SEBI relaxes Valuation Norms for AT-1 Bonds

The Securities and Exchange Board of India (SEBI) relaxed the norms for valuing perpetual bonds on March 22, 2021 after the finance ministry opposed the norms which proposed to value banks deemed residual maturity of Basel III additional tier 1 (AT1) bonds as 100-year debt.

Highlights

The statement released by the SEBI highlighted that the maturity would be 10 years till March 31, 2022. Later it will be increased to 20 and 30 years over subsequent six-month period. The statement further highlighted that, from April 2023 onwards, the residual maturity of the AT1 bonds will become 100 years from date of issuance of these bonds. It further states that, the deemed residual maturity of the Basel III Tier 2 bonds will be considered for 10 years or contractual maturity until March 2022. After March 2022, residual maturity will be in accordance with the contractual maturity. These guidelines were published by SEBI after the Finance Ministry opposed the norm which would have been valuing the deemed residual maturity of Basel III additional tier 1 (AT1) bonds of the banks as a 100-year debt from April 1, 2021.

Background

Earlier, the SEBI had issued a circular on March 15, 2021 to cap the debt mutual fund (MF) exposure to perpetual bonds. It also included the AT1 bonds and Tier 2 bonds. SEBI had also directed the MFs to use 100-year valuation norms to price such bonds. This move was not supported by the Industry player as well. They mentioned that, deferring the 100-year valuation norm by two years will provide the fund managers and banks time to recalibrate investments and bond issuances.

About AT-1 Bonds

The Additional Tier-1 bonds (AT-1 bonds) are an unsecured, perpetual bonds which is issued by the banks to support their core capital base to meet with the Basel-III norms. These bonds can be acquired from the “Initial private placement offers for the bonds by banks who are looking after raising money and from the Secondary market buys of AT-1 bonds which are already traded”. These bonds are similar to other bonds issues by banks or companies but they pay a higher rate of interest.

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