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FinMin asks SEBI to withdraw circular on AT1 bonds

PALAK SHAH Mumbai | Updated on March 12, 2021

“The clause on valuation is disruptive in nature”, says the Ministry note

The Finance Ministry has asked market regulator SEBI to withdraw its earlier circular on the controversial AT1 Bonds.

The Ministry has told SEBI chairman Ajay Tyagi in a note that the clause on valuation of the AT1 bonds is disruptive in nature.

The Department of Financial Services (DFS), under the Finance Ministry, has issued a memorandum to Tyagi asking him to withdraw a rule treating AT1 bonds (perpetuals) as having 100-year maturity. The memorandum was sent on Thursday.

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MF scenario grim

A circular on the AT1 bonds was issued by SEBI on March 10 and the rules were to be effective from April 1. But Mutual Fund (MF) expressed a grim scenario with regard to the circular and said that a revaluation of such bonds would lead to huge losses. The MF representative body had made representation to withdraw the circular.

“Considering the capital needs of banks going forward and the need to source the same from the capital markets, it is requested that the revised capital norms to treat all perpetual bonds as 100 year tenor be withdrawn. The clause on valuation is disruptive in nature. Instructions that reduce concentration risks on such instruments in MF portfolio can be retailed as MF have adequate headroom even with 10% ceiling,” the Finance Ministry note told SEBI.

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Depressed valuations

Further, the letter said there could be ‘potential swings in NAV’ that can follow from the valuation norms and possible disruption in the debt markets as mutual funds sell such bonds in anticipation of redemptions.

“This can also affect capital raising by PSU banks forcing them to rely more on the government for capital. Over the long run for all banks, not just PSUs, more equity dilution will take place (due to SEBI circular). This will lead to further depressed valuations,” the FinMin letter says.

Published on March 12, 2021

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