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Informist, Monday, Aug 5, 2024

 

--SEBI issues circular on valuation of additional tier-I bonds 

--SEBI: Mutual funds to value AT-1 bonds at yield to call

 

MUMBAI – Mutual funds can value their additional tier-1 bond holdings at the bond's call option data, or yield to call, the Securities and Exchange Board of India said in a circular today. This is based on the valuation methodology proposed by the National Financial Reporting Authority to the Ministry of Finance.

 

"For all other purposes, since liquidity risk of perpetual bonds is required to be suitably captured, deemed maturity of all perpetual bonds shall continue to be in line with the clause 9.4.2 of the Master Circular," the circular said, which refers to deemed maturity of such bonds at 100 years.

 

Additional tier-1 bonds are considered at par with equity in a bank's capital table, and are issued in perpetuity, typically with a call option, which enables the issuer to redeem the bonds. The market practice is for these bonds to quote or trade near the yield to call, the financial reporting authority noted. Its recommendation was that only the valuation methodology under accounting standards Ind AS 113 change.

 

The rollback of valuation to call tenures rather than a deemed tenure of 100 years has been a longstanding demand from the mutual fund industry since the SEBI changed its rules on valuation and investment in March 2021. With such a high deemed maturity, rather than the yield to the call date or the put option date, the capital gains and losses were far beyond the appetite of most mutual funds, and trades in such securities have come to a standstill in the last few years.

 

Only after Apr 1, 2023 did perpetual bonds have deemed contractual maturity of 100 years, which led to a slowdown in the issuance of such bonds. With the rollback, more banks may approach the market to raise money through perpetual bonds, a fixed income investment head at a mutual fund said.  End

 

Reported by Aaryan Khanna

Edited by Vidhi Verma

 

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