The regulator said additional Teir I bonds and Teir 2 bonds, which are popularly known as perpetual bonds, issued under Basel III framework, are some with special characters like converting into equity when financial institutions such as banks face stress.
Mutual funds have been directed to value these bonds on the assumption that these would be redeemed after 100 years essentially leading to steep losses in the near term. Currently, these bonds that come with call and put options are traded on the basis that they would be called by the issuer.
Fund managers said debt schemes holding perpetual bonds could see sharp swings in their values as a result in the change in valuations.
“There could be mark to market losses, which may result in a dip in net asset values,” said Mahendra Jajoo, chief investment officer- fixed income, Mirae Asset Investment Managers. “Although the new rule applies from the next fiscal year but market will start factoring changes from now only. Yields are expected to rise with immediate effect.”
The new rule will come into effect from April 1, 2021.
The regulator said investment in a single issuer of such debt instrument should not exceed 5% of assets.
Sebi said prudential investment limits are being set for such instruments as presently there are no specified investment limits and these instruments may be riskier than other debt instruments.
Debt schemes which have investment in such instruments or even enabling provisions for such investments should enable side pocketing in their schemes.
“The investments of mutual fund schemes in such instruments in excess of the limits as on the date of this circular may be grandfathered and such mutual fund schemes shall not make any fresh investment in such instruments until the investment comes below the specified limits,” Sebi said in a circular.
Sebi has been tightening investment norms with regard to perpetual bonds after several mutual funds were caught off guard while investing in AT1 bonds of Yes Bank that was bailed out by a consortium but after inflicting losses on those bond holders.
Sebi also said close ended debt schemes should not invest in perpetual bonds. At present, rules allow close ended debt scheme to invest only in such securities which mature on or before the date of the maturity of the scheme.
