IRDAI allows Insurers to Invest in Basel III Bonds

Insurance Regulatory and Development Authority of India (IRDAI) has allowed insurance companies to invest in Additional Tier 1 (Basel III compliant) perpetual bonds. Earlier, there was no clarity on insurers investing in these instruments and they perceived it risky. In a circular issued to insurance companies today, IRDAI said that the rating of the AT1 bonds should not be less than 'AA'. Further, it said that the aggregate value of the AT1 bonds held in any particular bank cannot exceed 10% of the total outstanding AT1 bonds at any time. These bonds will be a part of "equity" under investment regulations.

Insurers have been told that they cannot invest more than 10% in AT1 bonds offered through IPO. Also, the regulator said insurers can only invest in AT1 bonds of those banks that have declared dividends for preceding two years. Further, insurers cannot invest in AT1 bonds of their promoter group bank or where the bank is their corporate agent.

A perpetual bond is a financial instrument with no maturity date. These bonds are not redeemable but pay a steady stream of interest forever. Here, the price of a perpetual bond is, therefore, the fixed interest payment, coupon amount, divided by a constant discount rate, which represents the speed at which money loses value over time (partly because of inflation). The regulator also said that the Common Equity Tier 1 Capital (CET) including Capital Conservation Buffer of the issuer bank will have to be more than 1% of the CET prescribed by Reserve Bank of India at time of investment in these bonds.

Insurers were awaiting clarity on whether this instrument would count as a debt or an equityinstrument from the sector regulator. It is anticipated that large investors like Life Insurance Corporation of India will be able to take advantage of these norms to invest in such bonds as also issuing banks which were earlier finding it difficult to attract insurers to invest in perpetual bonds