Markets regulator SEBI has defended its stance on perpetual AT-1 bonds after the Department of Financial Services requested it to withdraw its revised norms issued last week. According to a report by the Hindu Business Line, SEBI explained to DFS that its decision is not a risk to the mutual fund industry.
Last week, SEBI had released a circular mandating converting perpetual AT-1 bonds into bonds with a 100-year maturity. This is in stark contrast to the market trading these bonds on a period to call option exercised date basis, usually 3-4 years from the date of issue.
The Ministry of Finance contends that this move will disrupt the perpetual bond market. NAV of these funds could drop sharply due to debt market panic. It says the move may also diminish the MF's appetite for perpetual instruments, further hurting the issuing authorities and increasing the burden on the government to infuse more equity into PSBs.
Read more: SEBI’s perpetual bond norms are a mess
SEBI, however, is of the view that its circular has clauses to safeguard risk to the mutual fund industry. One of them being 'grandfathering' the current investments. Further, the regulator told DFS that since mutual fund investments in perpetual bonds are below their total cap, there is "no immediate risk."
Mutual fund regulator AMFI has pointed out the trades in perpetual bonds happen on a yield-to-call basis. So if the call date is suddenly extended to more than 90 years, the yields would drop, and the security would become less attractive to the investors. The move could cause complications in terms of the pricing of these bonds too.
First Published: Mar 18, 2021 4:48 PM IST
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