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Valuation Norms for AT-1 Bonds are Relaxed by SEBI

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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 maturity will be 10 years until March 31, 2022, according to a statement released by the SEBI. It will then be raised to 20 and 30 years within the next six months. The statement went on to say that the AT1 bonds’ residual maturity would increase to 100 years from the date of issuance starting in April 2023.The deemed residual maturity of the Basel III Tier 2 bonds will be considered for 10 years or contractual maturity until March 2022, according to the document. The residual maturity will be in line with the contractual maturity after March 2022.SEBI issued these guidelines after the Finance Ministry objected to a rule that would have valued the considered residual maturity of banks’ Basel III additional tier 1 (AT1) bonds as a 100-year debt starting April 1, 2021.

Background

On March 15, 2021, the SEBI released a circular capping debt mutual fund (MF) exposure to perpetual bonds. The AT1 and Tier 2 bonds were also included. SEBI had also instructed MFs to price such bonds using 100-year valuation norms. This move was also met with opposition from industry players.They claim that deferring the 100-year valuation standard by two years would give fund managers and banks more flexibility to reassess their portfolios and bond issuances.

About AT-1 Bonds

Additional Tier-1 bonds (AT-1 bonds) are unsecured, permanent bonds issued by banks to augment their core capital base in order to comply with Basel-III regulations. These bonds can be bought through “initial private placement offers for the bonds by banks seeking to raise cash, as well as secondary market buys of AT-1 bonds that are already traded.” These bonds are similar to most bank or company bonds, but they pay a higher interest rate.

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