Door shut for mom-and-pop investors in BASEL III debt

The Securities and Exchange Commission (SEC) of Sri Lanka has taken measures to send away the retail investors from investing in BASEL III-compliant debt securities.    

In a circular issued to all listed licensed commercial and specialized banks, the Colombo Stock Exchange (CSE) has sent clear instructions blocking any mom-and-pop-styled investors from investing in these instruments but specified the type of investors who can invest and trade such instruments on the floor.

In order to give effect to this, the CSE amended its listing rules allowing only the “qualified investors” to invest in BASEL III-compliant debt instruments, where a qualified investor is defined in a broad manner. 

As a result, the new CSE listing rule is now read as, “BASEL III-compliant debt securities – issue and allotment of debt securities shall be limited to qualified investors”.

According to the SEC, a qualified investor will mean a licensed commercial bank or a specialized bank, a mutual fund, pension fund, the Employees’ Provident Fund or any other similar pooled fund, a venture capital fund or a company and a private equity company. 

Further, a licensed finance company, specialized leasing company, an insurance company, a listed or unlisted corporate entity, an investment trust or investment company, a non-resident institutional investor and an individual with an investment of Rs.5.0 million are also identified as a qualified investors.  

This has effectively turned away any small-time retail investors from investing in the debt instrument as the exponentially high initial investment has effectively shut the door for them. 

Since the higher capital adequacy requirements came into effect under BASEL III on July 1, 2017, the Sri Lankan banks stepped up the issuance of BASEL III-complaint Tier II instruments. 

It was only last week Fitch Ratings Lanka said the trend is likely to be intensified during 2018 as “most banks will need to raise capital to meet higher Basel III requirements that take full effect in January 2019 and to support balance sheet expansion”. 

So far, only Sampath Bank PLC has completed an issuance of similar instrument in December last year, which raised Rs.6.0 billion and is planning to raise another Rs.7.5 billion in 2018, through an identical instrument offering. 

Meanwhile, Seylan Bank PLC and Nations Trust Bank PLC are also planning similar issues.

The SEC has not provided a reason for its decision to limit the subscriptions in such debt instruments to only institutional and large-scale investors. 

These BASEL III-compliant Tier II debts are convertible into equity upon the occurrence of a trigger event, as determined by the Monetary Board of Sri Lanka. 

The December 2017 circular has an effective date of December 8, 2017 and any issuer – one who has already announced such a debt issuance or one who is planning to do one – is required to adhere to the amended rules.