What are AT1 bonds?

Department of Financial Services (DFS), under finance ministry, has sent a memorandum to the chairman of Securities and Exchange Board of India (Sebi) and has asked it to withdraw a rule treating AT1 bonds (perpetuals) which is having 100-year maturity.

Highlights

The circular was issued by SEBI on March 10, 2021 regarding the AT1 bonds and this will take effect from April 1, 2021. This circulation has generated significant apprehension in mutual fund industry for which the losses would result from the consequential revaluation of AT1 bonds.

About AT1 Bonds

AT1 bonds are the hybrid products which offer a fixed return which can be reset. These bonds are however risky as equities. These are unsecured instruments and are complex in nature. the investors are required to read the fine print before they put money in them. The bonds do not have fixed maturity. However, the banks which are issuing them can repay them at certain dates. These specified dates are regarded as the maturity dates historically.

What was the issue?

The AT1 bonds with the 100 years of maturity was being regarded as a risk. A change in the maturity to 100 years had the potential to increases the interest rate sensitivity of the portfolio of the fund. This, the investors were vulnerable to losses in case of even a small increase in interest rates. Thus, the mutual funds have expressed fears of increase in redemptions by investors because of fear of such losses. On the other side, the bonds are of relatively low liquidity because of which it is hard to sell them.

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