Finance
By: Shree1news, 13 MAR 2021
The finance ministry has written to the Securities and Exchange Board of India (Sebi), requesting it to withdraw a rule that fixes the tenor or maturity of all perpetual bonds at 100 years.
The letter states the clause on valuation is disruptive in nature and could result in higher borrowing cost for companies at a time when economic recovery is nascent.
“Considering the capital needs of banks … 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the capital markets, it is requested that the revised valuation norms to treat all perpetual bonds as 100 year tenor be withdrawn,” mentioned the letter.
On Wednesday, the market regulator issued curbs on mutual fund (MF) investment in debt instruments with special features such as additional tier I (AT1) bonds.
In a circular, Sebi had mentioned that no MF would own more than 10 per cent of AT1 bonds issued by a single issuer.
Further, at the scheme level, the exposure to such instruments will be less than 10 per cent of the assets and less than 5 per cent towards a single issuer.
However, the contentious part of the circular was that the maturity of perpetual bonds will be treated as 100 years from the date of issuance of the bond for valuation. Currently, mutual funds value perpetual bonds as if they mature on their call date, which is the date when issuers might call back bonds and repay their investors. Participants in the MF industry believe that changes in valuation will result in higher yields, causing losses to investors and outflows from debt schemes.
“AT1 bonds were valued hitherto on the basis of a short-term instrument of a similar tenor G-Sec. They will now be valued as 100-year bonds, for which no benchmark exists. Mark-to-market (MTM) losses will be very high, effectively reducing them (the bond value) to near zero,” mentioned the finance ministry’s letter.
MFs are one of the largest investors in perpetual debt instruments and hold more than Rs 35,000 crore of outstanding AT1 issuances of about Rs 90,000 crore.
Perpetual bonds are a fixed-income security with no maturity date. These bonds are redeemable when the issuer needs. A regular coupon, which is usually higher than other debt instruments like corporate bonds or debentures, is paid on these bonds by issuers, that are mostly banks.
One of the main concerns of the finance ministry is that the market regulator’s new norms would enhance public sector banks’ (PSBs’) dependence on the government for capital infusion at a time when lenders are being pushed to boost equity from the market.
Source:A-N
