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Why has SEBI’s latest circular about the new norms regarding AT-1 Bonds created havoc among mutual funds?

The revelation of a circular by the Securities Exchange Board Of India (SEBI) sent shock waves across the mutual fund’s stakeholders. An announcement that was made on March 11 became a topic of discussion within the share markets fraternity. The market’s regulation might be the precise decision overall, but the government nor the funding houses have the appetite to churn the market. How will this move shape the growth of mutual funds is uncertain, but investors and policymakers have to abide by SEBI’s guidelines as of now.

The Securities Exchange Board of India(SEBI) issuing circular regarding the valuation of bonds has brought in a realistic overview of the market despite the frayed tempers arising in the short term. Concerns regarding the price of mutual funds were short-lived as the Finance Ministry of India sent a note to SEBI advising it to drop the 100-year maturity clause in the bonds. This expansive change could bring a soothing effect to the ever-growing tensions in the mutual fund houses. It provided a sigh of relief to the debt mutual funds as this clause would have led to disruptions among the stock markets.


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The circular could become a worrying situation for the government as another strain of bad publicly can perpetuate income injecting from the AT-1 bonds. Where has the hype around AT-1 bonds originated from India, and is it another instrument for trading norms or differs in its valuation and risk factor?

AT-1 bonds are conceptually perpetual unsecured bonds that the banks’ issue on account of their capital venture. They first burst into the consciousness of the debt investors during the Yes Bank fiasco. Although these instruments may categorize as bonds but are far from different in their valuation and perspective of mutual funds.

The SEBI circular was also not particularly contentious barring one clause. While much of the guidelines emphasized the exposure limits of funds to such bonds, it also reverberated that the mutual funds can not hold more than 10 percent from a single issuer under any circumstances.

The Yes Bank fiasco could be an overview of the instability that AT-1 bonds bring along with it. The average investors realized that the so-called bonds were more of a quasi-equity instrument with a higher risk profile than the prevailing bonds in the mutual funds trading. The scenario that happened almost a year ago is still confusing in the hindsight of the low-key investors.

The initial phases in the issuing of these bonds were not of much value as there was a feeling of anxiety and disbelief among investors to raise their funds into such a risky profile of mutual bonds. The amount of risk that comes along with the mutual funds could not be measured. And that is why it is advised under many channels that the investors should properly follow the instructions before inculcating their funds into it.


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Before the announcement of the circular by SEBI, the perpetual bonds didn’t include the 100-year maturity clause. What changes it would bring for the mutual funds is a matter of concern, as this clause generally means that these bonds would be redeemed in 100 years.

Long-term investments are subject to higher risks, and an extension in the ongoing maturity clause will either reap more rewards or a substantial downfall in the returns of the investors. Contradictory to this particular clause is that Bond yields and bond prices tend to delineate in the opposite direction and therefore, higher yields will drive down the price of the bonds immensely.

Investors would have to vary their holdings to prevent drastic losses as if they look to invest lump-sum it will lead to a decrease in the net asset value of Mutual Funds holding the major proportion of these bonds and thus, diversely affect the holdings of the big investors across the mutual funds. While this is partially applicable in the short-term, as it would be a consolidated paper adjustment for the investors to look into and it would not affect the actual returns in the longer-term.

The big investors generally drive-in the maximum proportion of their investments in the debt funds as they seek higher rewards in the long run. The reluctance of the investors to backdown has proven troublesome in the short run, as for traders investing their valuable savings in the debt-equity, there seems to be a hefty challenge on the cards shortly.

They can start redeeming their holdings before April 1. While the bigger fund houses could ride it out, the smaller ones have to consolidate with rapid selling to procure the redemption pressures. All this comes down to the approach applied by the investors in arduous situations to overcome the piled-up pressure of debts.

“Potential redemptions on account of this new rule would lead to mutual fund houses engaging in panic selling of the bonds in the secondary market leading to widening of yields,” said Uttara Kolhatkar, Partner, J Sagar Associates.


SEBI's new norms for mutual fund sector to kick in from tomorrow - The  Hindu BusinessLineState banks are bound to different sources for securities for raising their revenues, and AT-1 Bonds play an instrumental part in all the belongings. AT1 bonds have emerged as the capital instrument of choice for state banks as they strive to shore up capital ratios. Nobody’s thinking has gone until the point where they thought that what if strict restrictions got imposed into the regulations of the bonds, how drastically it could impact the banks’ dealing of securities.

Over the past two days, SEBI has implemented restrictions on investments by mutual funds, as the banks find it tough to raise capital assets in the time when the revenues are down and out. A significant chunk of AT-1 bonds is bought by mutual funds, through which the stakes of the bond yields have risen to 40% over the last five years.

AT-1 bonds still have less awareness across the banks, holding a relatively great proportion of the capital structure as these are attracting interests from the distinctive state banks established across the nation. The obscenity shift from equity to bonds has transformed the cumulative structure of revenue for the state banks. What’s my outlook? The investors should delve deep into research without investing in any of the banks yielded security as many a time it could lead to fraudulent activities.


The finance ministry has sought withdrawal of the new norms from the AT-1 Bonds, as it might lead mutual funds in making losses which will, in turn, affect the capitalism of the PSU Banks. The PSU banks are looking to offload their stakes in the holdings to the private sector, and at this sensitive time, the Government doesn’t want any interference in the mobilization of funds of banks.

Amid the coronavirus pandemic, the banks are foreseeing a huge challenge upheld with them to raise enough funds to meet the asset-quality level that the banking economy demands. While that’s pretty obvious that the handling of the PSUs by the government has been atrocious, the Finance Ministry’s suggestion is just to evade the scrappy working of banks concerning mutual funds and bonds over the past few years.

Banks are yet to receive the proposed injection of funds in the Fiscal Year 2021, as the sources say that the government is expecting to acquire funds from huge private companies. Although the amount required to efficiently run a banking system is enormous, the government should try to pose some level of authority to meet the capital demands of the public banks and also the public sector.


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The top-notch state banks could face an uphill task to revive their position if the restrictions are not lifted from the mutual funds by SEBI anytime soon. Various analysts and economics have pegged down the numbers and found that the overall capital requirement of the banking sector amounts between $15 billion to $58 billion. The banks are commuting under various stress scenarios for the next two years, and the state banks could be the front-runner among the packs.

Bond yields surge would not benefit the government until and unless the price surges along with it. While that’s quite difficult, the banks have to seek to either inject some cash flow from other sources or appeal to SEBI to ease the restrictions on the dealings of the public sector secrities.

Gradually, the reality is sinking the barrel as the government is failing to prosper even its capital requirement in the PSUs, which constitutes a large proportion of the Indian economy. Sorting out such situations has become the obligation of the current political regime, but whether or not they will be able to do it without the injection from the private sector is in doubt.

Tanish Sachdev
Tanish Sachdev
Tanish seeks new opportunities as a professional content writer and writes on several fundamental topics like businesses and economics. The focal point remains on expressing opinions on critical aspects concerning the economy.
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