A day after the Securities and Exchange Board of India (Sebi) proposed mutual funds (MF) value AT- 1 bonds as instruments with tenures of 100 years, the Finance Ministry asked the regulator to withdraw the revised norms.
The department of financial services (DFS), argued in a memorandum to Sebi, the norms would adversely impact the capital raising plans of public sector banks. “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the capital markets, it is requested that the revised valuation norms to treat all perpetual bonds as 100-year tenor be withdrawn,” DFS wrote. The Association of Mutual Funds in India (Amfi), has supported Sebi’s norms on valuing the bonds.
Sebi’s March 10 circular barred MFs from owning more than 10% of AT-1 bonds from a single issuer, across schemes. Moreover, MFs were disallowed from investing more than 10% of the NAV of the debt portfolio in such instruments. The bonds were to be valued as 100-year instruments from April 1. Yields on AT-1 bonds rose on Thursday as there was some uncertainty in the market. The value of outstanding AT-1 bonds is estimated at Rs 58,000 crore with MFs owning around Rs 38,000 crore worth.
DFS has, however, said that Sebi can retain directions to cap investment limits in perpetual bonds to reduce concentration risk. Sebi has laid down these limits keeping in mind that these bonds come with loss-absorption features, which can be risky investments for MF schemes.
Amfi said it supports the need to cap exposure to perpetual bonds, saying the exposure of most schemes was well below the cap. It called for grand-fathering to prevent unnecessary market disruption. MF industry executives believe the change in the norms — the 100-year maturity for instance rather than using call options — has been too sudden.
Last year, the AT-1 bonds of Yes Bank, of which MFs held Rs 3,000 core, were written down and bondholders, including MFs had approached Bombay High Court. Similarly, Reserve Bank of India had ordered a complete write-down of tier 2 bonds of Lakshmi Vilas Bank as part of its resolution plan. As per RBI’s extant guidelines, Basel III-compliant AT-1 and tier 2 instruments can absorb losses via conversion into common equity or a write-down.
Banks believe that if Sebi’s circular is implemented, it will hit their balance sheet due to expected price fluctuations. A senior PSU banker said “We are trying to analyse how much hit banks will have to take. Since, AT-1 bonds come under AFS (available for sale) category, we have to mark to market it on a daily basis.” However, the banks will only declare it during the quarterly earnings, he added.