{"id":14562,"date":"2021-03-26T00:00:00","date_gmt":"2021-03-26T00:00:00","guid":{"rendered":"https:\/\/www.nextias.com\/current_affairs\/uncategorized\/26-03-2021\/relaxations-in-valuation-norms-for-at1-bonds\/"},"modified":"2021-03-26T00:00:00","modified_gmt":"2021-03-26T00:00:00","slug":"relaxations-in-valuation-norms-for-at1-bonds","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/26-03-2021\/relaxations-in-valuation-norms-for-at1-bonds","title":{"rendered":"Relaxations in valuation norms for AT1 bonds"},"content":{"rendered":"<p><strong>In News<\/strong><\/p>\n<p>Recently, Sebi has announced <strong>some relaxations in valuation norms for AT1 bonds.<\/strong><\/p>\n<ul>\n<li>It was done after the Finance Ministry asked <strong>Sebi <\/strong>to review restrictions on mutual<strong> <\/strong>fund investments in<strong> additional tier-1 (AT1) bonds.<\/strong><\/li>\n<\/ul>\n<p><strong>Why did the Finance Ministry ask Sebi to review the original decision?<\/strong><\/p>\n<ul>\n<li>The Finance Ministry has sough<strong>t withdrawal of valuation norms for AT1 bonds<\/strong> prescribed by Sebi for <strong>MF houses<\/strong> as it <strong>might lead to MFs making losses <\/strong>and <strong>exiting from these bonds,<\/strong> <strong>affecting capital raising plans of PSU banks.<\/strong><\/li>\n<li>The government <strong>doesn\u2019t want the fund mobilisation of banks<\/strong> disrupted at a time two <strong>PSU banks are on the privatisation block. <\/strong><\/li>\n<\/ul>\n<table border=\"1\" cellspacing=\"0\" style=\"width:735px\">\n<tbody>\n<tr>\n<td style=\"background-color:#fff2cc; width:468.0pt\">\n<p><strong>What was the original Sebi directive?<\/strong><\/p>\n<ul>\n<li>On March 10, Sebi directed <strong>mutual funds to value these perpetual bonds<\/strong> as a 100-year instrument.\n<ul>\n<li>This essentially means <strong>MFs will have to work<\/strong> on the <strong>assumption<\/strong> that these <strong>bonds would be redeemed in 100 years. <\/strong><\/li>\n<\/ul>\n<\/li>\n<li>The regulator also asked MFs to <strong>limit ownership of the bonds<\/strong> at 10% of the assets of a scheme, as these could be <strong>riskier than other debt instruments<\/strong>.\n<ul>\n<li>Sebi has possibly made this decision after the RBI allowed a write-off of Rs <strong>8,400 crore on AT1 bonds<\/strong> issued by Yes Bank Ltd after it was rescued by the State Bank of India.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><strong>Relaxation provided by SEBI<\/strong><\/p>\n<ul>\n<li>\u00a0AT1 bonds will continue to be treated as <strong>100-year bonds<\/strong> and there will be unwinding of <strong>positions by mutual funds in a specific timeframe.<\/strong><\/li>\n<li>The deemed residual maturity of <strong>Basel III AT-1 bonds<\/strong> will be <strong>10 years<\/strong> until March 31, 2022.\n<ul>\n<li>It will be <strong>increased to 20 years from April 1, 2022, to September 2022,<\/strong> and <strong>30 years for the subsequent six-month period.<\/strong><\/li>\n<li>\u00a0From April 2023, the residual maturity will become 100 years from the date of issuance of the bond.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li>Deemed residual maturity of <strong>Basel III tier-2 bonds<\/strong> will be considered <strong>10 years or<\/strong> <strong>contractual maturity<\/strong>, whichever is earlier, until March 2022.\n<ul>\n<li>\u00a0Afterwards, it will be as per the contractual maturity.<\/li>\n<\/ul>\n<\/li>\n<li>Sebi has also asked the Association of Mutual Funds of India to issue detailed guidelines with<strong> respect to the valuation of bonds<\/strong> issued under the <strong>Basel III framework<\/strong>, which should be implemented by<strong> April 1.<\/strong><\/li>\n<\/ul>\n<p><strong>f <\/strong><img decoding=\"async\" src=\"https:\/\/cfstatic.nextias.com\/cdn-cgi\/image\/format=auto\/file_library\/mix_content\/840921115252298800_image.jpg\" style=\"height:282px; margin-left:80px; margin-right:80px; width:455px\" \/><\/p>\n<ul>\n<li>Sebi has given a <strong>timeframe to unwind the AT1 <\/strong>bond investment<strong> positions of mutual funds.<\/strong><\/li>\n<li>\u00a0It\u2019s <strong>temporary relieas they don\u2019t have to rush for redemptions<\/strong> and prevent losses.<\/li>\n<li>\u00a0However, the original position of Sebi that perpetual bonds will be treated as 100-year bonds remains; there\u2019s no change in the <strong>10% cap on ownership of bonds<\/strong> in a <strong>particular mutual fund scheme.<\/strong><\/li>\n<li>\u00a0Sebi has stood its ground on its basic premise on perpetuity and limit on investments while <strong>allowing mutual funds<\/strong> to exit at <strong>specific intervals. <\/strong><\/li>\n<li>There won\u2019t be panic redemptions, but banks are unlikely to be fully <strong>happy with the partial relief.<\/strong><\/li>\n<\/ul>\n<p><strong>Impacts on <\/strong><\/p>\n<p><strong>\u00a0Mutual Funds<\/strong><\/p>\n<ul>\n<li>MFs have treated the date of the call option on AT1 bonds as the maturity date.<\/li>\n<li>\u00a0If these are treated as 100-year bonds, it raises the risk as they become ultra-long-term instruments.<\/li>\n<li>This could also lead to volatility in the prices of these bonds.<\/li>\n<li>As the risk increases, so does the yields on these bonds.\n<ul>\n<li><strong>Bond yields and bond prices<\/strong> move in opposite directions,<strong> higher yield<\/strong> will <strong>drive down the price<\/strong>, which in turn will lead to a <strong>decrease in the net asset<\/strong> value of <strong>MF schemes holding these bonds.<\/strong><\/li>\n<\/ul>\n<\/li>\n<li>There would have been <strong>panic redemptions and losses for MFs.<\/strong><\/li>\n<li>Moreover, these bonds are not liquid and it would have been <strong>difficult for MFs to sell these to meet redemption pressure.<\/strong><\/li>\n<li>\u00a0With Sebi relaxing norms, there will be orderly liquidation of AT1 bond holdings.<\/li>\n<\/ul>\n<p><strong>Banks<\/strong><\/p>\n<ul>\n<li>AT1 bonds have emerged as the capital instrument of choice for state banks as they strive to<strong> shore up capital ratios<\/strong>.<\/li>\n<li>If there are<strong> restrictions on investments<\/strong> by <strong>mutual funds in such bonds<\/strong>, banks will <strong>find it tough to raise capital<\/strong> at a time when <strong>they need funds <\/strong>in the wake of <strong>soaring bad assets.<\/strong><\/li>\n<li>\u00a0A major chunk of <strong>AT1 bonds is bought by MFs. <\/strong><\/li>\n<li>For banks, the latest Sebi relaxation doesn\u2019t give any major relief as they are likely to find it<strong> difficult to get investors for AT1 bonds.<\/strong><\/li>\n<\/ul>\n<table border=\"1\" cellspacing=\"0\" style=\"width:624px\">\n<tbody>\n<tr>\n<td style=\"background-color:#fff2cc; width:468.0pt\">\n<p><strong>What are AT1 bonds?<\/strong><\/p>\n<ul>\n<li>These are <strong>unsecured bonds <\/strong>that have <strong>perpetual tenure \u2014 or no maturity date<\/strong>.<\/li>\n<li>\u00a0They <strong>have a call option<\/strong>, which can be used by the banks to buy <strong>these bonds back from investors. <\/strong><\/li>\n<li>The interest rate on these bonds is higher than fixed deposit rates which make them an attractive investment option.<\/li>\n<li>The holders of these bonds can get their investments back by selling them in the secondary debt market unless the issuer redeems them.<\/li>\n<li>AT1 bonds are <strong>subordinate <\/strong>to <strong>all other debt <\/strong>and only <strong>senior to common equity. <\/strong><\/li>\n<li><strong>Mutual funds<\/strong> are among the <strong>largest investors <\/strong>in <strong>perpetual debt instruments<\/strong> and hold over Rs 35,000 crore of the outstanding additional tier-I bond issuances of Rs 90,000 crore.<\/li>\n<\/ul>\n<p><strong>What are Basel Norms?<\/strong><\/p>\n<ul>\n<li><strong>Basel <\/strong>is a city in <strong>Switzerland<\/strong>.<\/li>\n<li>\u00a0It is the headquarters of the <strong>Bureau of International Settlement (BIS)<\/strong>, which fosters <strong>cooperation among central banks<\/strong> with a common <strong>goal of financial stability <\/strong>and common <strong>standards of banking regulations<\/strong>.<\/li>\n<li>Basel guidelines refer to broad <strong>supervisory standards formulated<\/strong> by this group of central banks called the <strong>Basel Committee on Banking Supervision (BCBS).<\/strong><\/li>\n<li>The set of the agreement by the BCBS mainly focuses on <strong>risks to banks<\/strong> and the financial system is called the<strong> Basel accord.<\/strong><\/li>\n<li>The purpose of the accord is to ensure that<strong> financial institutions have enough capital<\/strong> on account to meet <strong>obligations and absorb unexpected losses.<\/strong><\/li>\n<li>India has accepted <strong>Basel accords for the banking system<\/strong>.<\/li>\n<li>Basel III norms were a set of rules that banking regulators around the world came up with after the global financial crisis in 2008, to strengthen bank balance sheets.<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><a href=\"https:\/\/indianexpress.com\/article\/explained\/will-sebi-relaxation-of-at1-bonds-valuations-norms-give-relief-to-mfs-banks-7241062\/#:~:text=The%20Finance%20Ministry%20has%20sought,raising%20plans%20of%20PSU%20banks.\" target=\"_blank\" rel=\"noopener\">Source :IE<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In News Recently, Sebi has announced some relaxations in valuation norms for AT1 bonds. It was done after the Finance Ministry asked Sebi to review restrictions on mutual fund investments in additional tier-1 (AT1) bonds. Why did the Finance Ministry ask Sebi to review the original decision? The Finance Ministry has sought withdrawal of valuation [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":14563,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[26,46],"class_list":["post-14562","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-current-affairs","tag-gs-3","tag-indian-economy-related-issues"],"acf":[],"jetpack_featured_media_url":"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2023\/07\/62576136268277current-affairs.jpg","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/14562","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=14562"}],"version-history":[{"count":0,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/14562\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media\/14563"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=14562"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=14562"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=14562"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}