The Department of Financial Services, Ministry of Finance has requested SEBI to revisit their decision on valuations norms of perpetual bonds issued by banks.
SEBI norms say that fund houses will have to consider 100 years to calculate valuation of perpetual bonds from April 1, 2021.
However, the Ministry believes that the move would disrupt stability of debt markets. The Ministry said, “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the capital markets, it is requested that the revised valuation norms to treat all perpetual bonds as 100 year tenor be withdrawn.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; instructions that reduce concentration risk of such instruments in MF portfolio can be retained as MFs have adequate headroom even within 10% ceiling.”
The Ministry further said, “AT1 bonds were valued hitherto on the basis of a short term instrument of similar tenor G-sec. They will now be valued as 100-year bonds for which no benchmark exists. Mark to market (MTM) loss will be very high, effectively reducing them to near zero. The abrupt drop in valuation is likely to lead large NAV swings and potential disruption in debt markets as MFs will seek to sell these bonds anticipating investor redemptions, causing panic in debt markets. This measure will also take away appetite for mutual funds for investing in such instruments given the valuation norms.”
“Panic redemption by mutual funds would impact overall corporate bond market as MFs may resort to selling other bonds to raise liquidity in debt schemes. This could lead to higher borrowing cost for corporates at a time when the economic recovery is still nascent,” said the ministry.
The Ministry clarified that it supports the 10% on exposure to such instruments by the mutual fund companies.
On March 10, SEBI has put 10% cap on exposure to bonds having special features like perpetual bonds, Tier I and Tier 2 bonds.
