InvestorQ : What is the new rule announced by SEBI for perpetual bonds and how does it affect Debt Mutual Fund Investors?
Anushri Vasa made post

What is the new rule announced by SEBI for perpetual bonds and how does it affect Debt Mutual Fund Investors?

Answer
image
Ayushi Kampani answered.
3 months ago
Follow
Recently, SEBI has modified investment norms for bonds that are quasi-equity in nature. Such bonds could be used to absorb losses before equity or could be converted into equity in case of a specified event. The rule comes into effect from April 1, 2021, with the issuance of Additional Tier 1 and Tier 2 bonds (AT1 and AT2).

What are AT1 and AT2 bonds?

Banks use these bonds to maintain their capital to meet the capital requirements as per BASEL III requirements and norms.
These bonds are perpetual and hence no maturity. Thus, banks do not need to re-pay the capital if they do not wish to. All they could pay is periodic interest and keep it that way. The claims of these bondholders are subordinate to the claims of equity shareholders.

For several banks, these bonds were written down to zero, and hence SEBI in its circular dated October 6, 2020, specified that AT1 bonds could only be issued to institutional buyers and shall not be available to retail investors.
With these changes, the investors won’t be able to keep perpetual bonds as part of their portfolios in which there are restrictions on average maturity. So, ultra-short duration, short-term bonds, and low duration bonds have perpetual bonds in the portfolio. Also, as per the new rule instead of valuing perpetual bonds at CALL dates, the maturity of such bonds shall be considered at 100 years.

Impact:

If your mutual fund scheme has 1% exposure to such a fund, the impact will be nominal. However, some of the banking and PSU debt funds have a higher exposure to such bonds, say 15% and if the value of such bonds is written off by 25%, the NAV of the MF scheme will go down by 3.75%. So, if the exposure to AT1 bonds in your portfolio is high, you might want to reconsider your investment in that MF scheme.

1 Views