SEBI allows MFs to 'grandfather' excess exposure; here's what experts say

Market regulator Securities and Exchange Board of India (SEBI) has notified a new rule capping mutual funds (MFs) exposure to perpetual bonds, also known as additional tier 1 and tier 2 bonds. This naturally affects banks - which use this as a popular route to raise capital and also mutual funds - among their largest consumers who invest in AT-1 bonds seeking a higher return. G Padmanabhan, Former Non-Executive Chairman, Bank of India (BoI), Ananth Narayan, Professor, SPJIMR and Amit Bivalkar, Director, Sapient Wealth Advisors and Brokers discussed the likely impact on both.

“The valuation norms do look a little troubling. It could create disturbances but I think this will get sorted out. While there is a bit of a flutter in the market right now, the intent that SEBI has come out with is quite right. Firstly, we have seen that some of these instruments particularly AT-1 bonds are sometimes paradoxically riskier than equity. So, it is important that therefore the risk be curtailed, which is what SEBI has done. Secondly, sometimes these bonds don’t trade for a long time. So, in those cases can we assume that these bonds will get called in the next call date and therefore the fact that there should be alacrity in the way in which the valuations move is also something which SEBI is trying to address,” said Narayan.

Bivalkar believes liquidity or credit risk is a problem.