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A day of big decisions at Sebi

The Finance Ministry has written to India’s capital market regulator SEBI, asking it to withdraw recently issued guidelines treating additional tier-1 (AT1) securities issued by banks as having 100-year (perpetual) maturity. The memorandum was sent on Thursday, March 11.

A circular on the AT1 bonds was issued by SEBI on March 10 and the rule was to take effect from April 1, 2021. Citing the notification mutual fund industry expressed a grim scenario concerning the circular and said that a revaluation of such bonds would lead to huge losses. In fact, AMFI made representation to withdraw the circular on Thursday.

Money9 has seen a copy of the letter sent by the ministry to SEBI chairman Ajay Tyagi.

“Considering the capital needs of banks going forward and the need to source the same from the capital markets, it is requested that the revised valuation norms to treat all perpetual bonds as 100-year tenor be withdrawn. The clause on valuation is disruptive in nature,” the letter said.

Further, the letter said there could be ‘potential swings in NAV’ that can follow from the valuation norms and possible disruption in the debt markets as mutual funds sell such bonds in anticipation of redemptions.

In a separate release, the Association of Mutual Funds in India said that the perpetual bond market is reasonably active with regular trades in large and higher-rated issuances. “Most trades in perpetual bonds happen on a yield-to-call basis. This is based on the established market convention, locally as well as globally, that the issuer will exercise the call option on the due date,” the release said.

Only in the event of lack of traded prices, the question arises as to whether the bond should be valued to call or to maturity. “Given a reasonably active market with regular trades, the issue is narrower than it appears,” the mutual fund lobby body said.

Apart from the revaluation of AT1 bonds the market regulator has also laid down certain investment limits on perpetual bonds. Mutual funds should not be investing more than 10% of the scheme’s corpus in perpetual bonds. And the exposure should not be more than 5% to a perpetual bond of the same company.

To these, the finance ministry did not object. “Instructions that reduce concentration risk of such instruments in mutual fund portfolios can be retained as mutual funds have adequate headroom even within the 10% ceiling,” it said.