AT-1 bonds: SEBI defends stance; points to safeguards

PALAK SHAH Mumbai | Updated on March 17, 2021

Market regulator SEBI is unlikely to change its stand on the controversial Additional Tier-1 (AT-1) bonds, despite a ‘request’ to do so from the Finance Ministry’s Department of Financial Services (DFS).

According to sources, SEBI has explained to the DFS why its 100-year tenor for the AT-1 bonds is not a market risk and indeed beneficial for the mutual fund industry. SEBI said that its circular has enough safeguards like ‘grandfathering’ the current investments. Also, with MF investments in these bonds below their total investment caps, there is no immediate risk.

A bone of contention

SEBI’s proposal of 100-year tenor for AT-1 bonds is a bone of contention while broadly there is agreement over other clauses that cap MF investments in these instruments, the sources said. MFs value these bonds as if they are maturing on their call date, which is the day on which its issuer may call back these bonds and repay the holders. Currently, there is no compulsion on the issuer to do so and they can call them any time.


Last week, the DFS, in an office memo to SEBI, requested the regulator to roll back a clause in its March 10 circular that specified a 100-year tenor for the AT1 bonds. SEBI’s circular changing the key valuation metrics was to be effective from April 1.

Rise in yields

The DFS is worried because the yields of AT-1 bonds issued by large banks have already shot up post the SEBI circular. But the regulator is keen on projecting that it works with some autonomy, the sources said.

SEBI has told the DFS that even the Association of Mutual Funds in India has supported its objective of fair valuation as a market determined price is the best for all investors. According to sources, both SEBI and AMFI are of the view that only in the event of lack of traded prices, the question of valuing at maturity arises. But given a reasonably active market for these bonds, the issue is narrower than it appears.

Since the minimum reserve capital requirements of banks under the Basel III norms were raised, they have used these bonds to raise funds by paying higher-than-usual interest rates. AT-1 bonds have turned out to be riskier investments than equity, sources close to SEBI said.

Still if push comes to shove, SEBI may at best look to just lower the proposed 100-year maturity period but not withdraw its circular, sources said.

Published on March 17, 2021

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