SEBI released a fresh circular on Monday on the valuation of perpetual bonds. The regulator has now adopted a calibrated approach to value such bonds.
From April 1, fund houses will have to value AT-1 bonds (also known as perpetual bonds) as 10-year debt paper till March-end 2022. The period will be increased to 20 and 30 years over the subsequent six-month period. From April 1, 2023, the deemed maturity of all such bonds will be 100 years.
According to an earlier SEBI notice, perpetual bonds were to be valued as 100-year debt papers from next month.
The circular issued on March 10 had elicited a surprise reaction from the finance ministry. On March 12, the Ministry had asked the market regulator to withdraw the rule that sought to treat AT1 bonds as having 100-year maturity.
The ministry was of the view that the move would disrupt stability of debt markets. "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,” the ministry had said.
In the latest circular, SEBI said the revision was done on MF industry's request to consider a glide path for implementation of the 100-year policy.
AT-1 bonds are considered perpetual in nature, similar to equity shares as per the Basel III guidelines. They form part of the tier I capital of banks.
