The Finance Ministry has sought withdrawal of valuation norms prescribed by the Securities and Exchange Board of India (Sebi) for mutual fund (MF) homes on AT-1 perpetual bonds, as these could possibly be disruptive resulting in sudden mark-to-market losses and affecting capital elevating plans of PSU banks. The new guidelines, that are geared toward lowering focus danger in MFs bond portfolio and making an attempt to precisely value danger in mild of current defaults by some banks on AT-1 bonds (Additional Tier 1), will kick in from April 1.
“Considering the capital needs of banks going forward and the need to source the same from capital markets, it is requested that the revised norms to treat all perpetual bonds as 100-year tenor be withdrawn. The clause on valuation is disruptive in nature,” the Department of Financial Services stated in a letter to Sebi on Thursday.
However, the federal government stated Sebi’s proposal to cap MFs publicity in such instrument at 10 per cent might be retained, as they’ve sufficient funding headroom even inside this ceiling. On Wednesday, Sebi directed fund homes to make maturity of all perpetual bonds as 100 years, from the date of issuance of the bond for the aim of valuation — sparking considerations of steep MTM (mark-to-market) losses that funds could should tackle their present portfolio of such bonds. This is as a result of at the moment such bonds are valued as short-term papers, however categorising them as a 100-year maturity paper will result in drop in valuation because of excessive low cost price on future coupons.
Mutual funds are among the many largest buyers in perpetual debt devices, and maintain over Rs 35,000 crore of the excellent extra tier-I bond issuances of Rs 90,000 crore, as per the Finance Ministry’s letter to Sebi. “With new limits, the incremental ability of MFs to buy bank bonds would be constrained. This will result in increase in coupon rates,” the Ministry stated.
“The abrupt drop in valuation is likely to lead to large NAV (net asset value) swings and potential disruption in debt markets as MFs will seek to sell these bonds anticipating investor redemptions, causing panic in debt markets,” the Ministry stated.
