The Securities and Exchange Board of India (Sebi) on Monday relaxed the norms for valuation of perpetual bonds like additional tier-1 (AT-1) bonds following strong objection from the Finance Ministry.
The regulator said the deemed residual maturity of Basel III additional tier-1 (AT-1) bonds will be 10 years until March 31, 2022. It will be increased to 20 and 30 years over the subsequent six-month period. And from April 2023 onwards, the residual maturity of AT-1 bonds will become 100 years from the date of issuance of the bond.
Sebi said deemed residual maturity of Basel III tier-2 bonds will be considered 10 years or contractual maturity whichever is earlier until March 2022. Afterwards, it will be as per the contractual maturity. Mutual funds (MFs) are among the largest investors in perpetual debt instruments, and hold over Rs 35,000 crore of the outstanding additional tier-I bond issuances of Rs 90,000 crore.
On March 15, the regulator had issued a circular capping debt mutual fund (MF) exposure to perpetual bonds, which includes AT-1 bonds and tier-2 bonds. It had also directed MFs to use the 100-year valuation norms for pricing such bonds. The circular was to come into effect from April 1, 2021. The Sebi has probably made this decision after the Reserve Bank of India (RBI) allowed a write-off of Rs 8,400 crore on AT1 bonds issued by Yes Bank Ltd after it was rescued by State Bank of India (SBI).
The Finance Ministry had taken strong objection to Sebi’s proposal on the valuing perpetual bonds, which are primarily issued by public sector banks to meet their capital requirement under the Basel III regulations. The Finance Ministry has sought withdrawal of valuation norms for AT1 bonds prescribed by the Sebi for mutual fund houses as it might lead to mutual funds making losses and exiting from these bonds, affecting capital raising plans of PSU banks.
Sebi said the new valuation methodology is based “on the representation of the MF industry to consider a glide path for implementation of the policy and request of other stakeholders.” It has further said if the issuer does not exercise call option then the valuation and calculation of duration shall be done considering maturity of 100 years from the date of issuance for AT-1 Bonds and Contractual Maturity for Tier 2 bonds. Also, if the non-exercise of call option is due to the financial stress of the issuer or if there is any adverse news, the same shall be reflected in the valuation.