On Monday, The Securities and Exchange Board of India (SEBI) issued a circular clarifying the valuation of bonds issued under the Basel III framework. SEBI amended the valuation rule attached to perpetual bonds.
The deemed residual maturity of Basel III additional tier-1 (AT-1) bonds will be 10 years the Financial Year (FY) of 2023, mentioned in the circular.
As per the revised circular, for valuation, the deemed residual maturity for Basel III AT-1 bonds are as follows:
- 10 years — time period up to 2022.
- 20 years — time period falling between Apr. 1- Sep. 30, 2022 30 years
- 30 years — time period falling between Oct. 01, 2022 to Mar
- 100 years — time period Apr. 01, 2023 onwards (100 years from the issuance of bonds)
The deemed residual maturity for Basel III Tier-2 bonds will have a period of 10 years, till Mar. 31, 2022 or will be based on the contractual maturity period – whichever is earlier.
The periods for such bonds thereafter will be bound through the contractually agreed maturity periods.
As per the news excerpt published in Moneycontrol, a fund manager, requesting anonymity, told them that “The impact is likely to be less compared to what it would have been if these bonds were to be valued as 100-year maturity papers. The bonds of good-quality banks, where there is a low probability of not exercising the call option, the yields would not rise much.”
Further, the circular notifies that if the issuer does not exercise call option for any An International Securities Identification Number (ISIN), then the valuation and calculation of duration shall be done considering the 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.’
The same would be reflected in case even if the non -exercise of the call option is due to the financial stress of the issuer or if there is any adverse news.
The circulation also advises the Association of Mutual Funds in India (AMFI), to issue guidelines for the valuation of bonds issued under the Basel-III framework, which will be implemented by April 01, 2021.
This notice has come in public domain after the market regulator, SEBI had asked Mutual Funds (MFs) for valuation, the maturity of all perpetual bonds to be treated as 100 years from the date of their issuance. So far, the perpetual bonds valued by funds on a yield-to-call basis.
The earlier circular issued by SEBI received mixed responses from the industry, while the Finance Ministry has asked the regulator to withdraw its guidelines, stating the potentially large mark-to-market losses for mutual funds, and difficulties in raising capital by banks.
“Considering the capital needs of banks going forward and the need to source the same from the capital markets, it is requested that the revised valuation norms to treat all perpetual bonds as 100-year tenor be withdrawn,” the office memorandum of Department of Financial Services to SEBI chairman and secretary and economic affairs.