SEBI postpones perpetual bonds valuation by MFs till April 2023

In clarification, Sebi takes a more relaxed view of valuation of perpetual bonds, but problems still remain

Staff Writer   /   March 23, 2021

The Securities and Exchange Board of India has revised the deemed residual maturity period for Basel III AT-1 and Tier 2 bonds.
As per the revised circular, the deemed residual maturity for Basel III AT-1 bonds will be:
10 years — for call option up to March 31, 2022
20 years — for call option falling between April 1, 2022 and September 30, 2022
30 years — for call option falling between October 1, 2022 to March 31, 2023
100 years — for call option for period April 2023 onwards
It is expected that bond yields will adjust to SEBI’s revised view, which means there will still be some NAV impact in mutual funds holding these instruments. 
Unless banks call back the perpetual bonds or mutual fund companies are able to sell the bonds quickly, on the effective date the new rules will be come into play. It remains to be seen what kind of valuation matrix AMFI comes up for the revised SEBI guidelines. As per latest data, banking & PSU funds, low duration funds and short duration funds as categories are most exposed to AT1 bonds. 
Do note that the 100 years maturity issue has also not been completely done away with. So, it remains to be seen if the revised 100 year maturity valuation norms are again changed when they come to close to getting effected in April 2023.
The regulator has said that in case the bond issuer does not exercise call option, then the valuation will be done considering maturity of 100 years from the date of issuance of all such bonds issued by the entity. This means bond holders like mutual funds will lobby hard with bond issuers like banks to exercise call option. To fund call options, banks may have to raise cash as low credit growth and impending NPA issues mean less free cash. 
In a March 10 circular, SEBI had asked mutual funds to treat the maturity of all perpetual bonds as 100 years from the date of their issuance for the purpose of valuation. 
This was a drastic change and in contrast to perpetual bonds so far being valued by funds on a yield-to-call basis. MFs hold about Rs 35,000 crore in AT1 bonds, which would have possibly become zero if the earlier valuation norms became effective. This would have impacted investor returns.

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