Post FinMin nudge, Sebi eases valuation norms for AT1 bonds

The Securities and Exchange Board of India (Sebi) on Monday relaxed the norms for valuation of perpetual bonds like further tier-1 (AT-1) bonds following robust objection from the Finance Ministry.
The regulator stated the deemed residual maturity of Basel III further tier-1 (AT-1) bonds can be 10 years till March 31, 2022. It can be elevated to twenty and 30 years over the next six-month interval. And from April 2023 onwards, the residual maturity of AT-1 bonds will turn out to be 100 years from the date of issuance of the bond.
Sebi stated deemed residual maturity of Basel III tier-2 bonds can be thought of 10 years or contractual maturity whichever is earlier till March 2022. Afterwards, it is going to be as per the contractual maturity. Mutual funds (MFs) are among the many largest buyers in perpetual debt devices, and maintain over Rs 35,000 crore of the excellent further tier-I bond issuances of Rs 90,000 crore.
On March 15, the regulator had issued a round capping debt mutual fund (MF) publicity to perpetual bonds, which incorporates AT-1 bonds and tier-2 bonds. It had additionally directed MFs to make use of the 100-year valuation norms for pricing such bonds. The round was to come back into impact from April 1, 2021. The Sebi has most likely made this resolution after the Reserve Bank of India (RBI) allowed a write-off of Rs 8,400 crore on AT1 bonds issued by Yes Bank Ltd after it was rescued by State Bank of India (SBI).

The Finance Ministry had taken robust objection to Sebi’s proposal on the valuing perpetual bonds, that are primarily issued by public sector banks to fulfill their capital requirement beneath the Basel III laws. The Finance Ministry has sought withdrawal of valuation norms for AT1 bonds prescribed by the Sebi for mutual fund homes as it’d result in mutual funds making losses and exiting from these bonds, affecting capital elevating plans of PSU banks.
Sebi stated the brand new valuation methodology is predicated “on the representation of the MF industry to consider a glide path for implementation of the policy and request of other stakeholders.” It has additional stated if the issuer doesn’t train name possibility then the valuation and calculation of length shall be achieved contemplating maturity of 100 years from the date of issuance for AT-1 Bonds and Contractual Maturity for Tier 2 bonds. Also, if the non-exercise of name possibility is because of the monetary stress of the issuer or if there’s any hostile information, the identical shall be mirrored within the valuation.