IRDAI relaxes standards for bank bonds, InvITs/REITs

The insurance regulator has allowed insurers to buy more perpetual bonds issued by banks and allowed them to participate in the public listing of high-yield InvITs (investment trusts), improving sources of capital for these instruments which hitherto faced growth challenges due to the lack of broader institutional sponsorship.

“The aggregate value of AT1 Bonds (Additional Tier 1) held in any particular bank, at any time, shall not exceed 10% of the total outstanding AT1 Bonds of that particular bank”, Indian Insurance Regulatory Development Authority (IRDAI) said Wednesday evening.

Previously, the cap was for any particular primary issue of these bonds, commonly referred to as perpetual papers.

AT1 bonds have no fixed maturities and are raised to strengthen the capital base. These quasi-equity securities offer much higher returns than traditional bonds because the risk is also greater.

This means that an insurer could immediately invest up to Rs 100 crore from a sale of Rs 1,000 crore AT1 bonds by a bank. Assuming the bank’s total outstanding perpetual paper is Rs 10,000 crore, under the current rule, the same insurer can now underwrite the entire primary issue of Rs 1,000 crore.

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The insurance regulator has also clarified the categories of bonds issued by banks, possibly clarifying investments following the proposed merger of and Ltd. The merger would have resulted in the violation of the sector exposure limit set for insurers that traditionally invest in these debt securities.

“Long-dated bank bonds for infrastructure and affordable housing finance will not be part of BFSI’s exposure,” IRDAI said.

In addition, an insurer can underwrite AT1 securities if an issuing bank would have reported net profits for two previous consecutive years without recording any discrepancy in asset classification and provisioning, identified by the Reserve Bank of India.

Previously, the benchmark was only tied to two consecutive years of an issuing bank’s bonus reporting. The latest addition of a profit clause expands the universe of potential investments.

“Bonus reporting is regulated by the RBI for which you cannot hold the bank accountable,” said an industry veteran, citing the pandemic during which the banking regulator banned banks from declaring dividends.

The insurance regulator has sought to break the dominance of sponsored-only investment trusts by imposing a mandatory limit on public participation in these triple-A-rated hybrid instruments.

“Public ownership in InvIT/REITs must not be less than 30% of the total outstanding shares of the InvIT/REIT at the time of investment,” IRDAI said.

No insurer should invest more than 20% of outstanding debt securities in a single InvIT/REIT, he said.

Garland K. Long