The finance ministry has asked the market regulator Sebi to withdraw its directive to mutual fund houses to consider additional in Tier I (AT-1) bonds as having a maturity of 100 years, citing the risk of market disruption and a negative effect on banks capital raising.
According to the Basel III rules, AT-1 bonds are permanent, equivalent to equity securities. They are part of a bank’s Tier I reserves. The Securities and Exchange Board of India (Sebi) released regulations earlier this week limiting mutual funds’ combined investments in Tier I and Tier II bonds to 10%. It also stated that all perpetual bonds should be considered as having a 100-year maturity.
The Department of Financial Services said in an office memorandum dated March 11 addressed to Sebi chairman and secretary, economic affairs, that the new limits would restrict the incremental capacity of mutual funds (MFs) to buy bank bonds which increase coupon rates.
Considering the capital needs of banks in the future and the need to procure the same from capital markets, it is requested that the updated valuation norms to treat all perpetual bonds as 100-year tenor be withdrawn, as per the memorandum.
The (Sebi) announced on Wednesday that a mutual fund under any of its schemes would not be allowed to own more than 10% of such instruments issued by a single issuer, imposing new restrictions on MFs’ exposure to debt instruments with special features.
The memorandum said that the Sebi circular could trigger panic redemption by mutual funds, which would affect the overall corporate bond market because fund houses would have to sell other bonds to increase liquidity in debt schemes. This could result in higher funding costs for companies at a time when the recovery is still in its early stages, according to the study.
