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. Business Standard, 23rd March 2021
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