apiece. That’s a discount to the prevailing market price. The company’s shares climbed as much as 2.6% Monday to touch Rs 609.25, before paring the gains.

The company said eligible shareholders can purchase one share for every 14 shares held as on the record date. The promoter and promoter group of the company will collectively subscribe to the full extent of their aggregate rights entitlement. In addition, they will subscribe to any unsubscribed shares in the issue.
Bharti Airtel’s promoter group comprises Bharti Telecom Ltd, which is controlled by billionaire Sunil Bharti Airtel, and Singapore Telecom (Singtel). The promoters own a total of 55.86% stake in Bharti Airtel. 
The company’s institutional shareholders include a couple of mutual funds, ICICI Prudential Life Insurance Company and Singapore sovereign wealth fund GIC Pte. Ltd.

The company said the shareholders will have to pay 25% of the amount at the time of the application and the balance in two more additional calls as and when required within 36 months. This indicates the company doesn’t require the entire amount in the short term and is raising the capital to defend or gain market share in the wake of stiff competition from Reliance Jio and to make investments for the upcoming 5G technology upgrade.

Bharti Airtel has so far managed to defend against Jio’s brutal price war that led to the shutdown of most telecom companies since 2016. It has also paid part of the amount due to the government on account of Adjusted Gross Revenue (AGR), which has pushed Vodafone Idea Ltd on the brink of bankruptcy.

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How bad loans of Indian banks shot up during Covid-19


India’s banking system recorded an over 50% jump in the stock of bad loans during the 15months of the Covid-19 pandemic, adding to the gross stressed assets in the books, brokerage house Nomura Securities said in a report.

Stressed loans shot up by additional Rs 4.60 lakh crore between April 2020 and June 2021, catapulting the gross pressured loans ratio to 12.6% of the loan book from 8.2% of the total as of March 2020, it estimates.
Of this, the financial system added Rs 3.7 lakh crore in loans due for the previous 90 days on top of restructured assets after adjusting for recoveries and write offs.

This has taken the overall gross NPA and restructured loans of banks and non-banking finance companies (NBFCs) to Rs 13.2 lakh crore.

The report comes at a time when many investors in the stock market have been wary of picking banking stocks as they see a lack of transparency in the state of their loan books. “It would not be too out of place, in our view, to suggest that the entire increase in stressed asset pool is on the March 2020 asset base and stress contribution from incremental lending in FY21 would be rather limited,” Nomura analysts said in the report.

The stress levels in the books of the banks remains much higher although the jump in bad loans of NBFCs is equally alarming. The gross NPAs moved to 13.3% in June 2021 compared to 8.9% in March 2020 for banks. 

For NBFCs, together with loans given via the government-sponsored Emergency Credit Line Guarantee Scheme (ECLGS), this more than doubled to 6.7% from 3.1% in the same period.

At a micro level, LIC-controlled IDBI Bank is believed to have the most pain with over a third (36.7%) of its loans under stress. Private-sector lender HDFC Bank, the most valued local lender, is in the best spot with 6% bad loans and ahead of Axis Bank that has 6.8% of loans under stress together with restructured loans.
Among the private lenders, Yes Bank and Bandhan Bank are under the most stress with NPA levels of 20% or more.

State-owned banks have restructured a good proportion of loans under the Covid-19 one-time restructuring schemes, corporate debt restructuring schemes and the RBI’s MSME restructuring scheme.
“Between Mar’20 and Jun’21, state-owned banks’ share in incremental restructuring across all schemes is 78%, and the balance is with private sector banks,” the Nomura report noted.