A day just after the Securities and Exchange Board of India (Sebi) proposed mutual funds (MF) worth AT- 1 bonds as instruments with tenures of one hundred years, the Finance Ministry asked the regulator to withdraw the revised norms.
The division of monetary services (DFS), argued in a memorandum to Sebi, the norms would adversely influence 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the capital markets, it is requested that the revised valuation norms to treat all perpetual bonds as 100-year tenor be withdrawn,” DFS wrote.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 had been disallowed from investing more than 10% of the NAV of the debt portfolio in such instruments. The bonds had been to be valued as one hundred-year instruments from April 1. Yields on AT-1 bonds rose on Thursday as there was some uncertainty in the marketplace. The worth of outstanding AT-1 bonds is estimated at Rs 58,000 crore with MFs owning about Rs 38,000 crore worth.
DFS has, having said that, stated that Sebi can retain directions to cap investment limits in perpetual bonds to lessen concentration threat. Sebi has laid down these limits maintaining in thoughts that these bonds come with loss-absorption attributes, which can be risky investments for MF schemes.
Amfi stated it supports the require to cap exposure to perpetual bonds, saying the exposure of most schemes was properly under the cap. It known as for grand-fathering to avert unnecessary marketplace disruption. MF market executives think the transform in the norms — the one hundred-year maturity for instance rather than working with get in touch with solutions — has been as well sudden.
Last year, the AT-1 bonds of Yes Bank, of which MFs held Rs 3,000 core, had been written down and bondholders, such as MFs had approached Bombay High Court. Similarly, Reserve Bank of India had ordered a total create-down of tier 2 bonds of Lakshmi Vilas Bank as element of its resolution program. As per RBI’s extant recommendations, Basel III-compliant AT-1 and tier 2 instruments can absorb losses by means of conversion into typical equity or a create-down.
Banks think that if Sebi’s circular is implemented, it will hit their balance sheet due to anticipated cost fluctuations. A senior PSU banker stated “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 in the course of the quarterly earnings, he added.