InvestorQ : What is this SEBI restriction on AT1 bonds and why has the government asked SEBI gto withdraw the circular?
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What is this SEBI restriction on AT1 bonds and why has the government asked SEBI gto withdraw the circular?

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Mary Joseph answered.
4 weeks ago
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In response to the recent SEBI circular to treat all AT1 bonds issued by bonds as 100-year bonds, the MOF has asked SEBI to withdraw the circular. AT1 bonds have been the bone of contention in cases of rescued banks like Yes Bank and LVB where the entire AT1 bonds were written off by the bank leaving investors in the lurch. The Finance Ministry felt that such stipulation would reduce the attractiveness at a time when banks need to raise funds.

Currently, AT1 bonds were valued by mutual funds as short-term instruments similar to G-Sec. By classifying it as a 100-year bond, many of these bonds would have to be revalued lower and that could result in panic redemptions. In principle, SEBI is correct that the AT1 bonds are risky bonds and cannot be classified as G-Secs, which are free of default risk.

In addition, the SEBI also put restrictions on the exposure of mutual funds to debt instruments with special features like in the case of AT1 bonds. SEBI had stipulated that any mutual fund under all its schemes should not own more than 10% of such special instruments issued by a single issuer. The Ministry of Finance, urged by banks, has asked SEBI to withdraw both these clauses due to their likely implications.

SEBI had also stipulated in the circular said that close-ended debt schemes should not invest in perpetual bonds or AT1 bonds as they are better known. In 2020, several debt funds were caught on the wrong foot in Yes Bank’s AT1 bonds, which was written down to zero before the merger with SBI. Mutual funds have an exposure of Rs.37,000 core to AT1 bonds and banks were worried about this framework coming into effect from 01 April 2021.

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