Perpetual bonds: MFs heave a sigh of relief

Our Bureau Mumbai | Updated on March 23, 2021

Mutual Funds have heaved a sigh of relief with the markets regulator SEBI easing the norms on valuation of perpetual bond investments.

Last week, the yields on perpetual bonds floated by banks moved up 25-35 basis points following the Securities and Exchange Board of India prescribing a 100-year validity for the Basel-III bonds issued by the banks. However, the Ministry of Finance had directed SEBI to withdraw the circular as it blocks MF investments in these bonds.

On Monday, SEBI issued a circular that gave MFs two years to adhere to the new norm.

Mutual funds have invested about ₹35,000 crore in these securities. The top four MFs alone hold 80 per cent in these bonds.

Mahendra Jajoo, Chief Investment Officer (fixed income), Mirae Asset, said the revised glide path announced by SEBI will provide sufficient time for funds to rebalance their debt portfolios even while avoiding any undue volatility in market.

Piyush Nagda, Head - Investment Products at Prabhudas Lilladher, said SEBI’s earlier circular on valuation of perpetual bonds could have resulted in huge mark-to-market losses to mutual funds and adversely affected the capital raising ability of banks.

SEBI has amended the earlier circular and provided for a “gradual glide path” for AT-1 bonds valuation. The deemed residual maturity for Basel III tier-2 bonds with a call option up to 31st March 2022 will be 10 years or the contractual maturity whichever is earlier, followed by 20-year, 30-year and 100-year maturity for other time periods.

This relaxation is expected to minimise the impact of MTM losses on bond yields in the range of 25-30 bps only compared to the earlier scenario, he added.

Published on March 23, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like