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SEBI amends recent AT-1 bond valuation norms
Over a week after the Finance Ministry asked the capital market regulator SEBI to withdraw its recent circular on valuation norms for AT-1 bonds, it has amended and eased the regulations.
In a circular on Monday, the regulator said the deemed residual maturity of Basel III additional tier-1 (AT-1) or the perpetual bonds will be 10 years until March 31, 2022.
Eventually, it will be increased to 20 and 30 years over the subsequent six-month period.
Staring April 2023, the residual maturity of AT-1 bonds will become 100 years from the date of issuance of the bond, it said.
The SEBI said that decision has been taken, based on the representation of the mutual fund industry to consider a glide path for implementation of the policy and request of other stakeholders.
"Further, if the issuer does not exercise call option for any ISIN then the valuation and calculation of Macaulay Duration shall be done considering maturity of 100 years from the date of issuance for AT-1 Bonds and Contractual Maturity for Tier 2 bonds, for all ISINs of the issuer," it said.
In addition, if the non-exercise of call option is due to the financial stress of the issuer or if there is any adverse news, the same shall be reflected in the valuation, the SEBI said.
Earlier this month, the securities market regulator had issued a circular capping debt mutual fund exposure to perpetual bonds, which include AT-1 bonds and tier-2 bonds. It directed mutual funds to use the 100-year valuation norms for pricing such bonds, which drew severe concern among the industry players.
The circular was to come into effect from April 1, 2021.
The Finance Ministry later asked the SEBI to withdraw its March 10 circular on AT-1 bonds.
In a memorandum to the SEBI, the Department of Financial Services (DFS) has said that the revised norms will lead to huge "mark to market losses" for investors.
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