The finance ministry has requested the markets regulator to withdraw a rule that sought to deal with banks’ further tier 1 (AT1) bonds as having 100-year maturity, making investments in them one of many riskiest, as the federal government feared a sell-off in these securities would make it harder for banks to boost capital.
The division of monetary companies letter dated 11 March to the chairman of the Securities and Trade Board of India (Sebi) was in response to a round issued by Sebi a day earlier, which amongst different guidelines, additionally restricted investments by mutual funds in AT1 bonds. Mint has reviewed a replica of the letter.
The brand new Sebi guidelines that had been to take impact from 1 April had been aimed toward lowering retail traders’ publicity to dangerous property. In October, Sebi had barred retail traders from buying AT1 bonds. Sebi’s choice adopted the Reserve Financial institution of India writing off ₹8,415 crore of AT1 bonds bought by Sure Financial institution Ltd as a part of a rescue plan.
Emails despatched to spokespeople for the finance ministry and Sebi didn’t elicit a remark instantly.
Sebi’s 10 March round, nonetheless, generated apprehension within the mutual fund business that the modifications would lead to a revaluation of such bonds, resulting in a spike in yields.
Whereas AT1 bonds don’t have any fastened maturity, banks have the choice, however no obligation, to purchase them again at specified dates. Mutual funds have handled these dates, sometimes no more than 10 years, as maturity dates. Treating them as 100-year bonds would make them approach riskier as longer-term bonds carry better rate of interest threat.
Mutual funds had expressed fears of a surge in redemptions by traders, anticipating losses. The comparatively low liquidity of such bonds additionally makes them laborious to promote.
“No matter whether or not the valuation provision of the round is withdrawn, I might not advocate any funds with greater than 5% of property underneath administration in AT1 bonds. These bonds have very low liquidity and are extra akin to fairness than debt. I don’t see why they need to be in debt funds,” mentioned Feroze Azeez, deputy chief govt of Anand Rathi Monetary Companies Ltd.
The finance ministry letter expressed issues concerning the impression on the web asset worth of funds due to the brand new norms and attainable disruption of debt markets as mutual funds promote such bonds in anticipation of redemptions. This may additionally have an effect on capital-raising by public sector banks, forcing them to rely extra on the federal government for capital, it famous. Nevertheless, the ministry didn’t object to different provisions within the Sebi round, equivalent to these limiting AT1 bond publicity to 10% of scheme property. “Contemplating the capital wants of banks going ahead and the necessity to supply the identical from capital markets, it’s requested that the revised valuation norms to deal with all perpetual bonds as 100-year tenor be withdrawn. The clause on valuation is disruptive in nature,” the letter mentioned.
Nevertheless, Amfi backed the regulatory cap on mutual funds publicity to perpetual bonds on Friday. “Solely within the occasion of lack of traded costs, the query arises as as to whether the bond needs to be valued to name or to maturity. Given a fairly energetic market with common trades, the problem is narrower than it seems,” Amfi mentioned.