CBR opposed to companies issuing perpetual bonds due to high risks for investors - source
MOSCOW. May 5 (Interfax) - The Central Bank of Russia (CBR) is opposed to the creation of a new instrument, perpetual bonds issued by non-credit institutions, due to their high risks, a source familiar with the regulator's position told Interfax.
A bill to amend the law on the securities market that is aimed at simplifying issuing procedures allows for the possibility of nonbank companies issuing bonds without a set maturity date. At present, only lending institutions are legally permitted to issue perpetual bonds, but the bill will also allow companies to issue such bonds.
The CBR bases its negative position regarding this part of the bill on the fact that the reliability of the instrument depends to a large extent on the good faith of the issuing company, the source said. For example, it does not give holders of perpetual bonds the right to demand their redemption or gives the right to demand redemption on such conditions that redemption becomes very unlikely or is required in the distant future. In addition, the issuer has the right to refuse to pay interest on such bonds.
Perpetual bonds issued by banks are subject to regulation by the CBR, which does not extend to corporations. This increases the risks of the perpetual bonds of companies compared to the risks of such bonds issued by banks.
CBR experts also said that perpetual bonds essentially do not give their holders the right to receive the face value of the bonds or interest on them, so as an instrument they are close to preferred shares. However, the name "bonds" could mislead amateur investors.
The CBR said it is necessary to provide a rationale for why such an instrument cannot be placed in the form of preferred shares, and it is also necessary to analyse the range of persons who will be able to acquire such bonds and the rules under which institutional investors will be able to invest in perpetual bonds.