Sebi eases valuation norms for AT-1 bonds

Implementation of 100-year valuation norm pushed to April 2023.

The Securities and Exchange Board of India (Sebi) on Monday relaxed the norms for valuing perpetual bonds.

The norms, which had sought to value banks’ deemed residual maturity of Basel III additional tier 1 (AT1) bonds as 100-year debt from April 1, were strongly opposed by the finance ministry.

In a statement released on Monday, the regulator said the maturity would be 10 years until March 31, 2022, and would be increased to 20 and 30 years over the subsequent six-month period.

And from April 2023 onwards, the residual maturity of AT1 bonds will become 100 years from the date of issuance of the bond.

Meanwhile, the deemed residual maturity of Basel III Tier 2 bonds will be considered 10 years or contractual maturity, whichever is earlier, until March 2022.

Post that, it will be in accordance with the contractual maturity, Sebi said.

On March 15, Sebi had issued a circular capping debt mutual fund (MF) exposure to perpetual bonds, which include AT1 bonds and Tier 2 bonds.

It had also directed MFs to use the 100-year valuation norms for pricing such bonds.

The circular was to come into effect from April 1, 2021.

Industry players said deferring the 100-year valuation norm by two years would give fund managers and banks time to recalibrate their investments and bond issuances.

Sebi said the new valuation methodology was based “on the representation of the mutual fund industry to consider a glide path for implementation of the policy and request of other stakeholders”.

Sebi further said if the issuer did not exercise a call option, the valuation and calculation of duration would be done considering the maturity of 100 years from the date of issuance for AT1 bonds and contractual maturity for Tier 2 bonds.

Also, if the non-exercise of a call option is due to the financial stress of the issuer or if there is any adverse news, this shall be reflected in the valuation.

The finance ministry had taken strong objection to Sebi’s proposal on valuing perpetual bonds, which are primarily issued by public sector banks to meet their capital requirement under the Basel III regulations.

“Capital raising by PSU banks from the market will be adversely impacted due to limited appetite from other investors.

"These would lead to increased reliance on government for capital raising by PSU banks as AT1 and Tier 2 would need to be replaced by core equity,” the finance ministry had written in a letter to Sebi.

Yields of perpetual bonds issued by banks such as State Bank of India (SBI) and Bank of Baroda (BoB), had gone up by as much as 90 basis points following Sebi’s March 15 circular.

Some banks had even deferred the issuance of AT1 bonds to avoid paying high yield.

According to an estimate, ban­ks have issued AT1 and Tier 2 bonds worth Rs 3.5 trillion.

A fifth of these bonds are held by MFs. Of the outstanding AT1 issu­ance of Rs 90,000 crore, more than Rs 35,000 crore are held by MFs, according to a note by the finance ministry.

In the abse­nce of specified valuation nor­ms, MFs used to consider the call-option date on such bonds as deemed maturity date.

The head of fixed income of a leading fund house said this would still provide a much-needed relief to the MF industry.

“Given the situation, the regulator has done a decent job as risk will be curtailed.

"At the same time, it has given time to the industry to adjust to the new regulations, he said, adding there will be some short-term volatility, but the impact now will not be as severe as the old circular."

Photograph: Shailesh Andrade/Reuters