AMFI has extended its support to SEBI’s recent move of putting a cap on exposure to perpetual bonds and issuing guidelines on valuation of such bonds.
Perpetual bonds or Additional Tier I Bonds are issued without any maturity date but are usually issued with call option. Banks and NBFCs issue such bonds. AMFI said that perpetual bond market is reasonably active with regular trades in large and higher rated issuances. “Most trades in perpetual bonds happen on a yield to call basis. This is based on the established market convention, locally as well as globally that the issuer will exercise the call option on the due date.”
“AMFI fully supports the need and spirit of the circular in capping exposure to perpetual bonds. Most of the mutual fund schemes are well below the cap specified in the circular. In few of the schemes where perpetual bond exposure is higher than the SEBI prescribed cap, grand fathering is kindly permitted by SEBI to ensure that there is no unnecessary market disruption,” said AMFI.
On valuation of perpetual bonds, AMFI said that market determined price is the best price to arrive at a valuation, which is fair to investors who are subscribing, redeeming or staying invested in a mutual fund scheme. AMFI said, “Perpetual bond market sees active participation from various players. Only in the event of lack of traded prices, the question arises as to whether the bond should be valued to call or to maturity. Given a reasonably active market with regular trades, the issue is narrower than it appears.”
AMFI said that while prices of such bonds can be influenced by many factors in short term, in the long-term fundamentals would prevail.
