The Finance Ministry has written to India’s capital market regulator, asking it to withdraw recently issued guidelines on valuing perpetual bonds, such as additional tier-1 securities issued by banks.
On Wednesday, the Securities and Exchanges Board of India had asked that these be valued as 100-year bonds. The directive was part of a wider circular on prudential limits for mutual fund investments in AT-1 bonds.
Objecting to the valuation norms prescribed, the Department of Financial Services said this could lead to large mark-to-market losses for mutual funds. No benchmark exists for 100-year bonds, the letter said. It added that mutual funds could see large swings in the net asset value of units and this could lead to panic redemption in these securities. Additionally, capital raising by PSU banks will be adversely impacted and lead to increased reliance on the government for capital raising, the letter said.
BloombergQuint has reviewed a copy of the letter. An email sent to SEBI was not immediately answered.
According to the letter, mutual funds have subscribed to Rs 35,000 crore worth AT-1 bonds, out of the Rs 90,000 crore worth bonds issued by banks.
Apart from the guidelines on valuing these securities, SEBI had also prescribed prudential limits for mutual fund investment norms in AT-1 bonds.
- No mutual fund under all its schemes shall own more than 10% of such instruments issued by a single issuer.
- A mutual fund scheme shall not invest more than 10% of its NAV of the debt portfolio of the scheme in such instruments.
- A mutual fund scheme shall not invest more than 5% of its NAV of the debt portfolio of the scheme in such instruments issued by a single issuer.
The Finance Ministry did not object to these. “Instructions that reduce concentration risk of such instruments in MF portfolios can be retained as MFs have adequate headroom even within the 10% ceiling,” it said.