SEBI amends valuation norms on AT-1 bonds after FinMin push

One week after the Finance Ministry intervened in the matter, the Securities and Exchange Board of India (SEBI) on Monday amended valuation rule of perpetual bonds. The circular issued by Sebi said that the deemed residual maturity of Basel III additional tier-1 (AT-1) bonds will be 10 years until 31 March, 2022.

“Further, if the issuer does not exercise call option for any ISIN then the valuation and calculation of Macaulay Duration shall be done considering maturity of 100 years from the date of issuance for AT-1 Bonds and Contractual Maturity for Tier 2 bonds, for all ISINs of the issuer,” the circular added.

The circular mentioned that the period will be increased to 20 and 30 years over the subsequent six-months. From April 2023 onwards, the residual maturity of AT-1 bonds will become 100 years from the date of issuance of the bond.

The Sebi circular said, “Based on the representation of the Mutual Fund Industry to consider a glide path for implementation of the policyand request of other stakeholders, it has been decided that the deemed residual maturity for the purpose of valuation of existing as well as new bonds issued under Basel III framework shall be as below:

Earlier, the Department of Financial Services had noted that the Sebi order on valuation norms can cause volatility in NAVs of debt funds. It also said that there might be disruption in the debt markets as mutual funds sell such bonds in anticipation of redemptions. The letter also said that the new rule can affect capital raising by PSU banks forcing them to rely more on the government for capital.
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