InvestorQ : Why has the recent circular introduced by SEBI on the valuation of AT1 bonds become such a controversial topic?
Niti Shenoi made post

Why has the recent circular introduced by SEBI on the valuation of AT1 bonds become such a controversial topic?

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ishika Banerjee answered.
4 weeks ago
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The SEBI had introduced the circular for more realistic provisioning of AT1 bonds by mutual funds. However, banks have objected to it and now MOF is putting pressure. Here it is.

· In the previous week SEBI stipulated changes to the AT1 bonds investment by capital market intermediaries, especially debt mutual funds.

· Firstly, SEBI has called for capping investment limit of a debt fund in AT1 bonds of one issuer to 10% of corpus and 5% of individual debt fund schemes.

· Secondly, close-ended funds have been barred from investing in AT1 bonds of banks. Current they can only invest in debt instruments with maturity shorter than fund tenure.

· SEBI has also stipulated a 100-year tenure for AT1 bonds as against the perpetual classification that it gets now. This will call for higher provisioning by MFs.

· The risks of these AT1 bonds have been underlined for MFs after Yes Bank and LVB repudiated their AT1 bonds leading to investors getting nothing.

· SEBI felt that a 100-year maturity would force MFs to better reflect the risk and market value of their holdings in AT1 bonds, which is a valid suggestion.

· Mutual funds are worried because they hold Rs.37,000 crore of AT1 bonds and this rule would force them to make huge provisions.

· Banks have been relying on debt funds to finance their AT1 bond needs and they are worried about lack of appetite and have lobbied against this rule.

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